PLR 200635003: Parent gets more time to elect recognition of subsidiary stock sale loss

Plain-English summary

A parent corporation sold part of a subsidiary's stock to an unrelated buyer at a loss, but its consolidated return omitted the statement needed to elect the limited loss recognition allowed by a temporary regulation. The IRS found that the parent had reasonably relied on a qualified tax professional and requested relief before the IRS discovered the omission. It gave the parent 45 days from the ruling date to file the election statement. The extension requires that aggregate tax liability be no lower than it would have been after a timely filing, taking account of the time value of money. The IRS did not decide the underlying tax consequences, and otherwise applicable penalties and interest still apply.

Ruling snapshot

• Question: May the parent file a late statement to elect recognition of a loss on subsidiary stock sold to an unrelated party?
• Outcome: Approved conditionally; file the statement within 45 days.
• Key authorities: Treas. Reg. §§ 1.337(d)-2T(c), 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200635003
Third Party Communication: None
Release Date: 9/1/2006
Date of Communication: Not Applicable
Index Number: 337.16-00, 9100.29-00
Person To Contact:
---------------------------
------------------------, ID No. ------------
-----------------------------------------
Telephone Number:
-----------------
--------------------
-----------------------------------
Refer Reply To:
----------------------------------
CC:CORP:B1
PLR-109228-06
Date:
-
May 11, 2006

Legend:

Parent = --------------------------------------------------
----------------------------------------------------------------------

Subsidiary = -----------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------

Company = ---------------

Date A = -----------------

Date B = --------------------------

Company Official = -------------------
----------------------------------------------------------------------------------------------------

Tax Professional = --------------------
------------------------------------------------------------------------

Dear -------------------:

This letter responds to a letter dated January 30, 2006, submitted on behalf of Parent, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to file an Election. Parent is requesting an extension of time to file a statement under § 1.337(d)-2T(c) of the Income Tax Regulations (the “Election”)

PLR-109228-06
2

in connection with the sale of some of the Subsidiary stock to Company on Date B (“Stock Sale”). The material information is summarized below.

Parent is the common parent of a consolidated group. Subsidiary was a wholly owned subsidiary of Parent from Date A until Date B when Parent sold, at a loss, some of its Subsidiary stock to Company, an unrelated party, in a taxable transaction.

An election under § 1.337(d)-2T(c)(3) to recognize some or all of the loss upon the disposition of some of the stock of Subsidiary was required to be filed with or as part of Parent’s consolidated group’s return for the year of the disposition, the year that includes Date B. However, for various reasons, the Election was not made. The return was timely filed, but did not include the relevant information regarding the Stock Sale. The statute of limitations on assessment under § 6501(a) has not expired for Parent’s consolidated group’s taxable year for which it wants to make the Election or for any taxable years that would be affected by the Election had it been timely filed.

Section 1.337(d)-2T(a)(1) provides that no deduction is allowed for any loss recognized by a member of a consolidated group with respect to the disposition of stock of a subsidiary.

Section 1.337(d)-2T(c)(1) provides that § 1.337(d)-2T(c) applies with respect to stock of a subsidiary only if a separate statement entitled “§ 1.337(d)-2T(c) statement” is included with the return in accordance with § 1.337(d)-2T(c)(3).

Section 1.337(d)-2T(c)(2) provides that loss is not disallowed under § 1.337(d)- 2T(a)(1) to the extent the taxpayer establishes that the loss is not attributable to the recognition of built-in gain on the disposition of an asset (including stock and securities).

Section 1.337(d)-2T(c)(3) provides that the statement required under § 1.337(d)- 2T(c)(1) must be included with or as part of the taxpayer’s return for the year of the disposition.

In general, § 1.337(d)-2T applies with respect to dispositions and deconsolidations on or after March 7, 2002, and before March 3, 2005.

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

PLR-109228-06
3

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., § 1.337(d)-2T(c)). Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Parent to file the Election, provided Parent shows 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.

Information, affidavits, and representations submitted by Parent, Company Official, and Tax Professional 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 make, or advise Parent to make, the Election, the request for relief was filed before the failure to file 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 has shown 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 § 301.9100-3, until 45 days from the date on this letter, for Parent to file the Election with respect to the Stock Sale, as described above. A copy of this letter must be attached to the Election. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling.

The above extension of time is conditioned on Parent’s consolidated group’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 filed (taking into account the time value of money). No opinion is expressed as to the taxpayer’s 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 taxpayer’s tax liability is lower. Section 301.9100-3(c).

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 § 301.9100-3, we relied on certain statements and representations

PLR-109228-06
4

made by the taxpayer. However, the Director should verify all essential facts. In addition, notwithstanding than an extension is granted under § 301.9100-3 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 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 representatives.

Sincerely,

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

--------------------------
-------------------------------------------------
------------------------------------
----------------------------------

---------------
----------------------------------------
------------------------------------
--------------------------------