PLR 200314022: Buyers and sellers get extension for section 338(h)(10) election

Plain-English summary

A corporate buyer and two shareholders of an S corporation intended to elect section 338(h)(10) treatment for a stock purchase but missed the filing deadline. The IRS found that they had reasonably relied on a qualified tax professional and sought relief before the agency discovered the missed election. It granted them 45 days from the letter date to file Form 8023 and required affected returns within 120 days. The relief is conditioned on aggregate tax liability being no lower than if the election had been timely made; the IRS did not decide whether the purchase itself qualified for section 338(h)(10) treatment.

Ruling snapshot

• Question: May the buyer and sellers file their joint section 338(h)(10) election late?
• Outcome: Approved, subject to filing deadlines and the tax liability condition
• Key authorities: IRC § 338(h)(10); Treas. Reg. §§ 1.338(h)(10)-1(c), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Number: 200314022
Washington, DC 20224
Release Date: 4/4/2003
Index Numbers: 338.01-02 Person to Contact:
9100.07-00
Telephone Number:

Refer Reply To:
CC:CORP:5 - PLR-148897-02
Date:
December 30, 2002

LEGEND

Parent
=

Purchaser =

Target
=

Seller 1 =

Seller 2 =

Date A
=

Date B
=

Date C
=

Tax Professional =

a
=

b
=
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Dear
:

This letter responds to a letter dated August 30, 2002, submitted on behalf of Parent, Seller 1 and Seller 2 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 Seller 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)-1(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 B. Additional information was received in a letter dated October 24, 2002. The material information is summarized below.

Parent is the common parent of a consolidated group of which Purchaser is a member. Purchaser is a holding company of a group of several entities. Target was an S corporation. On Date A, Target issued a and b shares of its stock to Seller 1 and Seller 2 (hereinafter referred to as the “Sellers”), respectively. The Sellers were the sole shareholders of Target at all times prior to the sale of Target stock to Purchaser.

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

Parent and the Sellers intended to file the Election. The Election was due on Date C, 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, Target’s, or the 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 corporation and sellers 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)-1(c)(1).
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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)-1(c)(2)). Therefore, the Commissioner has discretionary authority under § 301.9100-1 to grant an extension of time for Parent and the Sellers to file the Election, provided Parent and the 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 Parent, Purchaser, the Sellers, and Tax Professional explain the circumstances that resulted in the failure to timely file a valid Election. The information establishes that Parent and the Sellers reasonably relied on a qualified tax professional who failed to make, or advise Parent and the Sellers 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 made, we conclude that Parent and the 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 Parent and the Sellers to file the Election with respect to the acquisition of the stock of Target, as described above.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, Parent and the Sellers must file the Election on Form 8023, executed on or after the date on this letter, in accordance with § 1.338(h)(10)-1(c) and the instructions to the form. A copy of this letter must be attached to Form 8023.
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WITHIN 120 DAYS OF THE DATE ON THIS LETTER, all relevant parties must file or amend, as applicable, all returns and amended returns (if any) necessary 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). 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' (Parent's consolidated group’s, the 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).

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.

Parent must provide the 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.

Sincerely yours,

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