PLR 200125039: Bankruptcy-related section 338 election receives extra time

Plain-English summary

A purchaser and the selling group's parent missed the deadline for a section 338(h)(10) election after the purchaser acquired a subsidiary's stock. The purchaser and target later entered bankruptcy proceedings. The IRS found that the parties had reasonably relied on a tax professional and granted 120 days from the letter to file Form 8023. The relief required bankruptcy court approval, consistent returns filed within the same 120 days, an acquisition that was not rescinded, a qualified stock purchase, and no reduction in aggregate tax liability compared with a timely election. The IRS did not decide whether the purchase or target's debtor-in-possession status met those conditions.

Ruling snapshot

• Question: Could the purchaser and selling parent file a late section 338(h)(10) election during bankruptcy proceedings?
• Outcome: Approved: 120 days to file, subject to bankruptcy court and tax conditions.
• Key authorities: IRC § 338(h)(10); 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: 200125039
Washington, DC 20224
Release Date: 6/22/2001
Index Numbers: 338.01-02
Person to Contact:
9100.07-00
Telephone Number:

Refer Reply To:
CC:CORP:B04 - PLR-110042-00
Date:
March 21, 2001

Legend

Purchaser =

Parent =

Seller =

Target =

Date A =
Date B =
Date C =
Date D =
Date E =
Date F =

Parent’s Company
Officials =

Purchaser’s Company
Official =

Tax Professional =
Bankruptcy
Trustee =

Authorized
Representatives =

This letter responds to your letter dated May 10, 2000 requesting, on behalf of the taxpayers identified above, an extension of time under §§ 301.9100-1 through
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301.9100-3 of the Procedure and Administration Regulations to file an election. Purchaser (as the purchasing corporation) and Parent (as the common parent of the consolidated group of which Seller and Target were members) are requesting an extension to file a “§ 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 (sometimes hereinafter referred to as the “Election”) with respect to Purchaser’s acquisition of the stock of Target on Date A. In addition, because Purchaser and Target are in bankruptcy proceedings the Bankruptcy Trustee of Purchaser, and Target as a debtor- in-possession, have joined this request. (All citations in this letter to regulations under
§ 338 are to regulations in effect on Date A.) Additional information was received in letters dated August 21, and December 4 and 19, 2000, and January 3 and 12, and February 22, 2001. The material information is summarized below.

Purchaser has a calendar taxable year, uses the accrual method of accounting and files a separate Federal income tax return. Parent is the common parent of a consolidated group that has a calendar taxable year and that uses the accrual method of accounting. Prior to the acquisition, Target was a wholly owned subsidiary of Seller, Seller was a wholly owned subsidiary of Parent, and both were included in Parent’s consolidated return. Target did not have any subsidiaries.

On Date A, Purchaser and Seller entered into a Stock Purchase Contract that provided Purchaser would acquire all of Seller’s Target stock. Also, on Date A, pursuant to the Stock Purchase Contract, Purchaser acquired all of the stock of Target from Seller for installment notes plus the assumption of Target’s liabilities in a transaction that is represented to be fully taxable. It is also represented that: (1) Purchaser was not related to Sellers within the meaning of § 338(h)(3); and (2) Purchaser's acquisition of the stock of Target qualified as a "qualified stock purchase," as defined in § 338(d)(3). Following the acquisition of Target, Purchaser and Target did not file a consolidated tax return. Purchaser and Target will file separate returns.

