PLR 200604018: More time to elect restoration of controlled group stock value

Plain-English summary

After a stock acquisition, a parent company and related subsidiaries missed the deadline to elect how stock value would be restored among controlled group members for the section 382 loss limitation. The IRS found that the parent had reasonably relied on a tax professional and that a late election would not prejudice the government. It granted the companies 45 days from the letter date to file the election. The extension is conditional: their aggregate tax liability for affected years cannot be lower than it would have been with a timely election, accounting for the time value of money. The IRS did not decide the amount of value that could be restored or the amount of any net operating losses.

Ruling snapshot

• Question: Could the companies file a late election to restore stock value under the section 382 controlled group rules?
• Outcome: Approved, with a 45-day deadline and a condition on aggregate tax liability.
• Key authorities: IRC § 382; Treas. Reg. §§ 1.382-8, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200604018
Third Party Communication: None
Release Date: 1/27/2006
Date of Communication: Not Applicable
Index Number: 382.12-16, 9100.22-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:CORP:B03
PLR-138042-05
Date:
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October 24, 2005

Purchasing Corporation = ---------------------------------------
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Parent = ---------------------
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Sub 1 = ------------------------------
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Sub 2 = -----------------------------------------
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Sub 3 = --------------------------------
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Sub 4 = -----------------------------------------------------------------------
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Sub 5 = ---------------------------
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Date 1 = -------------------------
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Date 2 = -----------------------

Company Official = --------------------------------------------------
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Tax Professional = -----------------------------------------------
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Dear -----------------:

This letter responds to a letter submitted on behalf of Parent and Electing Subs, dated July 15, 2005, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to file an election. The extension is being requested in order to allow Parent and Electing Subs to file an election to restore value under § 1.382-8(h) of the Income Tax Regulations (hereinafter referred to as the "Election").
The material information submitted is summarized below.

Prior to Date 1, Parent owned all of the stock of Sub 1 and Parent and Sub 1 filed a consolidated Federal income tax return (the “Parent Group”). Parent also owned 50 percent of the stock of Sub 2. Sub 2 owned all the stock of Sub 3, Sub 4 and Sub 5.
Hereinafter, Sub 2, Sub 3, Sub 4, and Sub 5 may be referred to, collectively, as the Electing Subs. The Electing Subs filed a consolidated Federal income tax return (the “Electing Subs Group). On Date 1, Purchasing Corporation purchased all of the stock of Parent, causing Parent to experience an ownership change within the meaning of § 382, and terminating both the Parent Group and the Electing Subs Group. The Parent Group constitutes a loss subgroup within the meaning of § 1.1502-91(d). However, the Electing Subs Group does not constitute a loss subgroup.

Section 382(a) provides that the amount of the taxable income of any loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the § 382 limitation for such year. Under § 382(b)(1), the § 382 limitation is determined by multiplying the value of the old loss corporation by the applicable long term tax- exempt rate. A special rule designed to prevent "double counting" by controlled groups is set forth in §1.382-8. Section 1.382-8(c)(1) requires the value of the stock of each component member of the controlled group be reduced by the value of the stock owned by that component member in any other component member. Component members of a controlled group can elect under §1.382-8(c)(2) to restore some or all of the value to the member whose value is reduced under §1.382-8(c)(1). The election to restore value is made by following the procedures set forth in §1.382-8(h).

Section 1.382-8(f) provides that solely for purposes of applying §1.382-8, a consolidated group, loss group, or loss subgroup is treated as a single corporation.
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The Parent Group and Electing Subs group are component members of a controlled group within the meaning of §1.382-8(e). An election to restore the value of the Electing Subs was due on Date 2. However, for various reasons, Parent and the Electing Subs failed to make the Election in a timely manner. The § 382 limitation has been utilized by Purchasing Corporation, Parent, and Sub 1 – Sub 5 consistent with the Election having been made.

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., §1.382-8(h)).
Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Parent and the Electing Subs to file the Election, provided they show that 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 government.

Information, affidavits, and representations submitted by Parent, Company Official, and Tax Professional explain the circumstances that resulted in the failure to timely file the Election. The information establishes that Parent reasonably relied on a qualified tax professional who failed to make, or advise Parent to make, the Election, and that the interests of 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 and the Electing Subs have shown that 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 § 301.9100-3, until 45 days from the date on this letter, for Parent and the Electing Subs to file the Election.

The above extension of time is conditioned on the taxpayers' (Purchasing Corporation's, Parent’s, and Sub 1 – Sub 5’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 Director's office upon audit of the Federal income tax returns involved. Further,
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no opinion is expressed as to the Federal income tax effect, if any, if it is determined that the taxpayers' liability is lower. Section 301.9100-3(c).

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion with respect to whether an ownership change occurred; whether Parent and the Electing Subs are component members of a controlled group; the amount of value, if any, that may be restored or as to values or amounts of NOLs. In addition, we express no opinion as to the tax effects or consequences of filing the Election late under the provisions of any other section of the Code or regulations, or as to the tax treatment of any conditions existing at the time of, or effects resulting from, filing the Election late that are not specifically set forth in the above ruling.

For purposes of granting relief under § 301.9100-3 we relied on certain statements and representations made by Parent, Company Official, and Tax Professional under penalties of perjury. However, the Director should verify all essential facts. Moreover, notwithstanding that the extension is granted under § 301.9100-3 to file the Election, any penalties and interest that would otherwise be applicable still apply.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to both of your authorized representatives.

Sincerely,

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

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