PLR 200152034: Corporate buyer and sellers granted late section 338(h)(10) election relief

Plain-English summary

A corporate buyer acquired all the stock of an S corporation from its shareholders and intended to make a joint § 338(h)(10) election with the sellers. The election was missed even though the parties had relied on a qualified tax professional. The IRS found that the parties acted reasonably and in good faith and granted 45 days from the ruling date to file a new election. The relief required necessary returns or amended returns within 120 days and imposed an aggregate tax liability condition. The IRS did not decide whether the purchase or election otherwise qualified under § 338(h)(10), and any applicable penalties and interest remained payable.

Ruling snapshot

• Question: Could the buyer and sellers file a late § 338(h)(10) election for the target stock purchase?
• Outcome: Approved: 45 days to file the election, subject to return-filing and aggregate-tax-liability conditions.
• Key authorities: IRC § 338; Treas. Reg. §§ 301.9100-1 through 301.9100-3 and 1.338(h)(10)-1T.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200152034
Washington, DC 20224
Release Date: 12/28/2001
Index Numbers: 338.01-02
Person to Contact:
9100.07-00
Telephone Number:
(202) 622-7790
Refer Reply To:
CC:CORP:B03 - PLR-139183-01
Date:
October 1, 2001

LEGEND

Purchaser =

Target
=

Sellers
=

State M
=

State N
=

Date A
=

Date B
=

Company Official =

Tax Professional =

This letter responds to a letter dated July 3, 2001, submitted on behalf of Purchaser and Sellers, requesting 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 “§ 338(h)(10) election” under §§ 338(g) and 338(h)(10) of the Internal Revenue Code and § 1.338(h)(10)-1T(c) 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
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information was received in a letter dated August 17, 2001. The material information is summarized below.

Purchaser is a C corporation incorporated in State M. Purchaser is the common parent of a consolidated group. Target was incorporated in State N and had elected to be treated as an S corporation for Federal income tax purposes. Sellers owned all of the Target stock.

On Date A, pursuant to a stock purchase agreement of same date, Purchaser acquired all of the Target stock from Sellers in exchange for cash and notes in a fully taxable transaction. It is represented that Purchaser’s acquisition of the stock of Target 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, but for various reasons the Election was not made. 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 Sellers’ taxable years 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(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. 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)-1T(c)(1).

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.

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)-1T(c)). 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 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, Sellers, Company Official and Tax Professional explain the circumstances that resulted in the failure to timely file a valid Election. The information establishes that Purchaser and Sellers reasonably relied on a qualified tax professional who was aware of all relevant facts, the request for relief was filed before the failure to make the Election was discovered by the Internal Revenue Service, and that the government will not be prejudiced if relief is granted. See §§ 301.9100-3(b)(1)(i) and (v).

Based on the facts and information submitted, including the representations made, we conclude that Purchaser and Sellers 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 45 days from the date on this letter, for Purchaser and Sellers 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) the filing, within 120 days of the date on this letter, of all returns and amended returns (if any) necessary to report the transaction in accordance with the Election, and (2) the taxpayers' (Purchaser's consolidated group’s, Sellers’, 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 applicable 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’ tax liability is lower. Section 301.9100-3(c).

Purchaser and Sellers must file the Election in accordance with § 1.338(h)(10)-1T(c). That is, a new election on Form 8023 must be executed on or after the date on this letter, 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 file or amend, as applicable, their returns to report the transaction as a § 338(h)(10) transaction for the taxable year in which the transaction was consummated (and for any other affected taxable year), and to attach to the returns a copy of this letter and a copy of the Election.

We express no opinion as to: (1) whether the “acquisition/sale” of the Target
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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) any other tax consequences arising from the Election.

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, continue to apply.

Purchaser must provide Sellers with 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 the power of attorney on file in this office, copies of this letter are being sent to your authorized representatives.

Sincerely yours,
Ken Cohen
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Corporate)