PLR 200237025: Buyer and sellers get more time for a stock purchase election

Plain-English summary

A corporate buyer acquired all the stock of an S corporation and intended to join its sellers in making a section 338(h)(10) election. A tax professional failed to make or advise the buyer to make the election by the deadline. The IRS granted the buyer and sellers 45 days from the letter date to file it, finding that they acted reasonably and in good faith and that relief would not prejudice the government. They also had to file any necessary returns or amended returns within 120 days and meet a condition concerning their aggregate tax liability. The IRS did not decide whether the transaction itself qualified for section 338(h)(10) treatment.

Ruling snapshot

• Question: May the buyer and sellers file a late section 338(h)(10) election for the stock acquisition?
• Outcome: Approved, with filing and tax liability conditions
• Key authorities: IRC § 338(h)(10); Treas. Reg. §§ 301.9100-1, 301.9100-3, 1.338(h)(10)-1T(c)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200237025
Washington, DC 20224
Release Date: 9/13/2002
Index Number: 338.01-02, 9100.07-00 Person to Contact:

Telephone Number:
(202) 622-7790
Refer Reply To:
CC:CORP:B03 - PLR-112264-02
Date:
June 13, 2002

Re:

LEGEND

Purchaser =

Target
=

Target Subs =

Sellers =

State M =

State N =

Date A
=

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Date B
=

Date C
=

Company Officials =

Dear

This letter responds to a letter dated February 20, 2002, requesting an extension of time under §§ 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations for Purchaser and Sellers 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 regulations in effect on Date A.) Additional information was received in and with letters dated April 29 and May 31, 2002. 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 has three subsidiaries, Target Subs. Target was incorporated in State N and had elected to be treated as an S corporation for Federal income tax purposes. Target Subs are qualified subchapter S subsidiaries and thus are not treated as separate entities from Target. Sellers (one of which is an LLC owned solely by an individual and is disregarded as an entity separate from its single owner) owned all of the Target stock.

On Date A, pursuant to a stock purchase agreement of Date B and later amended, Purchaser acquired all of the Target stock from Sellers in exchange for cash and stock of Purchaser 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 C, 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

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which the election should have been filed, or any taxable years 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 purchaser acquires stock meeting the requirements of § 1504(a)(2) from a selling consolidated group, a selling affiliate, or the S corporation shareholders in a qualified stock purchase. Section 1.338(h)(10)-IT(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).

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, and Company Officials 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 failed to make, or advise Purchaser to make, 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 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

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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 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; (3) whether the LLC referred to herein is disregarded as an entity separate from its owner; (4) whether Target qualifies as an S corporation; (5) whether Target Subs qualify as QSubs; or (6) 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.

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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 a power of attorney on file in this office, a copy of this letter has been sent to the taxpayer.

Sincerely yours,

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