PLR 200127035: Buyer and seller receive more time for a stock purchase election

Plain-English summary

A corporation bought all the stock of an S corporation, and the buyer and seller intended to elect treatment under IRC § 338(h)(10). They missed the deadline for a valid joint election after relying on a tax professional to handle it. The IRS found that they acted reasonably and in good faith and that an extension would not prejudice the government. It granted 30 days to file a new Form 8023, subject to conditions on consistent tax reporting and filing affected returns within 120 days. The ruling did not decide whether the stock purchase qualified for the election or determine the resulting tax liability.

Ruling snapshot

• Question: May the buyer and seller file a late joint § 338(h)(10) election for the stock acquisition?
• Outcome: Approved, with a 30-day filing extension and conditions on affected returns.
• 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: 200127035
Washington, DC 20224
Release Date: 7/6/2001
Index Numbers: 338.01-02, 9100.07-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:CORP:4 - PLR-129083-00
Date:
April 6, 2001

LEGEND:

Purchaser
=

Target
=

Seller
=
.
Month E
=

Date A
=

Date B
=

Date C
=

Accounting Firm =

Purchaser’s
Company Officials =

Authorized
Representatives =

This letter responds to a letter dated September 28, 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 Seller 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 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 regulations in effect on Date A.) Additional information was received in a letter dated January 29, 2001. The material information is summarized below.

Purchaser is a C corporation that is the common parent of an affiliated group that
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files a consolidated federal income tax return. Target was an S corporation within the meaning of § 1361 at the time of acquisition. Target was wholly owned by Seller, an individual. Purchaser used a fiscal year taxable year ending the last day of Month E and Target used a calendar year taxable year. Purchaser used the accrual method of accounting and Target used the cash method of accounting. Target had no subsidiaries.

On Date A, Purchaser acquired all of Seller’s stock in Target for cash in a fully taxable transaction pursuant to a stock purchase agreement entered into the same day. After the purchase, “new” Target was included in Purchaser’s consolidated group as a subchapter C corporation, but Target thereafter merged into Purchaser, which continues Target’s business. It is represented that (1) Purchaser was not related to Seller 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).

Purchaser and Seller intended to file the Election for Target. The Election was due on Date B. However, for various reasons a valid Election was not filed. On or about Date C (which is after the due date for the Election), one or more tax professionals at Accounting Firm 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 assessment under § 6501(a) has not expired for Purchaser’s, Target’s, or Seller’s 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 "§ 338 election" or a “§ 338(h)(10) election”, 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 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
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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.

Section 1.338-2(c)(1) permits a purchasing corporation to make an election under § 338 for the target corporation even though the target is liquidated on or after the acquisition date.

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).
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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 Seller to file the Election, provided Purchaser and Seller 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’s Company Officials and Authorized Representatives explain the circumstances that resulted in the failure to timely file a valid Election. The information establishes that a competent tax professional, who was aware of all relevant facts, was responsible and relied on for the Election, and that Purchaser and Seller 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, we conclude that Purchaser and Seller 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 30 days from the date of issuance of this letter, for Purchaser and Seller 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 Seller 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) Seller 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 taxpayers’ (Seller’s, Target’s, and Purchaser’s consolidated group’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 Seller 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 Seller must file or amend, as applicable, their returns for all affected taxable 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 the “acquisition/sale” of the 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, 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, if any, will continue to apply.

Purchaser must provide Seller with a copy of this letter.

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of the Code 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 Purchaser’s Company Official.

Sincerely yours,
Associate Chief Counsel (Corporate) by: Ken Cohen
Senior Technician Reviewer, Branch 3