Corporation receives extra time for an outbound intangible-property election

Plain-English summary

A domestic corporation was treated as transferring operating intangibles to a foreign corporation when a foreign disregarded entity elected corporate status. Its accounting firm reported the outbound transfer on Form 926 but did not identify the operating intangibles or advise the corporation to elect immediate gain recognition under the section 367(d) regulations. The corporation requested more time to make that deemed-sale election. Based on the submitted facts and representations, the IRS concluded that the requirements for relief were met. It granted 120 days to amend the relevant open-year returns consistently with the election, without deciding whether the corporation otherwise qualified to make it.

Ruling snapshot

• Question: May the corporation make a late election to treat its transfer of operating intangibles to a foreign corporation as a deemed sale?
• Outcome: Approved, subject to filing consistent amended returns within 120 days
• Key authorities: IRC §§ 351, 367(d), 6038B; Treas. Reg. §§ 1.367(d)-1T(g)(2), 1.367(d)-1(g)(2)(i), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202447013 Third Party Communication: None
Release Date: 11/22/2024 Date of Communication: Not Applicable
Index Number: 367.30-00, 9100.00-00
Person To Contact:
-------------------------- -----------, ID No. -----------------
------------------------------ Telephone Number:
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--------------------------------- Refer Reply To:
CC:INTL:B04
PLR-105091-24
Date:
August 20, 2024

Legend

X = --------------------------

FDE1 = --------------------------------------------

FDE2 = ------------------------------------------------------------

Country = ----------------

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

Date 2 = --------------------

State = -------------

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

This responds to a letter dated February 14, 2024, and subsequent correspondence,
submitted on behalf of X by its authorized representative, requesting an extension of
time under § 301.9100-3 of the Procedure and Administration Regulations to elect to
treat a transfer of operating intangibles by X to FCorp1 (as defined below) as a sale
pursuant to §§ 1.367(d)-1T(g)(2) and 1.367(d)-1(g)(2)(i), effective for the tax year
including Date 2 (the “Deemed Sale Election”).

                                                     Facts

PLR-105091-24 2

X is a domestic corporation organized under the laws of State. On Date 1, X formed
FDE1, a Country company that was disregarded as an entity separate from its owner for
federal tax purposes at the time of its formation. On Date 1, FDE1 acquired all the
interests of FDE2, a Country company that was disregarded as an entity separate from
its owner for federal tax purposes, for cash from an unrelated seller.

FDE1 filed Form 8832, Entity Classification Election, to be treated as an association
(and thus a corporation under § 301.7701-2(b)(2)) for federal tax purposes as of Date 2
(the “CTB Election”). Following the CTB Election, FDE1 is referred to as “FCorp1.” As
a result of the CTB Election, X was treated as contributing all of the assets and liabilities
of FDE1 to FCorp1 in exchange for stock of FCorp1 under § 301.7701-3(g)(1)(iv). X
intended this contribution to be treated as a section 351(a) exchange.

At the time of the CTB Election, FDE1 held no assets other than the interests of FDE2
acquired on Date 1. The assets of FDE1 that are deemed transferred as a result of the
CTB Election therefore are comprised of FDE2’s assets, which included “operating
intangibles” (as defined in § 1.367(a)-1(d)(6)). X determined that its basis in the deemed
transferred assets equaled the fair market value of the assets at the time of the deemed
transfer resulting from the CTB Election.

An external accounting firm assisted X with analyzing the tax consequences of the
acquisition of FDE2 by FDE1 and the CTB Election, and in the preparation of X’s tax
return for the year including Date 2, including a Form 926, Return by a U.S. Transferor
of Property to a Foreign Corporation. The Form 926 prepared by the accounting firm
and filed by X noted the outbound transfer of intangible property to FCorp1, the total fair
market value and basis of such property, and an income inclusion for the year under
section 367(d) of zero. However, the Form 926 did not identify any of the intangible
property as “operating intangibles” nor did it indicate a Deemed Sale Election was
made. Further, the accounting firm did not advise X to make the Deemed Sale Election
on its tax return.

                                        Law

Section 367(d) provides that if a U.S. person transfers any intangible property to a
foreign corporation in an exchange described in section 351, the U.S. person is treated
as having sold the property in exchange for payments that are contingent upon the
productivity, use, or disposition of the property.

Section 1.367(d)-1T(g)(2) provides that a U.S. person that transfers intangible property
to a foreign corporation in a transaction subject to section 367(d) may instead elect to
recognize gain in the year of the transfer as ordinary income in an amount equal to the
difference between the fair market value of the intangible property transferred and its
adjusted basis, if the U.S. person meets certain requirements. Under § 1.367(d)-
PLR-105091-24 3

1(g)(2)(i), the requirements of § 1.367(d)-1T(g)(2) are met if the intangible property
transferred constitutes an operating intangible, as defined in § 1.367(a)-1(d)(6).

