PLR 200121043: Buyer and sellers receive more time for a stock purchase election

Plain-English summary

A corporate buyer acquired all the stock of an S corporation, and the buyer and sellers intended to make a joint IRC § 338(h)(10) election. The election was not filed on time despite their reliance on tax professionals. The IRS found that the parties met the standards for discretionary filing relief and gave them 30 days from the letter's issuance to file a new Form 8023 election. The extension also requires necessary returns or amended returns within 120 days and limits the parties' aggregate tax liability as stated in the ruling. The IRS did not decide whether the acquisition or election otherwise qualified for § 338(h)(10) treatment.

Ruling snapshot

• Question: May the buyer and sellers file their joint § 338(h)(10) election late?
• Outcome: Approved, subject to the 30 day filing deadline and stated conditions.
• Key authorities: IRC § 338; Treas. Reg. §§ 1.338(h)(10)-1(d), 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200121043
Washington, DC 20224
Release Date: 5/25/2001
Index Number: 0338.01-02, 9100.07-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:CORP:1- PLR-122422-00
Date:
February 22, 2001

LEGEND:

Purchaser
=

Sellers
=

Target
=

Date A
=

Date B
=

Y
=

Business X
=

Purchaser’s Company Officials =

Purchaser’s Tax Professional =

Purchaser’s Authorized =

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Representative

This responds to your letter dated October 19, 2000, requesting on behalf of the taxpayers identified above, an extension of time under §§ 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations to file an election. Purchaser and Sellers are requesting an extension to file a "section 338(h)(10) election" under §§ 338(g) and 338(h)(10) of the Internal Revenue Code and § 1.338(h)(10)-1(d) of the Income Tax Regulations, with respect to Purchaser's acquisition of the stock of Target (sometimes hereinafter referred to as the "Election"), on Date A. All citations in this letter to regulations under § 338 are to the regulations as in effect for Date A. Additional information was submitted in letters dated January 5 and February 20, 2001. The material information is summarized below.

Target was as an S corporation for Federal income tax purposes. Target was wholly owned by Sellers and engaged in Business X. Purchaser is the common parent of a consolidated group that has a calendar taxable year and uses an accrual method of accounting. Purchaser's group includes approximately Y subsidiaries and the group is engaged in Business X.

On Date A, Purchaser and Sellers entered into a stock purchase agreement for Purchaser to acquire all of Sellers’ Target stock. Also, on Date A, Purchaser acquired all of the stock of Target from Sellers for cash in a fully taxable acquisition. It is represented that (1) Purchaser was not related to Sellers within the meaning of § 338(h)(3), and (2) Purchaser's acquisition of Target stock qualified as a "qualified stock purchase," as defined in § 338(d)(3).

Purchaser and Sellers intended to file the Election. The Election was due on Date B. However, for various reasons the Election was not timely filed. Also, on Date B, one of Purchaser’s Company Officials discovered that the Election was not timely filed. Subsequently, this request was submitted, under § 301.9100-1, for an extension of time to file the Election. The period of limitations on assessments under § 6501(a) has not expired for Purchaser's, Target's, or Sellers’ taxable year(s) in which the acquisition occurred, the taxable years in which the Election should have been filed, or any taxable years that would have been affected by the Election had it been timely filed.

Section 338(a) permits certain stock purchases to be treated as asset acquisitions if: (1) the purchasing corporation makes or is treated as having made a "section 338 election" under § 338(g); and (2) the acquisition is a "qualified stock purchase." Section 338(d)(3) defines a "qualified stock purchase" as any transaction or series of transactions in which stock (meeting the requirements of § 1504(a)(2)) of one corporation is acquired by another corporation by purchase during the 12-month acquisition period.

Section 338(h)(3)(A) provides that the term "purchase" means any acquisition of stock, but only if: (i) the basis of the stock in the hands of the purchasing corporation is

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not determined (I) in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or (II) under § 1014(a) (relating to property acquired from a decedent); (ii) the stock is not acquired in an exchange to which §§ 351, 354, 355, or 356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain or loss realized on the transaction; and (iii) the stock is not acquired from a person the ownership of whose stock would, under § 318(a) (other than paragraph (4) thereof), be attributed to the person acquiring such stock.

Section 338(h)(10) permits the purchasing and selling corporations to elect jointly to treat the target corporation as deemed to sell all of its assets and distribute the proceeds in complete liquidation. The sale of stock included in the qualified stock purchase generally is ignored. A § 338(h)(10) election may be made for target only if it is a member of a selling consolidated group, a member of a selling affiliated group filing separate returns, or an S corporation. Section 1.338(h)(10)-1(a). Gain or loss on the deemed sale is included in the consolidated return of the selling group (unless the target corporation is a member of a selling affiliated group filing separate returns or an S corporation). Section 1.338(h)(10)-1(d) provides that a § 338(h)(10) election may be made for the target corporation if the purchasing corporation makes a "qualified stock purchase" of the target corporation stock. Section 1.338(h)(10)-1(d)(3) provides that if a § 338(h)(10) election is made for the target corporation, it is irrevocable.

