Consolidated group may make late intercompany regulation election

Plain-English summary

A consolidated group had deferred gains from two stockless mergers completed before the 1995 intercompany transaction regulations took effect. It failed to make the transition election that would apply the newer regulations to those transactions and discovered the omission only after the election deadline. The group sought relief while planning an internal restructuring involving a subsidiary liquidation and a disregarded-entity conversion. The IRS found that the parent acted reasonably and in good faith and granted 60 days to attach the election to an amended return for the period that included July 12, 1995. Relief was conditioned on the group's aggregate tax liability not being lower than it would have been with a timely election, including the time value of money. The IRS did not rule that the group substantively qualified for the election.

Ruling snapshot

• Question: Could the consolidated group make a late election to apply the 1995 intercompany transaction regulations to its deferred stock gains?
• Outcome: Approved, with 60 days to file the election on an amended return and no reduction in aggregate tax liability
• Key authorities: Treas. Reg. §§ 1.1502-13(l)(3), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201507006 Third Party Communication: None
Release Date: 2/13/2015 Date of Communication: Not Applicable
Index Number: 1502.13-00, 9100.22-00
Person To Contact:
--------------------- ----------------------, ID No. ------------------
-------------------------------- Telephone Number:
------------------------ ----------------------
----------------------------------- Refer Reply To:
--------------------------------------- CC:CORP:B06
PLR-120199-14
Date:
November 12, 2014

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

Sub 1 = --------------------------------------------------------------

-

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Sub 2 = --------------------------------------------------------------

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Sub 3 = -------------------------------------

Sub 4 = --------------------------------------------------------------

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Date 1 = ------------------

Date 2 = ----------------------

Date 3 = ---------------------------

PLR-120199-14 2

Date 4 = ----------------------------

Date 5 = --------------

Year End = -------------------------------------------------

$a = ------------

$b = ----------------

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

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

This letter is in response to your authorized representative’s letter dated May 15, 2014,
requesting an extension of time under §§ 301.9100-1 through 301.9100-3 of the
Procedure and Administration Regulations to file an election under § 1.1502-13(l)(3) of
the Income Tax Regulations (hereinafter referred to as the “Election”). Additional
information was received in letters dated July 10, 2014, July 30, 2014, August 21, 2014,
September 17, 2014, and November 12, 2014. The material information is summarized
below.

Parent is the common parent of a consolidated group that has a taxable year ending
Year End (the “Parent Group”). Parent owns all the stock of Sub 1 and Sub 2. Sub 2
owns all the stock of Sub 3. Sub 3 owns all the stock of Sub 4. Sub 1, Sub 2, Sub 3,
and Sub 4 are all members of the Parent Group.

As part of a proposed restructuring, Sub 4 will liquidate into Sub 3 and Sub 2 will
convert to an entity disregarded as separate from Parent for Federal tax purposes.

In July 1995, the Internal Revenue Service and Treasury Department published new
intercompany transaction regulations under § 1.1502-13 governing the treatment of
transactions between members of a consolidated group. The regulations are generally
effective for transactions occurring in taxable years beginning on or after July 12, 1995.
Section 1.1502-13(l)(1).

Section 1.1502-13(l)(3) of the regulations permitted taxpayers to elect to have the
regulations apply to certain stock elimination elections (i.e., those transactions
described in § 1.1502-13(l)(3)(ii)) that occurred in a year to which prior law would
otherwise apply (the “Prior § 1.1502-13 Regulations”). To make the Election under

PLR-120199-14 3

§ 1.1502-13(l)(3), taxpayers were required to include a statement making the Election
with their original return for the taxable year including July 12, 1995.

Prior to July 12, 1995, the following transactions were entered into by members of the
Parent Group:

1. On Date 1, a wholly-owned subsidiary of Sub 1 merged with and into Sub 2 in a
   stockless merger treated as a tax-free reorganization. Sub 1 was treated as distributing
   to Parent the deemed Sub 2 shares received in the merger to properly reflect stock
   ownership in Sub 2. Sub 1 recognized approximately $a of gain on the deemed
   distribution of Sub 2 stock, all of which was deferred under the Prior § 1.1502-13
   Regulations.

2. On Date 2, a wholly-owned subsidiary of Sub 4 merged with and into Sub 2 in a
   stockless merger treated as a tax-free reorganization. Sub 4 was treated as distributing
   the deemed Sub 2 shares received in the merger to Sub 3, which in turn was treated as
   distributing the deemed shares to Parent to properly reflect stock ownership in Sub 2.
   Sub 4 recognized approximately $b of gain on the deemed distribution, all of which was
   deferred under the Prior § 1.1502-13 Regulations.

3. On Date 3, Parent transferred the stock of Sub 3 to Sub 2 in a transaction intended to
   qualify as a tax-free exchange described in § 351.

The Election was required to be filed by Date 4, but for various reasons, a valid Election
was not filed. On Date 5 (which was after the due date for the Election), it was
discovered that no Election was made by Parent with respect to the Parent Group.

Parent has represented that except for the transactions described in this letter, no
member of the Parent Group had any deferred stock gain or loss at any time during the
taxable year that included July 12, 1995, from an intercompany transaction. Parent has
also represented that it is not seeking to alter a return position for which an accuracy
related penalty has been or could be imposed under § 6662.

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

PLR-120199-14 4

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., § 1.1502-
13(l)(3)). 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 and Company Official
explain the circumstances that resulted in the failure to timely file a valid Election. The
information establishes that the request for relief was filed before the failure to make the
Election was discovered by the Internal Revenue Service. See § 301.9100-3(b)(1)(i).

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 60 days from the date on this letter, for Parent to file the Election.
The election must be attached to an amended return for the period including July 12,
1995.

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.

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 Parent Group
qualifies substantively to make the Election.

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 made by the
taxpayer. However, the Director should verify all essential facts. In addition,
notwithstanding that 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.

PLR-120199-14 5

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.

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 their return that provides the date and control number of this
letter ruling.

Pursuant to the power of attorney on file in this office, copies of this letter are being sent
to your authorized representatives.

                                   Sincerely,


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