Fund company gets more time to make the joint election that shifts a built-in loss from asset basis to stock basis

Plain-English summary

When property with a built-in loss (basis higher than value) is contributed to a
corporation in a tax-free § 351 exchange, § 362(e)(2) normally forces the
receiving corporation to reduce its basis in that property to fair market value,
preventing the loss from being duplicated. As an alternative, the transferor and
transferee can jointly elect under § 362(e)(2)(C) to instead reduce the
transferor's basis in the stock it receives, leaving the property's basis intact.
That election has two steps: a written binding agreement and an election
statement filed with the transferor's timely return. Here a regulated investment
company (RIC) contributed built-in-loss assets to a new RIC and intended to make
the election, but failed to complete either step. It sought "9100 relief" for more
time. Because the election deadline is fixed by regulation, the IRS granted 60
days for the parties to sign the binding agreement and file the statement, finding
they acted reasonably and in good faith by relying on a tax professional. The
relief is conditioned on no party's tax being lower than if the election had been
timely made.

Ruling snapshot

• Question: May the parties get an extension of time to make the § 362(e)(2)(C) election shifting a built-in loss from asset basis to stock basis?
• Outcome: Approved (60-day extension granted, subject to conditions)
• Key authorities: IRC §§ 362(e)(2)(C), 351; Treas. Reg. §§ 1.362-4(d), 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201839013
Release Date: 9/28/2018                                        Third Party Communication: None
                                                               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:B04
In Re: ---------------------------------------------------- PLR-115619-18
----------------------------------------------------------- Date:
                                                            June 27, 2018




Legend

Taxpayer                            = -------------------------------------------
                                      ------------------------
Fund 1                              = -------------------------------------------
                                      ------------------------
Fund 2                              = -------------------------------------------
                                      ------------------------
Fund 3                              = -------------------------------------------
                                      ------------------------
Transferee Fund                     = -------------------------------------------
                                      ------------------------
Date 1                              = -----------------
Date 2                              = ----------------------
Year 1                              = -------------------------------------------
                                      ---------------------------
Company Official                    = -------------------------------------------
                                      -------------------------------------------
                                      ----------------------
Tax Professional                    = -------------------------------------------
                                      ----------------------------

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

        This letter responds to a letter dated May 7, 2018, submitted by your authorized
representative, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of
the Procedure and Administration Regulations to make an election. The extension is
being requested to allow Taxpayer and Transferee Fund to make an election under
§ 362(e)(2)(C) and § 1.362-4(d) regarding Taxpayer’s property contribution to
Transferee Fund on Date 2. Specifically, Taxpayer and Transferee Fund are requesting
an extension of time to enter into a written, binding agreement to elect to apply
§ 362(e)(2)(C) (the “Binding Agreement”), and for Taxpayer to file an election statement
as described in § 1.362-4(d)(3)(i) (the “Section 362(e)(2)(C) Statement”). The material
information submitted in the March 7, 2017, letter and subsequent correspondences is
set forth below.

       Taxpayer is a regulated investment company (“RIC”) within the meaning of
§ 851(a). In transactions intended to qualify under § 351(a), Taxpayer contributed
assets to newly created RICs. In Date 1, Taxpayer contributed assets to Fund 1, and in
Date 2, Taxpayer contributed assets to Fund 2, Fund 3, and Transferee Fund. At the
time of the property contribution to Transferee Fund, the aggregate basis of the property
contributed exceeded its 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
transferee’s aggregate adjusted bases of the transferred property would, if not for the
provision, exceed its fair market value immediately after the transfer, then
(notwithstanding § 362(a)), the transferee’s aggregate adjusted bases in such property
will not exceed the fair market value of such property immediately after such
transaction.

        However, under § 362(e)(2)(C), the transferor and the transferee may make a
joint election to reduce the transferor’s basis in the stock received in the exchange 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) further provides that the joint 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 1.362-4(d)(1) of the Income Tax Regulations provides that a
section 362(e)(2)(C) election has two steps. The first step is the transferor and
transferee entering into a written, binding agreement to elect to apply § 362(e)(2)(C).
The second step is filing a Section 362(e)(2)(C) Statement in accordance with § 1.362-
4(d)(3).

      Section 1.362-4(d)(3)(ii)(A) provides that if the transferor is required to file a
United States federal income tax return, the Section 362(e)(2)(C) Statement is filed by

the transferor with its timely filed original United States tax return for the taxable year in
which the transfer occurred.

       In order to make a section 362(e)(2)(C) election, the Taxpayer and Transferee
Fund were required to enter into the Binding Agreement prior to filing the Section
362(e)(2)(C) Statement on or with the Taxpayer’s timely filed income tax return for Year

1. Taxpayer and Transferee Fund intended to make the section 362(e)(2)(C) election.
For various reasons, however, Taxpayer and Transferee Fund failed to enter into the
Binding Agreement, and Taxpayer failed to file the Section 362(e)(2)(C) Statement.

        Subsequently, this request was submitted, under §§ 301.9100-1 and 301.9100-3,
for an extension of time to enter into the Binding Agreement and to file the Section
362(e)(2)(C) Statement in order to make the section 362(e)(2)(C) election. Taxpayer
and Transferee Fund represent that neither party is seeking to alter a return position for
which an accuracy-related penalty has been or could be imposed under § 6662 at the
time of the request for relief (taking into account any qualified amended return filed
within the meaning of § 1.664-2(c)(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 taxpayers who are 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 (see
§ 601.601(d)(2) of this chapter). 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. See § 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 making the section 362(e)(2)(C) election is fixed by § 1.362-4(d).
Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an
extension of time for Taxpayer and Transferee Fund to enter into the Binding
Agreement, and for Taxpayer to file the Section 362(e)(2)(C) Statement, provided
Taxpayer and Transferee Fund 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, Transferee
Fund, Company Official, and Tax Professional explain the circumstances that resulted
in the failure to make the section 362(e)(2)(C) election. The information establishes that
Taxpayer and Transferee Fund reasonably relied on a qualified tax professional who
failed to advise Taxpayer and Transferee Fund to properly make the section
362(e)(2)(C) election, and that the request for relief was filed before the failure to
properly make the section 362(e)(2)(C) 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 and Transferee Fund 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 and Transferee Fund to enter into the Binding
Agreement, and for Taxpayer to file the Section 362(e)(2)(C) Statement, in the manner
described by § 1.362-4(d)(3).

      This extension of time is conditioned on the Federal tax liability (if any) of any
relevant party not being lower, in the aggregate, for all years to which the section
362(e)(2)(C) election applies than it would have been if the section 362(e)(2)(C) 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 concerning the basis or fair market value of
any asset, whether any of the property contributions qualify under § 351(a), and
whether the Taxpayer and Transferee Fund are substantively entitled to make a Section
362(e)(2)(C) election. In addition, we express no opinion as to the tax effects or
consequences of making the section 362(e)(2)(C) 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, making the section 362(e)(2)(C) 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, Transferee Fund, Company Official, and
Tax Professional made under penalties of perjury. However, the Director should verify
all essential facts. Moreover, notwithstanding that an extension is being granted under
§ 301.9100-3 to make the section 362(e)(2)(C) election, any penalties and interest that
would otherwise be applicable, if any, continue to apply.

       This letter ruling is directed only to the taxpayers 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 (PLR-115619-18) on this 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)

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