Taxpayer receives more time for a section 362 basis election

Plain-English summary

A corporate taxpayer transferred built-in-loss assets to a subsidiary in a transaction intended to qualify under section 351. The parties intended to elect under section 362(e)(2)(C) to reduce the taxpayer's basis in the subsidiary stock instead of reducing the subsidiary's basis in the transferred property, but the election was not timely filed. The taxpayer showed that it reasonably relied on a qualified tax professional who failed to make or recommend the election and requested relief before the IRS discovered the omission. The IRS found that the taxpayer acted reasonably and in good faith and that granting relief would not prejudice the government. It granted 60 days from the ruling date to file the election under Notice 2005-70 or the applicable regulation.

Ruling snapshot

• Question: Could the taxpayer obtain more time to make the joint section 362(e)(2)(C) election for a transfer of built-in-loss property?
• Outcome: Approved, the taxpayer received 60 days to file the election.
• Key authorities: IRC §§ 351 and 362(e)(2)(C); 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: 201521011 Third Party Communication: None
Release Date: 5/22/2015 Date of Communication: Not Applicable
Index Number: 362.01-00, 9100.22-00
Person To Contact:
--------------------- -----------------------, ID No. -------------------
------- ---------------------------------------------------
------------------------------------------------------------ Telephone Number:
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------------------------------ Refer Reply To:
--------------------------------------------- CC:CORP:B03
PLR-144401-14
Date:
February 19, 2015

Legend

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

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

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

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

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

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

Year 1 = -----------------------------------------------

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

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

   This letter responds to a letter dated December 2, 2014, submitted by your

authorized representative, 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 January 26, 2015. The extension is being requested in order
PLR-144401-14 2

to allow Taxpayer to file an election under § 362(e)(2)(C) of the Internal Revenue Code
with respect to the Date 2 Transfer (as described below) (the "Election"). The material
information is summarized below.

   Taxpayer is a State A limited liability company that was initially classified as a

partnership for federal income tax purposes but made an election to be treated as a
corporation effective as of Date 2. Sub 1 is a State A limited liability company that was
organized on Date 1. Sub 1 made an election to be treated as a corporation for federal
income tax purposes effective as of Date 2. On Date 2 (a date before September 4,
2013), Taxpayer contributed assets to Sub 1 in a tax-free transfer described in § 351
(the "Date 2 Transfer"). At the time of the Date 2 Transfer the assets transferred had
aggregate adjusted tax bases exceeding 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 adjusted basis of the transferred property would, if not for this provision,
exceed the fair market value of such property 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 Date 2, Notice 2005-70, 2005-2 C.B. 694, provided guidance on how

to make elections under § 362(e)(2)(C). Notice 2005-70 generally provided that the
transferor made a valid election 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.

  Generally, for transactions after September 3, 2013, rules for making elections

under § 362(e)(2)(C) are in § 1.362-4(d)(3). However, taxpayers may apply § 1.362-4 to
transactions occurring after October 22, 2004.

   Taxpayer intended to file the Election. 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. 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 at the time Taxpayer requested relief, and
the new position requires or permits the aforementioned election for which relief is
requested.
PLR-144401-14 3

   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 an election

whose due date is prescribed by a regulation, revenue ruling, revenue procedure,
notice, or announcement published in the Internal Revenue Bulletin. 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
§§ 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, and Tax Professional 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, 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

Sub 1 being not lower, in the aggregate, for all years to which the Election applies than
PLR-144401-14 4

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 2 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, and Tax Professional
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.

   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)