Transferor receives more time to make loss-property basis election

Plain-English summary

A foreign company treated as a corporation transferred a partnership interest to a related corporation in a transaction represented to qualify under IRC § 351. The interest's tax basis exceeded its fair market value, and the parties missed the deadline for the joint IRC § 362(e)(2)(C) election that would reduce the transferor's stock basis instead of the transferee's property basis. The IRS found that the transferor reasonably relied on a qualified tax professional, acted in good faith, and requested relief before the IRS discovered the failure. It granted 60 days from the letter date to file the election, conditioned on the parties' aggregate tax liability not being lower than if the election had been timely. The IRS did not decide whether the transfer qualified under IRC § 351 or determine any asset's basis or value.

Ruling snapshot

• Question: Could the transferor receive additional time to make the IRC § 362(e)(2)(C) basis election?
• Outcome: Approved, with 60 days to file and an aggregate-tax-liability condition
• Key authorities: IRC §§ 351 and 362(e)(2); Treas. Reg. §§ 1.362-4(d)(3), 301.9100-1, and 301.9100-3; Notice 2005-70

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201502002 Third Party Communication: None
Release Date: 1/9/2015 Date of Communication: Not Applicable
Index Number: 9100.22-00, 362.00-00
Person To Contact:
------------------ ------------------------, ID No. ----------------
---------- Telephone Number:
------------------- --------------------
---------------------- Refer Reply To:
------------------- CC:CORP:B01
-------------------------- PLR-115163-14
--------------------------------- Date:
October 06, 2014

                                                LEGEND

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

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

LP = ------------------------------------

LLC 1 = -------------------------

LLC 2 = ------------------

Interest = ------------------------------------------------------
-----------------------------------------------

Country A = ---------------------------

State A = ------------

Date 1 = --------------------------
PLR-115163-14 2

Year 1 = ------

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

Tax Professional 1 = -------------------------

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

Tax Professional 2 = ----------------------------------

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

   This letter responds to a letter dated April 3, 2014 requesting an extension of

time under § 301.9100-3 of the Procedure and Administration Regulations to file an
election. Additional information was submitted in letters dated August 28, 2014 and
September 12, 2014. The extension is being requested in order to allow Taxpayer to file
an election under § 362(e)(2)(C) of the Internal Revenue Code with respect to the Date
1 Transfer (as defined below) (the “Election”). The material information is summarized
below.

   Taxpayer is a Country A company that has elected to be treated as a corporation

for federal income tax purposes. Taxpayer owns a limited partnership interest in LP, a
State A limited partnership. LP held Interest in LLC 1, a State A limited liability
company that has elected to be treated as a partnership for federal income tax
purposes. LLC 1 is engaged in a trade or business in the United States. Taxpayer is a
wholly-owned subsidiary of Parent, a Country A company. Parent also owns all of the
interests in LLC 2, a State A limited liability company that has elected to be treated as a
corporation for federal income tax purposes.

   On Date 1, Taxpayer transferred its interest in LP to LLC 2 in a tax-free transfer

described in § 351 (the “Date 1 Transfer”). At the time of the Date 1 Transfer, the
interest in LP transferred had a tax basis exceeding fair market value.

  Taxpayer has represented that it does not seek to alter a return position for which

an accuracy-related penalty has been or could have been imposed under § 6662.

  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
PLR-115163-14 3

aggregate basis of the transferred property would, if not for this provision, exceed 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 may 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.

    In effect on the dates of the Date 1 Transfer, Notice 2005-70, 2005-2 C.B. 694,

provides guidance on how to make elections under § 362(e)(2)(C). Notice 2005-70
generally provides that the transferor makes an election under § 362(e)(2)(C) 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. For transactions after September 3,
2013, rules for making elections under § 362(e)(2)(C) are in § 1.362-4(d)(3)(ii).
However, taxpayers may apply § 1.362-4 to transactions occurring after October 22,
2004.

    The Election was required to be filed on or with Taxpayer’s timely filed income

tax return for Year 1. For various reasons, however, Taxpayer 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. Section 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 to the satisfaction of the Commissioner 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).

    The time for filing the Election under § 362(e)(2)(C) is fixed by Notice 2005-70 or,

if applicable, § 1.362-4(d)(3)(ii). Therefore, the Commissioner has discretionary
authority under § 301.9100-3 to grant an extension of time for Taxpayer to file the
Election, provided Taxpayer acted reasonably and in good faith, the requirements of
PLR-115163-14 4

§§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the
government.

    Information, affidavits, and representations submitted by Taxpayer, Company

Official, Tax Professional 1, and Tax Professional 2 explain the circumstances that
resulted in the failure to timely file the Election. The information establishes that
Taxpayer reasonably relied on a qualified tax professional who failed to make, or advise
Taxpayer to make, the Election, and that the request for relief was filed before the
failure to timely make the Election was discovered by the Internal Revenue Service. See
§ 301.9100-3(b)(1)(i) and (v).

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

and the representations made, we conclude that Taxpayer 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 60 days from the date on this
letter, for Taxpayer to file the Election, in the manner described in Notice 2005-70 or
§ 1.362-4(d)(3), if applicable.

   This extension of time is conditioned on the tax liability (if any) of Taxpayer and

LLC 2 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.

    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 Date 1 Transfer 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 Taxpayer, Company Official, Tax Professional 1,
and Tax Professional 2 made 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.
PLR-115163-14 5

   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, copies of this

letter are being sent to your authorized representatives.

                                   Sincerely,



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

cc: