PLR 200724009: Seller gets more time for section 197 gain recognition election

Plain-English summary

A seller made a timely section 338(h)(10) election in a related-party stock transaction but failed to make a separate section 197 gain recognition election for acquired intangible assets. The seller represented that it reasonably relied on a qualified tax professional who missed the election. The IRS granted 60 days to make the section 197 election by filing it with an amended return for the transaction year. The seller must also satisfy the election statement and buyer notification requirements in the regulations.

Ruling snapshot

• Question: May the seller make a late section 197(f)(9)(B) gain recognition election?
• Outcome: Approved, with a 60-day filing deadline and required regulatory notifications.
• Key authorities: IRC § 197(f)(9)(B); Treas. Reg. §§ 1.197-2(h)(9), 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200724009
[Third Party Communication:
Release Date: 6/15/2007
Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:PSI:B06
PLR-141751-06
Date:
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February 13, 2007

Re: Request for Extension of Time to Make the Election to recognize gain pursuant to section 197(f)(9)(B)

Taxpayer = -----------------------------------------------------------------

A = --------------------------------------------------------
B = ------------------------------------------------------
C = ------------------------------------------------------------
Date1 = -------------------
Date2 = ------------------
Tax = -------------------------------------
Professional
Company = ------------------------------------------------------------------------
Official 1
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Company = ------------------------------------------------------------------------
Official 2
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LMSB = ------------------------------------------------
Official

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

This letter is in response to your letter dated August 23, 2006, submitted on behalf of Taxpayer, requesting an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to file an election. The extension is being requested for Taxpayer to make an election under § 197(f)(9)(B)(ii) of the Internal Revenue Code and §1.197-2(h)(9)(iii) of the Income Tax Regulations for certain section 197 intangibles acquired in the taxable year ended Date1.

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FACTS

Taxpayer represents that the facts are as follows:

On Date 1, Company A purchased all of the stock of Company B from Company C. Company C is a wholly owned subsidiary of Taxpayer. The sole shareholder of Taxpayer also owned 33 1/3% of Company A as of Date 1. The stock purchase agreement provided that Taxpayer would make a section 338(h)(10) election. The agreement further provided that Taxpayer would make a gain-recognition election under § 1.197(h)(9)(iii) on its timely filed Federal income tax return for the year ending on Date

2. Taxpayer made a timely election under section 338(h)(10). However, Taxpayer did
   not make a valid election under § 1.197-2(h)(9)(iii) for its taxable year ending on Date 2. The period of limitations on assessment under § 6501(a) has not expired for the taxable year for which the election should have been filed or for any subsequent taxable year.

   Information, affidavits, and representations submitted by Taxpayer, Tax
   Professional, Company Official 1, and Company Official 2 explain the circumstances that resulted in the failure to timely file a valid election under § 197(f)(9)(B). The information establishes that Taxpayer reasonably relied on a qualified tax professional who failed to make, or advise Taxpayer to make, the election.

RULING REQUESTED

Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to file an election under § 197(f)(9)(B) and § 1.197-2(h)(9)(iii) to recognize gain on the applicable transaction on its Federal income tax return for the year ending on Date 2.

LAW

Section 197(a) provides that a taxpayer shall be entitled to an amortization deduction with respect to any amortizable section 197 intangible. Section 197(c) provides that, in general, the term “amortizable section 197 intangible” means any section 197 intangible which is acquired after August 10, 1993, and which is held in connection with the conduct of a trade or business. Section 197(d)(1) provides, in part, that the term “section 197 intangible” means goodwill, going concern value, and other identified intangible assets.

Section 197(f)(9)(A) provides, in part, that the term “amortizable section 197 intangible” shall not include any section 197 intangible which is goodwill, going concern value, or for which depreciation or amortization would not have been allowable but for § 197, and which is acquired after August 10, 1993, if the intangible was held or used at

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any time on or after July 25, 1991, and on or before August 10, 1993, by the taxpayer or a related person. Section 197(f)(9)(C)(i) provides, in part, that a person is related to any person if the related person bears a relationship to such person specified in § 267(b) or § 707(b)(1). In applying § 267(b) or § 707(b)(1), “20 percent” shall be substituted for “50 percent.” However, § 197(f)(9)(B) provides that § 197(f)(9)(A) would not apply to an intangible acquired by the taxpayer but for the 20 percent substitution rule of § 197(f)(9)(C)(i), and the person from whom the taxpayer acquired the intangible elects to recognize gain on the disposition of the intangible and pay a tax on such gain which, when added to any other income tax on such gain equals such gain multiplied by the highest rate of income tax applicable to such person.

