PLR 200248022: Buyer and seller receive extension for section 338(h)(10) election

Plain-English summary

A buyer acquired all the stock of an S corporation, but the parties did not file a valid section 338(h)(10) election by its due date. The buyer's parent and the seller requested more time before the IRS discovered the missed election. The IRS granted an extension until September 30, 2002, to file Form 8023 and the required returns or amendments, with the specified attachments. The extension requires that the parties' aggregate tax liability be no lower than it would have been with a timely election, after accounting for the time value of money. The IRS did not determine whether the purchase or election otherwise qualified, and applicable penalties and interest remain payable.

Ruling snapshot

• Question: May the buyer's parent and seller file a late section 338(h)(10) election for the target stock purchase?
• Outcome: Approved through September 30, 2002, subject to filing and aggregate tax liability conditions.
• 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: 200248022
Washington, DC 20224
Release Date: 11/29/2002
Index Numbers: 338.01-02
Person to Contact:
9100.07-00
Telephone Number:

Refer Reply To:
CC:CORP:06 - PLR-125591-02
Date:
August 27, 2002

LEGEND

Purchaser =

Purchaser's Parent =

Target
=

Seller
=

Date A
=

Date B
=

Company Official =

Tax Professional =

Dear

This letter responds to a letter dated March 28, 2002, submitted on behalf of Purchaser's Parent and Seller, requesting an extension of time under §§ 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations to file an election. Purchaser's Parent and Seller are requesting an extension to file a “§ 338(h)(10)

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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 subsequent letters. The material information is summarized below.

Purchaser's Parent formed Purchaser as a QSub in order to purchase the stock of Target which was an S corporation. Seller owned all of the shares of Target which did not have any subsidiaries.

Purchaser and Seller entered into a stock purchase agreement for Purchaser to acquire all of the Target stock from Seller. On Date A, Purchaser acquired all of the stock of Target from Seller in exchange for cash and promissory notes. It is represented that the acquisition of the stock of Target qualified as a "qualified stock purchase," as defined in § 338(d)(3).

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.

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)-1(a).

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

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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)-1(d)). Therefore, the Commissioner has discretionary authority under § 301.9100-1 to grant an extension of time for Purchaser's Parent and Seller to file the Election, provided Purchaser's Parent 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 Parent, Seller, Company Official and Tax Professional explain the circumstances that resulted in the failure to timely file a valid Election. The information establishes that 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).

Based on the facts and information submitted, including the representations made, we conclude that Purchaser's Parent 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 September 30, 2002 for Purchaser's Parent and Seller to file the Election with respect to the acquisition of the stock of Target, as described above.

ON OR BEFORE September 30, 2002, Purchaser's Parent and Seller must file the Election on Form 8023, executed on or after the date on this letter, in accordance with § 1.338(h)(10)-1(d) and the instructions to the form. A copy of this letter must be attached to Form 8023.

ON OR BEFORE September 30, 2002, Purchaser's Parent must file or amend, as applicable, all returns and amended returns (if any) necessary to report the transaction consistent with the Election for the taxable year in which the transaction was consummated (and for any other affected taxable year). A copy of this letter and a copy of Form 8023 must be attached to the returns.

The above extension of time is conditioned on the taxpayers' (Purchaser's Parent's, Purchaser's Parent's consolidated group’s, Seller’s, 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).

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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) 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's Parent must provide Seller 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, a copy of this letter is being sent to your authorized representative.

Sincerely yours,

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