Buyer and sellers of an S corporation get extra time to make a late Section 338(h)(10) election treating the stock purchase as an asset sale

Plain-English summary

A § 338(h)(10) election lets the buyer and sellers of a corporation jointly treat a stock purchase as if the target had sold all its assets and liquidated, which often gives the buyer a stepped-up basis in the assets. Here a member of a consolidated group (through a disregarded entity) bought all the ownership interests of an S corporation in what was represented to be a "qualified stock purchase," and the parties intended to make the § 338(h)(10) election but missed the deadline. They asked the IRS for relief under Treas. Reg. § 301.9100-3, which allows more time for a missed regulatory election if the taxpayer acted reasonably and in good faith and the government is not prejudiced. The IRS granted the relief: 75 days from the letter to file the election on Form 8023, and 150 days to file or amend all affected returns to report the deal as a § 338(h)(10) transaction. The relief is conditioned on the election not lowering the parties' aggregate tax (accounting for the time value of money), and the IRS did not rule on whether the purchase actually qualifies or on any resulting tax consequences.

Ruling snapshot

• Question: May the buyer and sellers of an S corporation get an extension of time to make a late § 338(h)(10) election?
• Outcome: approved (75-day extension to file the election; 150 days to conform returns)
• Key authorities: IRC § 338(a), (d)(3), (h)(10); Treas. Reg. § 1.338(h)(10)-1(c); Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202221005 Third Party Communication: None
Release Date: 5/27/2022 Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.07-00
Person To Contact:
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------------------------------- Telephone Number:
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------------------------- Refer Reply To:
CC:CORP:B05
PLR-122229-21
Date:
March 01, 2022

Legend

Parent = -------------------------------
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Purchaser = ----------------------------------------------
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DE = ----------------------------------
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Target = --------------------------------------
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Sellers = --------------------
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Date = -----------------------

Company Officials = -----------------------------------------
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Dear ----------------:
PLR-122229-21 2

This letter responds to a letter dated October 25, 2021, submitted on behalf of Parent
and Sellers, requesting an extension of time under §301.9100-3 of the Procedure and
Administration Regulations to file an election. Parent and Sellers are requesting an
extension to file a "section 338(h)(10) election" under section 338(h)(10) of the Internal
Revenue Code (the "Code") and §1.338(h)(10)-1(c) of the Income Tax Regulations (the
"regulations") with respect to Purchaser's acquisition of the stock of Target, an S
corporation, on Date as described below (the "Election"). The material information
submitted for consideration is summarized below.

Parent was the common parent of a consolidated group of which Purchaser was a
member. On Date, Purchaser acquired, through DE (a disregarded entity for federal tax
purposes), all the ownership interests in Target, an entity treated as an S corporation for
federal income tax purposes, from Sellers (the "Purchase"). It is represented that the
acquisition of Target qualified as a "qualified stock purchase" within the meaning of
section 338(d)(3).

Parent and Sellers intended to file the Election, but for various reasons, a valid Election
was not made. After the due date for the Election, it was discovered that a valid
Election was not made. Subsequently, this request was submitted, under §301.9100-3,
for an extension of time to file the Election. Parent and Sellers have represented that
they are not seeking to alter a return position for which an accuracy-related penalty has
been or could be imposed under section 6662 at the time of the request for relief.

Section 338(a) permits certain stock purchases to be treated as asset acquisitions if: (1)
the purchasing corporation makes or is treated as having made a section 338 election
or a section 338(h)(10) election; and (2) the acquisition is a qualified stock purchase.

Section 338(h)(10) permits the purchasing corporation and sellers to elect jointly to treat
the target corporation as deemed to sell all of its assets and distribute the proceeds in
complete liquidation. A section 338(h)(10) election may be made for target only if
purchaser acquires stock meeting the requirements of section 1504(a)(2) from a selling
consolidated group, a selling affiliate, or the S corporation shareholders in a qualified
stock purchase. Section 1.338(h)(10)-1(c)(1).

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
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.
See §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 to the satisfaction of the Commissioner that
PLR-122229-21 3

the taxpayer acted reasonably and in good faith, and that granting relief will not
prejudice the interests of the government. See §301.9100-3(a).

In this case, the time for filing the Election is fixed by regulations (i.e., §1.338(h)(10)-
1(c)(3)). Therefore, the Commissioner has discretionary authority under §301.9100-3 to
grant an extension of time for Parent and Sellers to file the Election, provided Parent
and Sellers show they 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, Sellers, and Company
Officials 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
possible 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 and Sellers have shown they 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 75 days from the date on this letter, for Parent and
Sellers to file the Election with respect to the acquisition of the stock of Target.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, Parent and Sellers must file the
Election on Form 8023, in accordance with §1.338(h)(10)-1(c) and the instructions to
the Form. A copy of this letter must be attached to Form 8023.

WITHIN 150 DAYS OF THE DATE ON THIS LETTER, all relevant parties must file or
amend, as applicable, all returns and amended returns (if any) necessary to report the
transaction as a section 338(h)(10) transaction for the taxable year in which the
transaction was consummated (and for any other affected taxable year). A copy of this
letter and a copy of Form 8883 must be attached to any tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy the requirement of
attaching a copy of this letter by attaching a statement to their return that provides the
date on, and control number (PLR-122229-21) of, the letter ruling.

The above extension of time is conditioned on Parent's consolidated group's, Seller's,
and Target'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 made
(taking into account the time value of money). No opinion is expressed as to the
taxpayers' 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.
PLR-122229-21 4

We express no opinion as to: (1) whether the Purchase qualifies as a "qualified stock
purchase" under section 338(d)(3); (2) whether the Purchase qualifies for section
338(h)(10) treatment; or (3) any other tax consequences arising from 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
Parent, Sellers, and Company Officials. 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.

This letter is directed only to the taxpayers who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

Pursuant to the power of attorney on file in this office, a copy of this letter is being sent
to your authorized representative.

                                              Sincerely,


                                              Thomas I Russell__
                                              Thomas I. Russell
                                              Chief, Branch 1
                                              Office of Associate Chief Counsel (Corporate)

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