PLR 1035006: IRS granted extra time to make a § 362(e)(2)(C) election

Plain-English summary

The IRS considered a partnership that was expected to become a corporation through an entity-classification election and would have transferred property with an aggregate basis greater than its fair market value. The taxpayer had failed to timely make the related § 362(e)(2)(C) election to reduce the transferor’s stock basis instead of reducing the corporation’s asset basis. The IRS granted 45 days of additional time because the taxpayer acted reasonably and in good faith and the government would not be prejudiced. The extension was conditioned on the consolidated group’s aggregate tax liability not being lower than it would have been if the election were timely.

Ruling snapshot

• Question: May the taxpayer make a late § 362(e)(2)(C) election concerning the basis of transferred property?
• Outcome: Approved
• Key authorities: IRC §§ 351, 362(e)(2)(C), 7701, and 6110; Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201035006 Third Party Communication: None
Release Date: 9/3/2010 Date of Communication: Not Applicable
Index Number: 362.01-00, 9100.22-00
Person To Contact:
---------------------- --------------------, ID No. ------------
-------------- Telephone Number:
----------------------------------------- --------------------
---------------------- Refer Reply To:
------------------------------------------- CC:CORP:04
---------------------------------- PLR-105724-10
Date:
June 04, 2010

Legend

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

Sub = -------------------------------------------

LLC = -------------------------------------------

Year = -------

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

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

   This letter responds to a letter dated February 1, 2010, requesting an extension

of time under § 301.9100-3 of the Procedure and Administration Regulations to file an
election. Additional information was submitted in a letter dated March 29, 2010. The
extension is being requested in order to allow LLC to file an election under
§ 362(e)(2)(C) (the “Election”). In addition, in a separate letter (PLR-105726-10), LLC
has also requested an extension of time under § 301.9100-3 to file an election to be
treated as an association taxable as a corporation (the “Entity Classification Election”).

PLR-105724-10 2

For purposes of this letter, we assume that the Entity Classification Election will be
granted. The material information is summarized below.

    Parent indirectly owns Sub. Sub is the common parent of a consolidated group.

Sub indirectly owns LLC, an entity that is classified as a partnership for federal income
tax purposes. If the Entity Classification Election is granted, the partnership will be
deemed to contribute all of its assets and liabilities to a corporation in exchange for
stock under § 351, and immediately thereafter, the partnership will be deemed to
liquidate by distributing the stock of the corporation to its partners. See § 301.7701-
3(g)(1)(i). On the effective date of the Entity Classification Election, the aggregate basis
of the transferred property will exceed its aggregate fair market value.

    Section 362(e)(2)(A) generally provides that if property is transferred to a

corporation as a capital contribution or in an exchange to which § 351 applies and the
aggregate basis of the transferred property exceeds its aggregate value immediately
after the transaction, then the transferee corporation's basis in such property shall not
exceed the fair market value of such property. Under § 362(e)(2)(C), however, the
transferor and transferee can make a joint election to reduce the transferor's basis in the
stock received to its fair market value, and no reduction of the transferee's basis in the
property received will be required. Section 362(e)(2)(C) provides that the Election shall
be made at such time and in such form and manner as the Secretary may prescribe,
and, once made, shall be irrevocable. Notice 2005-70, 2005-2 C.B. 694, provides
guidance on how to make the Election, generally providing that the transferor may make
a valid election by including the certification described therein on or with its tax return
filed by the due date (including extensions) for filing its original return for the taxable
year in which the transaction occurred.

   The Election was required to be filed on LLC’s income tax return for Year. For

various reasons, however, LLC failed to file the Election in a timely manner.

   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.

   Section 301.9100-1(b) defines the term “regulatory election” as including an

election whose due date is prescribed by a regulation, revenue ruling, revenue
procedure, notice or announcement. 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 (§ 301.9100-1(a)). Section 301.9100-2 provides
automatic extensions of time for making certain elections. Section 301.9100-3 provides
extensions of time for making regulatory elections that do not meet the requirements of
§ 301.9100-2. 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

PLR-105724-10 3

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 Notice 2005-70. Therefore,

the Commissioner has discretionary authority under § 301.9100-3 to grant an extension
of time to file the Election, provided LLC 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 LLC and Company

Official explain the circumstances that resulted in the failure to timely file the Election.
The information establishes that the request for relief was filed before the IRS
discovered the failure 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)(i).

    Based on the facts and information submitted, including the affidavits submitted

and the representations that have been made, we conclude that LLC 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 to file the Election.

    This extension of time is conditioned on LLC’s and the Sub 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 made (taking into
account the time value of money). No opinion is expressed as to the 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, 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 discussed in this
letter. Specifically, no opinion is expressed as to whether the transaction is described in
§ 351, nor is any opinion expressed concerning the basis or fair market value of any
asset. 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 have relied on certain

statements and representations that LLC and Company Official made under penalties of
perjury. However, the Director should verify all essential facts. Moreover,

PLR-105724-10 4

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.

   The letter ruling is directed only to the taxpayer 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. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to the return that provides the date and control
number of the letter ruling.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                   Sincerely,


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