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 ----------------:
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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
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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.
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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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