Built-in-loss transfer gets 60 days for a late basis election

Plain-English summary

A partnership owned a controlled foreign corporation that transferred built-in-loss property to a newly formed corporate subsidiary in a purported section 351 exchange. Section 362(e)(2) would ordinarily reduce the subsidiary’s basis in the property to fair market value. The transferor and transferee instead intended to elect to reduce the transferor’s stock basis, but the election was not timely filed because qualified tax professionals failed to make or recommend it. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file the election, conditioned on the foreign corporation’s and subsidiary’s aggregate tax liability not being lower than it would have been with a timely election.

Ruling snapshot

• Question: Could the taxpayer make a late section 362(e)(2)(C) election for a built-in-loss property transfer?
• Outcome: Approved
• Key authorities: IRC §§ 351, 362(e)(2)(C); Treas. Reg. §§ 1.362-4, 301.9100-3; Notice 2005-70

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201545013 Third Party Communication: None
Release Date: 11/6/2015 Date of Communication: Not Applicable
Index Number: 9100.22-00, 362.01-00
Person To Contact:
------------------------------------------------------------ --------------------------, ID No. ----------------
----------- -----------------
------------------------------------------------------------ Telephone Number:
------------- --------------------
------------------------------------ Refer Reply To:
--------------------------------------------------- CC:CORP:3
PLR-108930-15
Date:
August 04, 2015

Legend

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

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

FSub = ------------------------------------

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

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

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

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

Year 1 = -------

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

Internal Tax Professional
& Company Official = -----------------------------------------------

PLR-108930-15 2

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

   This letter responds to a letter dated March 10, 2015, submitted by your

authorized representative, requesting an extension of time under § 301.9100-3 of the
Procedure and Administration Regulations to file an election. The extension is being
requested in order to allow Taxpayer to file an election under § 362(e)(2)(C) of the
Internal Revenue Code (the “Code”) with respect to the Date 1 Transfer (as defined
below) (the “Election”). The material information is summarized below.

   Taxpayer is a State A limited partnership that is classified as a partnership for

federal income tax purposes. Taxpayer wholly owns FSub, a Country A company that
is a controlled foreign corporation, as defined in § 957, (a “CFC”). LLC is a State A
limited liability company that was organized on Date 1. LLC made an election to be
treated as a corporation for federal income tax purposes effective as of its date of
formation. FSub wholly owned LLC on Date 1.

    On Date 1 (a date before September 4, 2013), FSub transferred property to LLC

in a tax-free transfer described in § 351 (the “Date 1 Transfer”). At the time of the Date
1 Transfer, the property transferred had a tax basis 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.
Section 362(e)(2)(A) does not apply, and the election under § 362(e)(2)(C) is not
available, to exchanges subject to § 362(e)(1).

    In effect on Date 1, 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, if the
transferor is a CFC, its controlling U.S. shareholder(s), as defined in § 1.964-1(c)(5) of
the Income Tax Regulations, may make a valid election for the CFC on or with each of
their tax returns filed by the due date(s) (including extensions) for filing their original
returns 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)
PLR-108930-15 3

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.

   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, External Tax

Professional, and Internal Tax Professional & Company Official 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).
PLR-108930-15 4

     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 FSub and LLC

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, External Tax Professional, and Internal
Tax Professional & Company Official 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.
PLR-108930-15 5

    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)