Section 1.338(h)(10)-1(d)(2) provides that a § 338(h)(10) election is jointly made by a purchaser and the selling consolidated group (or the selling affiliate or the S corporation shareholders) on Form 8023 in accordance with the instructions to the form. The regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition date occurs. The instructions to Form 8023 provide that a § 338(h)(10) election must be made jointly by the purchasing corporation and the common parent of the selling consolidated group (or selling affiliate or S corporation shareholders). The instructions provide that the form must be signed by a person authorized to act on behalf of each corporation, and if made for an S corporation it must be signed by each S corporation shareholder who sells target stock in the qualified stock purchase. The instructions further provide that the signatures, dates and titles (if applicable) of those persons must be provided in a "signature attachment," and they provide specific details as to the preparation of the "signature attachment" and its attachment to Form 8023.

Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Section 301.9100-1(b) defines the term "regulatory election" as including an election whose due date is prescribed by a regulation, revenue ruling, revenue procedure, notice, or announcement. Sections 301.9100-1 through 301.9100-3 provide

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the standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-1(a). Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of § 301.9100-2. Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. Section 301.9100-3(a).

In this case, the time for filing the Election is fixed by the regulations (i.e., § 1.338(h)(10)-1(d)). Therefore, the Commissioner has discretionary authority under § 301.9100-1 to grant an extension of time for Purchaser and Sellers to file the Election, provided Purchaser and Sellers show that they acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government.

Information, affidavits, and representations submitted by Sellers, Purchaser, Purchaser's Company Officials, Purchaser's Tax Professional, and Purchaser's Authorized Representative explain the circumstances that resulted in the failure to timely file a valid Election. The information also establishes that tax professionals were responsible for the Election, that Sellers and Purchaser relied on them to timely ma e the Election, and that the government will not be prejudiced if relief is granted. See § 301.9100-3(b)(1)(v).

Based on the facts and information submitted, including the representations made, we conclude that Purchaser and Sellers have shown that they acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Accordingly, an extension of time is granted under § 301.9100-1, until 30 days from the date of issuance of this letter for Purchaser and Sellers to file the Election with respect to the acquisition of Target, as described above.

The above extension of time is conditioned on: (i) the filing within 120 days of the issuance of this letter, of all returns and amended returns necessary to report the transaction in accordance with the Election; and (ii) the taxpayers' (Sellers’, Purchaser's consolidated group, and Target's) tax liability (if any) being not lower, in the aggregate, for all years to which the Election applies, than it would have been if the Election had been timely made (taking into account the time value of money). No opinion is expressed as to the taxpayers' tax liability for the years involved. A determination thereof will be made by the director's office upon audit of the Federal income tax returns involved. Further, no opinion is expressed as to the Federal income tax effect, if any, if it is determined that the taxpayers' liability is lower. Section 301.9100-3(c).

Purchaser and Sellers must file the Election in accordance with § 338(h)(10)-1(d) (i.e., a new election on Form 8023 must be executed on or after the date of this letter,

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which grants an extension, and filed in accordance with the instructions to the form). A copy of this letter must be attached to the election form. Purchaser and Sellers must amend their applicable returns (they reported the transaction as a "section 338(h)(10)" transaction and disclosed that they were requesting an extension of time under § 301.9100-1) to attach a copy of the "new" Election (and the information required therewith) and a copy of this letter.

We express no opinion regarding: (1) whether the acquisition/sale of Target stock qualifies as a "qualified stock purchase" under § 338(d)(3); (2) whether the acquisition/sale of Target stock qualifies for § 338(h)(10) treatment; or (3), if § 338(h)(10) is applicable, as to the amount and character of gain or loss, if any, recognized by Target and Sellers on Target's deemed asset sale and deemed liquidation.

In addition, we express no opinion as to the tax consequences of filing the Election late under the provisions of any other section of the Code and regulations, or as to the tax treatment of any conditions existing at the time of, or resulting from, filing the Election late that are not specifically set forth in the above ruling. For purposes of granting relief under § 301.9100-1, we relied on certain statements and representations made by the taxpayers. However, the director(s) should verify all essential facts. In addition, notwithstanding that an extension is granted under § 301.9100-1 to file the Election, penalties and interest that would otherwise be applicable, if any, continue to apply.

Purchaser must provide each of the Sellers a copy of this letter. This letter is directed only to the taxpayer(s) who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Pursuant to powers of attorney on file in this office, we are sending a copy of this letter to the Purchaser.

Sincerely yours,
Associate Chief Counsel (Corporate)
By
Chief, Branch 1