PLR 200225028: Extension granted for late section 338 election

Plain-English summary

A corporate parent intended to elect under IRC § 338(g) after a subsidiary bought the stock of a foreign target, but the election was not filed on time. The IRS found that the parent reasonably relied on tax professionals and that granting relief would not prejudice the government. It gave the parent 45 days from the letter date to file the election. The extension required the necessary returns or amended returns within 120 days and required aggregate tax liability for the affected years to be no lower than if the election had been timely filed. The IRS did not decide whether the purchases met the qualified stock purchase requirement.

Ruling snapshot

• Question: May the parent file a late section 338 election for the target and its affiliates?
• Outcome: Approved, with filing and tax liability conditions.
• Key authorities: IRC § 338(g); Treas. Reg. §§ 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200225028
Washington, DC 20224
Release Date: 6/21/2002
Index Numbers: 338.01-02, 9100.06-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:CORP:1 - PLR-167263-01
Date:
March 20, 2002

LEGEND

Parent
=

Purchaser
=

Target
=

Target Affiliate 1 =

Target Affiliate 2 =

Target Affiliate 3 =

Target Affiliate 4 =

Sellers
=

Date A
=

Date B
=

Company Official =

Tax Professionals =

Country X
=

Country Y
=

Country Z
=

Dear

This letter responds to a letter dated October 1, 2001, submitted on behalf of Parent, requesting an extension of time under §§ 301.9100-1 through 301.9100-3 of the

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Procedure and Administration Regulations to file an election. Parent is requesting an extension to file a “§ 338 election” under § 338(g) with respect to Purchaser’s acquisition of the stock of Target and the deemed acquisition of the stock of Target Affiliate 1, Target Affiliate 2, Target Affiliate 3, and Target Affiliate 4 (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.) The taxpayer submitted additional information in letters dated February 26 and March 8, 2002. The material information is summarized below.

Parent is the common parent of an affiliated group that files consolidated returns with its wholly-owned U.S. subsidiaries. Parent wholly owns Purchaser, which is a Country X corporation. Prior to the acquisition described below, Target, a Country X corporation, was wholly owned by foreign individuals ("Sellers"). Target Affiliate 1, Target Affiliate 2, Target Affiliate 3, and Target Affiliate 4 (together, “Target Affiliates”) are wholly owned subsidiaries of Target. Target Affiliate 1 and Target Affiliate 2 are Country X corporations. Target Affiliate 3 and Target Affiliate 4 are incorporated in Country Y and Country Z, respectively.

On Date A, Purchaser acquired all of the stock of Target from unrelated foreign sellers in exchange for cash pursuant to a purchase agreement. It is represented that Purchaser’s acquisition of the stock of Target qualified as a "qualified stock purchase," as defined in § 338(d)(3).

Prior to the acquisition, Target and Target Affiliates did not file United States income tax returns, were not subject to United States income taxation, nor were required, under § 1.6012-2(g), to file a United States income tax return. In addition, neither Target nor any of Target Affiliates were (1) a controlled foreign corporation within the meaning of § 957(a); (2) a passive foreign investment company for which an election under § 1295 was in effect; or (3) a foreign investment company or a foreign corporation the stock ownership of which is described in § 552(a).

Purchaser is a CFC as defined in § 957 and is not required under § 1.6012-2(g) (other than § 1.6012-2(g)(2)(i)(b)(2)) to file a United States income tax return for its taxable year that includes the acquisition date.

Parent intended to file the Election. The Election was due on Date B, but for various reasons a valid Election was not filed. After the due date for the Election, it was discovered that the Election had not been 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 Parent’s consolidated group’s or Target’s 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

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"§ 338 election" or a “§ 338(h)(10) election”; and (2) the acquisition is a "qualified stock purchase."

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).

In this case, the time for filing the Election is fixed by the regulations (i.e., § 1.338-2T(d)). Therefore, the Commissioner has discretionary authority under § 301.9100-1 to grant an extension of time for Parent to file the Election, provided Parent 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 Parent, Company Official and Tax Professionals explain the circumstances that resulted in the failure to timely file a valid Election. The information establishes that Parent reasonably relied on qualified tax professionals who failed to make, or advise Parent to make, 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 Parent has shown it 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 Parent to file the Election with respect to the acquisition of the stock of Target, and the deemed acquisition of the stock of Target Affiliates, 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) Parent'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 applicable Director’s office upon audit of the Federal income tax returns involved. Further, no

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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).

Parent must file the Election in accordance with § 1.338-2T(d) and (e)(3). 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. Parent must file or amend, as applicable, its returns to report the transaction as a § 338 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 of the Target stock and the deemed acquisition of Target Affiliates stock qualify as "qualified stock purchases" under § 338(d)(3); or (2) 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. 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.

This letter is directed only to the taxpayer 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 Associate Chief Counsel (Corporate)