Purchaser and Parent intended to file the Election. The Election was due on Date B. However, for various reasons the Election was not filed. On Date C (which is after Date B), Target filed a petition of bankruptcy under chapter 11 of the Bankruptcy Code and became a debtor-in-possession. On Date D (which is just days after Date C), Purchaser filed a petition of bankruptcy under chapter 11 of the Bankruptcy Code. On Date F (which is after Dates D and E), Purchaser’s bankruptcy proceeding was converted from a chapter 11 proceeding to a chapter 7 proceeding by the Bankruptcy Court and the Bankruptcy Trustee was appointed. It is represented that: (1) Target is a “debtor-in-possession” in the United States Bankruptcy Court proceedings for the applicable district in which Target is located; (2) Purchaser’s acquisition of Target stock, pursuant to the Stock Purchase Contract, has not and will not be rescinded by the Bankruptcy Court; and (3) there has not been a claim of recission filed in the Bankruptcy Court, and Seller is unaware of any basis for a claim of recission.
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On or near Date E (which is after Date D), it was discovered that the Election had not been properly 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 Parent’s taxable year(s) in which the acquisition occurred, the taxable year(s) in which the Election should have been filed, or any taxable year(s) 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 "§ 338 election" under § 338(g); and (2) the acquisition is a "qualified stock purchase." Section 1.338(h)(10)-1(d)(3) provides that if a § 338(h)(10) election is made for Target, a “§ 338 election” is deemed made for Target. 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 1 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 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.
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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.

Section 1.1502-77(a) provides that the common parent, for all purposes (other than for several purposes not relevant here), shall be the sole agent for each subsidiary in the group, duly authorized to act in its own name in all matters relating to the tax liability for the consolidated return year. See also Form 8023 and the instructions thereto.

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 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. 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 Parent to file the Election, provided Purchaser and Parent show 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 Purchaser, Parent, Parent’s Company Officials, Purchaser’s Company Official, Tax Professional, and Authorized Representatives explain the circumstances that resulted in the failure to timely file a valid Election. The information establishes that a competent tax
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professional, who was aware of all relevant facts, was responsible and relied on for the Election, and that Purchaser and Parent relied on the tax professional to make the Election. The information also establishes that the interests of 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, and subject to the conditions in the below paragraph, we conclude that Purchaser and Parent have shown 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 120 days from the date of issuance of this letter, for Purchaser and Parent to file the Election with respect to the acquisition of the stock of Target, as described above.

The above extension of time is conditioned on: (1) Purchaser (and the Bankruptcy Trustee) and Parent each treating the “acquisition/sale” of the Target stock as a § 338(h)(10) transaction on their affected returns (i.e., the taxable year in which the transaction was consummated plus any applicable carryback and/or carryforward taxable years): (2) Parent and Purchaser filing all their returns for all affected taxable years (i.e., original returns or amended returns, as applicable) not later than 120 days after the issuance of this letter; (3) the Bankruptcy Court approving the filing of the Election (i.e., Form 8023); (4) Purchaser’s acquisition of Target stock, pursuant to the Stock Purchase Contract, not being rescinded or revoked by the Bankruptcy Court; (5) Target, in fact, being a “debtor-in-possession”; (6) Purchaser's deemed acquisition of the stock of Target in fact qualifying as a "qualified stock purchase," as defined in § 338(d)(3); and (7) the taxpayers’ (Parent’s and Purchaser’s plus any applicable subsidiaries’) 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 Parent must file the Election in accordance with § 1.338(h)(10)- 1(d). That is, a new Election on Form 8023 must be executed on or after the date of this letter, which grants an extension, and filed in accordance with the instructions to the form. A copy of this letter should be attached to the election form. Purchaser and Parent must file or amend, as applicable, their returns for all affected taxable years to report the transaction as a § 338(h)(10) transaction (e.g., the year in which the transaction was consummated and all carryback and/or carryforward years) and attach to the returns a copy of this letter and a copy of the Election (i.e., Form 8023).
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We express no opinion as to: (1) whether Target is a “debtor-in-possession”; (2) whether the “acquisition/sale” of the Target stock qualifies as a "qualified stock purchase" under § 338(d)(3); (3) whether the “acquisition/sale” of Target stock qualifies for § 338(h)(10) treatment; or (4) if § 338(h)(10) is applicable, the amount and character of gain or loss, if any, recognized on Target’s deemed asset sales and deemed liquidation. See § 1.338(h)(10)-1(e).

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 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 (e.g., any penalties and interest for “late” filing), if any, will continue to apply.

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 the powers of attorney on file in this office, a copy of this letter is being sent to the designated Parent Company Official and the designated Purchaser Company Official.

Sincerely yours,
Associate Chief Counsel (Corporate)
By:Vicki J. Hyche
Chief, Branch 4