More time granted to make the § 362(e)(2)(C) basis election for a built-in-loss property transfer

Plain-English summary

A taxpayer transferred property to a corporation in a tax-free § 351 exchange, but the property's tax basis was higher than its value (a built-in loss). To stop the same loss from being duplicated, § 362(e)(2) normally reduces the corporation's basis in the transferred property down to fair market value. There is an alternative: under § 362(e)(2)(C), the transferor and the corporation can jointly elect instead to reduce the transferor's basis in the stock it receives, leaving the corporation's basis in the property intact. That election requires a written binding agreement and a statement filed with the transferor's timely return, and here neither was done on time. The parties asked the IRS for relief under the "9100" regulations, which allow a late election when the taxpayer acted reasonably and in good faith and the government is not prejudiced. The IRS granted a 75-day extension to enter the agreement and file the statement, conditioned on the election not lowering anyone's aggregate tax (accounting for the time value of money). The IRS took no position on whether the transfer actually qualified under § 351 or whether the parties were substantively entitled to make the election.

Ruling snapshot

• Question: Should the IRS grant a late-election extension to make the joint § 362(e)(2)(C) basis election for a built-in-loss § 351 transfer?
• Outcome: approved (75-day extension, conditioned on no reduction in aggregate tax)
• Key authorities: IRC §§ 351, 362(e)(2); Treas. Reg. §§ 1.362-4(d), 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                           Department of the Treasury
                                                                   Washington, DC 20224

Number: 202430006                                                  Third Party Communication: None
Release Date: 7/26/2024                                            Date of Communication: Not Applicable
Index Number: 362.00-00, 9100.22-00
                                                                   Person To Contact:
-----------------------------------------                          ---------------------, ID No. -----------------
--------------------------------------------------                 Telephone Number:
-----------------------------                                      --------------------
---------------------------------                                  Refer Reply To:
                                                                   CC:CORP:B04
                                                                   PLR-124121-23
                                                                   Date:
                                                                   April 30, 2024




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

 Transferee                  =        -----------------------------------------------------
                                      ------------------------

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

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

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

 Tax Professionals           =        -------------------------------------------------------------------
                                      ---------------------------------------

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

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

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

 This letter responds to a letter dated December 11, 2023, submitted by your authorized
 representative, requesting an extension of time under §§301.9100-1 and 301.9100-3 of
PLR-124121-23                                  2

the Procedure and Administration Regulations to make an election. The extension is
being requested to allow Taxpayer and Transferee to make an election under section
362(e)(2)(C) and §1.362-4(d) regarding Taxpayer’s transfer of property to Transferee on
Date 1. Specifically, Taxpayer and Transferee are requesting an extension of time to
enter into a written, binding agreement to elect to apply section 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 is set forth below.

On Date 1, in a transaction that Taxpayer represented was a transaction described
under section 351, Taxpayer transferred certain property to Transferee (the “Transfer”).
At the time of the Transfer, the aggregate adjusted bases of the property transferred
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 section 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 section 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 section 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 section 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, Taxpayer and Transferee were
required to enter into the Binding Agreement prior to filing the Section 362(e)(2)(C)
Statement on or with Taxpayer’s timely filed income tax return for Year 1. For various
reasons, however, Taxpayer and Transferee 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
PLR-124121-23                                 3

to make the section 362(e)(2)(C) election. Taxpayer and Transferee represent that
neither party is seeking to alter a return position for which an accuracy-related penalty
has been or could be imposed under section 6662.

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.

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. 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 the regulations (i.e.,
§1.362-4(d)). Therefore, the Commissioner has discretionary authority under
§301.9100-3 to grant an extension of time for Taxpayer and Transferee to enter into the
Binding Agreement, and for Taxpayer to file the Section 362(e)(2)(C) Statement,
provided Taxpayer and Transferee 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 Taxpayer, Transferee,
Company Official, and Tax Professionals explain the circumstances that resulted in the
failure to make the section 362(e)(2)(C) election. The information establishes 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).

Based on the facts and information submitted, including the representations made, we
conclude that Taxpayer and Transferee 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 Taxpayer and
Transferee 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.
PLR-124121-23                                 4

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
the Transfer is described in section 351, and whether the Taxpayer and Transferee 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 made by Taxpayer, Transferee, Company Official, and Tax
Professionals. 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 still 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 on, and control number (PLR-
124121-23) of, 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,


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


cc:    -