Section 1.197-2(h)(9)(i) provides that a section 197(f)(9) intangible qualifies for the gain-recognition exception if: (A) the taxpayer acquires the intangible from a person that would not be related to the taxpayer but for the substitution of 20 percent for 50 percent under § 1.197-2(h)(6)(i)(A); and (B) that person (whether or not otherwise subject to Federal income tax) elects to recognize gain on the disposition of the intangible and agrees, notwithstanding any other provision of law or treaty, to pay for the taxable year in which the disposition occurs an amount of tax on the gain that, when added to any other Federal income tax on such gain, equals the gain on the disposition multiplied by the highest marginal rate of tax for that taxable year.

Section 1.197-2(h)(9)(ii) provides that the anti-churning rules of § 1.197-2(h) apply to a section 197(f)(9) intangible that qualifies for the gain-recognition exception only to the extent the acquiring taxpayer's basis in the intangible exceeds the gain recognized by the transferor.

Section 1.197-2(h)(9)(iii) provides that the election described in § 1.197-2(h)(9) must be made by the due date (including extensions of time) of the electing taxpayer's Federal income tax return for the taxable year in which the disposition occurs. The election is made by attaching an election statement satisfying the requirements of § 1.197-2(h)(9)(viii) to the electing taxpayer's original or amended income tax return for that taxable year (or by filing the statement as a return for the taxable year under § 1.197-2(h)(9)(xi)). In addition, the taxpayer must satisfy the notification requirements of § 1.197-2(h)(9)(vi). The election is binding on the taxpayer and all parties whose Federal tax liability is affected by the election.

Section 1.197-2(h)(9)(vi) provides that a taxpayer making an election under § 1.197-2(h)(9) with respect to the disposition of a section 197(f)(9) intangible must provide written notification of the election on or before the due date of the return on which the election is made to the person acquiring the section 197 intangible. In addition, a partnership or S corporation making an election under § 1.197-2(h)(9) must attach to the Schedule K-1 furnished to each partner or shareholder a written statement containing all information necessary to determine the recipient's additional tax liability under § 1.197-2(h)(9).

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Section 1.197-2(h)(9)(viii) provides that an election statement satisfies the requirements of § 1.197-2(h)(9)(viii) if it is in writing and contains the information listed below. The required information should be arranged and identified in accordance with the following order and numbering system:
(A) The name and address of the electing taxpayer.
(B) Except in the case of a taxpayer that is not otherwise subject to Federal income tax, the taxpayer identification number (TIN) of the electing taxpayer.
(C) A statement that the taxpayer is making the election under § 197(f)(9)(B).
(D) Identification of the transaction and each person that is a party to the transaction or whose tax return is affected by the election (including, except in the case of persons not otherwise subject to Federal income tax, the TIN of each such person).
(E) The calculation of the gain realized, the applicable rate of tax, and the amount of the taxpayer's additional tax liability under 1.197-2(h)(9).
(F) The signature of the taxpayer or an individual authorized to sign the taxpayer's Federal income tax return..

Under § 301.9100-1, the Commissioner has discretion, upon a showing of good cause, to grant a reasonable extension of time for making the election under the rules set forth in '' 301.9100-2 and 301.9100-3 to make a regulatory election.

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 an election. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making elections that do not meet the requirements of ' 301.9100-2.

Section 301.9100-3(a) provides that requests for relief under ' 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the government.

CONCLUSIONS

Based solely on the facts and representations submitted, we conclude that the requirements of '' 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, Taxpayer is granted an extension for making the election under § 197(f)(9)(B) until 60 calendar days from the date of this letter. Taxpayer must file the election with its amended Federal income tax return for its taxable year ending on Date 2 and must comply with all the requirements of § 1.197-2(h)(9)(vi) and (viii).
Except as specifically set forth above, we express no opinion concerning the federal income tax consequences of the facts described above under any other provisions of the Code.

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In accordance with the power of attorney, we are sending a copy of this letter to Taxpayer’s authorized representative. We are also sending a copy of this letter to the LMSB Official.

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

Sincerely,

WILLIAM P. O’SHEA

William P. O’Shea
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2) copy of this letter copy for section 6110 purposes