PLR 200232014: IRS grants more time to elect asset treatment for foreign stock purchases

Plain-English summary

A parent company sought more time to make a section 338(g) election for stock purchases involving three foreign corporations. It had intended to make the election but relied on a qualified tax professional who missed the filing deadline. The IRS found that the parent acted reasonably and in good faith, requested relief before the IRS discovered the omission, and would not prejudice the government. It granted 45 days from the letter date to file the election, conditioned on filing affected returns within 120 days and meeting the letter's tax liability condition. The ruling gives relief from the election deadline, but does not decide whether the purchases were qualified stock purchases or determine their ultimate tax consequences.

Ruling snapshot

• Question: May the parent file a late section 338(g) election for the three foreign stock acquisitions?
• Outcome: Approved, with a 45-day election deadline and additional conditions
• Key authorities: IRC § 338; Treas. Reg. §§ 301.9100-1, 301.9100-3, and 1.338-2T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Number: 200232014 Washington, DC 20224
Release Date: 8/9/2002
Index Numbers: 338.01-02 Person to Contact:
9100.06-00
Telephone Number:

Refer Reply To:
CC:CORP:4 PLR-101415-02
Date:
May 1, 2002

LEGEND

Parent
=

Sub 1
=

Sub 2
=

Purchaser
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Foreign Parent =

Foreign Sub
=

Foreign Target 1 =

Foreign Target 2 =

Foreign Target 3 =
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Nominee
=

Date A
=

Date B
=

Country A
=

Company Official
=

Accounting Firm
=

Dear

This letter responds to a letter dated January 3, 2002, submitted on behalf of Parent, requesting an extension of time under §§ 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations to file an election. Parent (as common parent of the consolidated group of which Sub 2, the United States shareholder of Purchaser, is a member) is requesting an extension to file a “§ 338 election” under § 338(g) with respect to Sub 2’s and Purchaser’s acquisition of the stock of Foreign Target 1, Foreign Target 2, and Foreign Target 3, as described below (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 letters dated March 6, April 2, and April 22, 2002. The material information is summarized below.

Parent is the common parent of a consolidated group that includes Sub 1 and Sub 2. Parent wholly owns Sub 1, and Sub 1 wholly owns Sub 2. Sub 2 formed Purchaser as a Country A corporation in order to consummate part of the stock acquisitions described below. Purchaser is a controlled foreign corporation (“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 Date A.

Prior to the stock acquisitions described below, Foreign Parent wholly owned Foreign Sub, and Foreign Sub wholly owned Foreign Target 1 and Foreign Target 2. Foreign Sub also owned 99.999% of the stock of Foreign Target 3, with the remaining .001% (one share) being owned by Nominee. Foreign Parent, Foreign Sub, Foreign Target 1, Foreign Target 2, and Foreign Target 3 are all Country A corporations.

Parent, Foreign Parent, and Foreign Sub entered into a stock purchase agreement under which Purchaser agreed to acquire all of the stock of Foreign Target
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1, Foreign Target 2, and Foreign Target 3 held by Foreign Sub. Sub 2 also agreed to acquire the one share of stock of Foreign Target 3 held by Nominee. On Date A, Purchaser, pursuant to the stock purchase agreement, acquired all of the stock of Foreign Target 1, Foreign Target 2, and Foreign Target 3 held by Foreign Sub in exchange for cash. Also on Date A, Sub 2 acquired the one share of Foreign Target 3 stock held by Nominee in exchange for cash. It is represented that Purchaser’s acquisition of the stock of Foreign Target 1 and Foreign Target 2 from Foreign Sub, and Purchaser’s and Sub 2's acquisition of all the stock of Foreign Target 3 from Foreign Sub and Nominee (hereinafter, sometimes referred to collectively, as the “stock acquisitions”) each qualified as a "qualified stock purchase" as defined in § 338(d)(3).

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

Parent intended to file the Election.

The Election was due on Date B, but for various reasons 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 or Foreign Target 1's, Foreign Target 2's, or Foreign Target 3's taxable years in which the stock acquisitions 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."

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
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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.

The information, affidavits, and representations submitted by Parent, Company Official, and Accounting Firm explain the circumstances that resulted in the failure to timely file a valid Election. The information establishes that Parent reasonably relied on a qualified tax professional who failed to timely file the Election, the request for relief was filed before the failure to make the Election was discovered by the Internal Revenue Service, and that the interests of 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 Parent has shown that 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 Purchaser’s and Sub 2's acquisition of the stock of Foreign Target 1, Foreign Target 2, and Foreign Target 3, 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 stock acquisitions in accordance with the Election, and (2) the taxpayers' (Parent’s consolidated group, Foreign Target 1's, Foreign Target 2's, and Foreign Target 3's tax liability (if any) not being 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).

Parent must file the Election on behalf of Purchaser and Sub 2 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 of 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 consolidated tax returns to report the stock acquisitions as § 338 transactions for the taxable year in which these acquisitions
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were consummated (and for any other affected taxable year). Parent must attach a copy of this letter and a copy of the Election to these consolidated returns.

We express no opinion as to: (1) whether the stock acquisitions each qualified as a "qualified stock purchase" under § 338(d)(3), and (2) any other federal income 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.

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 a power of attorney on file in this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

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