A taxpayer makes an election under § 1.367(d)-1T(g)(2) by notifying the Internal
Revenue Service of the election in accordance with the requirements of section 6038B
and regulations thereunder, and subsequently including the appropriate amounts in
gross income in a timely filed tax return for the year of the transfer.

Section 6038B and the regulations thereunder require U.S. persons to report transfers
subject to section 367(d) on Form 926. Section 1.6038B-1(c)(6)(iv) specifically requires
reporting of the adjusted basis of transferred intangible property and that items of
intangible property be separately identified, including intangible property described in §
1.367(d)-1(g)(2)(i). Form 926 instructs taxpayers to include gain recognized as a result
of an election under § 1.367(d)-1T(g)(2) in the income inclusion for the year of transfer
that is required to be entered for each identified transferred intangible.

Section 301.9100-1(a) provides that §§ 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 301.9100-3(a) provides that requests for
extensions of time for regulatory elections (other than automatic extensions covered in §
301.9100-2) will be granted when the taxpayer provides evidence (including affidavits)
to establish that the taxpayer acted reasonably and in good faith and the grant of relief
will not prejudice the interests of the Government.

Under § 301.9100-3(b), a taxpayer is deemed to have acted reasonably and in good
faith if the taxpayer requests relief before the failure to make the regulatory election is
discovered by the Service, or reasonably relied on a qualified tax professional, and the
tax professional failed to make, or advise the taxpayer to make, the election. However,
a taxpayer is not considered to have reasonably relied on a qualified tax professional if
the taxpayer knew or should have known that the professional was not competent to
render advice on the regulatory election or was not aware of all relevant facts.

In addition, § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have
acted reasonably and in good faith if the taxpayer—
(i) Seeks to alter a return position for which an accuracy-related penalty has been or
could be imposed under section 6662 at the time the taxpayer requests relief,
and the new position requires or permits a regulatory election for which relief is
requested;
(ii) Was fully informed in all material respects of the required election and related tax
consequences but chose not to make the election; or
(iii) Uses hindsight in requesting relief. If specific facts have changed since the
original deadline that make the election advantageous to a taxpayer, the Service
will not ordinarily grant relief.
PLR-105091-24 4

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time to make the regulatory election only when the interests of the
Government will not be prejudiced by the granting of relief.

Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced
if granting relief would result in a taxpayer having a lower tax liability in the aggregate
for all taxable years affected by the election than the taxpayer would have had if the
election had been timely made (taking into account the time value of money).

Section 301.9100-3(c)(1)(ii) provides that the interests of the government are ordinarily
prejudiced if the taxable year in which the regulatory election should have been made or
any taxable year that would have been affected by the election had it been timely made
are closed by the period of limitations on assessment under section 6501(a) before the
taxpayer’s receipt of a ruling granting relief under this section.

                                 Representations

X represents that it acted reasonably and in good faith, and that the interests of the
government will not be prejudiced by granting relief.

In addition, X makes the following representations:

1. The transfer of the assets of FDE1 to FCorp1 resulting from the CTB Election
  qualifies as an exchange under section 351 of the Code.
2. The assets deemed transferred to FCorp1 as a result of the CTB Election include
  “operating intangibles” as defined in § 1.367(a)-1(d)(6).
3. X’s basis in the assets of FDE1 as of the date of the CTB Election equaled its fair
  market value of the assets of FDE1 on the date of deemed transfer resulting from
  the CTB Election.

                                    Conclusion

Based solely on the facts submitted and representations made, we conclude that X has
satisfied the requirements of §§ 301.9100-1 and 301.9100-3.

Accordingly, X is granted an extension of time of 120 days from the date of this letter to
make the Deemed Sale Election. X should make the election by filing an amended tax
return consistent with the requested relief with the appropriate service center, and a
copy of this letter should be attached to the filing.

This ruling is contingent on X filing within 120 days of the date of this letter amended
returns for all open years consistent with the requested relief. These returns may
include, but are not limited to Forms 5471, Information Return of U.S. Persons With
Respect to Certain Foreign Corporations, such that these forms reflect the
PLR-105091-24 5

consequences of the relief granted in this letter. A copy of this letter ruling should be
attached to any such returns.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including any consequences to any person under section 482 and the source
under sections 861 through 865 of any gain recognized on the Deemed Sale Election.
In addition, § 301.9100-1(a) provides that the granting of an extension of time for
making an election is not a determination that a taxpayer is otherwise eligible to make
the election.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by the appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                            Sincerely,



                                            Robert Williams Jr
                                            Senior Counsel, Branch 4
                                            (International)

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