After a parent sold all stock of its South Carolina subsidiary on August 31, 1988 and later made an IRC section 338(h)(10) election, when was the subsidiary's South Carolina return due and how were penalties, interest, and estimated tax handled?

Plain-English summary

South Carolina Revenue Ruling 89-10 held that subsidiary Y's short-period South Carolina corporate return was due November 15, 1988 after its parent sold all of Y's stock on August 31, 1988. The due date was the same whether or not the parties later made an IRC section 338(h)(10) election.

An extension could run through the federal return's due date, including federal extensions, but ordinarily had to be requested by filing a tentative South Carolina return by November 15, 1988.

Because adoption of the federal taxable year changed the state short-period filing requirement, the ruling gave limited transition relief: failure-to-file and failure-to-pay penalties would be waived through March 15, 1989 if the return or extension request was filed by then. Interest still ran from November 15, 1988, and the deemed-sale tax was disregarded when computing the estimated-tax penalty.

The transaction

Parent corporation X and subsidiary Y belonged to a calendar-year federal consolidated group. Y was the group's only corporation doing business in South Carolina and therefore filed its own calendar-year South Carolina return.

X sold 100% of Y's stock on August 31, 1988. The parties planned to make a section 338(h)(10) election on March 15, 1989, treating the stock acquisition as an asset transaction for federal tax purposes.

Why the state return was due November 15

The ruling explained that section 338 generally allowed a qualifying stock buyer to elect deemed asset-purchase treatment. The target corporation was treated as recognizing gain or loss on the deemed sale and as repurchasing its assets, giving the buyer a stepped-up basis.

Former South Carolina section 12-7-1410 required the state taxable year to match the federal taxable year. Y's federal taxable year ended on the stock-sale date.

South Carolina therefore required Y to file a return including its operating income or loss and the gain or loss on the deemed sale two and one-half months after the month of sale. That produced a November 15, 1988 due date, regardless of whether the section 338(h)(10) election was ultimately made.

Extension and transition penalty relief

The ruling allowed an extension through the due date of Y's federal return, including federal extensions. The extension ordinarily should have been requested with a tentative South Carolina return filed by November 15, 1988.

However, the ruling recognized that the federal-taxable-year adoption had changed the South Carolina short-period return requirement. It therefore waived failure-to-file and failure-to-pay penalties through March 15, 1989 if Y filed the return or requested an extension by that date.

The ruling also said South Carolina would waive penalties attributable to the section 338 election as provided in the cited temporary federal regulation.

Interest and estimated-tax treatment

Interest was different from penalties. Section 12-54-160 prohibited its waiver, so interest accrued on the unpaid balance from November 15, 1988 until payment.

For the estimated-tax penalty, the ruling disregarded the tax attributable to the deemed asset sale under the cited temporary federal regulation.

What this means for you

Corporate tax departments

Under this historical ruling, a target's short federal taxable year also controlled the South Carolina filing period. Waiting until the later section 338 election date did not postpone the original state return due date.

Mergers and acquisitions teams

The stock closing date, target's federal year end, planned election date, and state extension mechanics all had to be coordinated before the election was formally made.

Accountants and tax professionals

Penalty relief did not eliminate interest. The ruling treated filing/payment penalties, statutory interest, and estimated-tax penalties as separate questions with different results.

Common questions

Q: Was Y's return due November 15, 1988 or March 15, 1989?

A: November 15, 1988, whether or not the section 338(h)(10) election was made.

Q: Could Y obtain an extension?

A: Yes, through the federal return period, including federal extensions. The tentative South Carolina return ordinarily should have been filed by November 15, 1988.

Q: Why did the ruling allow filing by March 15, 1989 without specified penalties?

A: It provided transition relief because adoption of the federal taxable year changed the South Carolina short-period filing requirement.

Q: Was interest also waived?

A: No. Interest ran from November 15, 1988 until payment.

Q: Did the deemed-sale tax increase the estimated-tax penalty?

A: No. The ruling said to disregard that tax for the estimated-tax penalty calculation.

Q: Are these specific dates current rules for a modern transaction?

A: No. They arise from the 1988 sale and 1989 election in RR 89-10. Current federal and South Carolina law must be checked.

Citations and references

• IRC section 338 and section 338(h)(10) — qualifying stock acquisition and deemed asset-sale election
• Former S.C. Code section 12-7-1410 — South Carolina taxable year followed the federal taxable year
• S.C. Code section 12-54-70 (Law. Co-op. Supp. 1988) — listed in the ruling's reference block
• S.C. Code section 12-54-160 — statutory interest could not be waived
• IRS Temporary Regulation section 1.338-IT(h)(1) — penalty waiver and estimated-tax treatment as cited in the ruling
• S.C. Code section 12-3-170 and SC Revenue Procedure 87-3 — authority cited for the Revenue Ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR89-10.pdf

Original ruling text

SC REVENUE RULING #89-10

SUBJECT:

Return Due Date - IRC Section 338(h)(10) Election
(Income Tax)

EFFECTIVE DATE:

Applies to all periods open under statute.

SUPERSEDES:

All previous documents and any oral directives
in conflict herewith.

REFERENCE:

S.C. Code Ann. Section 12-7-1410 (Law. Co-Op. Supp. 1988)
S.C. Code Ann. Section 12-54-70 (Law. Co-Op. Supp. 1988)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how
tax law is to be applied to a specific set of facts. A Revenue Ruling is
public information and remains a permanent document until
superseded by a Regulation or is rescinded by a subsequent Revenue
Ruling.

Questions:
1.

If the IRC Section 338(h)(10) election is not made, will Y's South Carolina corporate
tax return be due November 15, 1988 or March 15, 1989? If the IRC Section
338(h)(10) election is made will the South Carolina return be due November 15, 1988?

2.

If the IRC Section 338(h)(10) election changes the due date of the return to November
15, 1988, can an extension be granted? Also, how and when should the extension be
requested since the Section 338(h)(10) election will not be made until March 15, 1989?

3.

If the IRC Section 338(h)(10) election changes the due date of the return, will penalties
and interest be assessed if the return is filed or extended by March 15, 1989?

4.

Will the tax attributable to the deemed sale that results from the IRC Section 338(h)(10)
election be disregarded for purposes of the estimated tax penalty?

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Facts:
Parent corporation X and its subsidiary Y file as part of a consolidated group with a calendar
year end for federal tax purposes. Subsidiary Y is the only member of the group doing business
in South Carolina. Therefore, Y files a separate South Carolina return on a calendar year basis.
On August 31, 1988 X sold 100 percent of the stock of Y. On March 15, 1989 an election will
be made under IRC Section 338(h)(10) to treat the stock purchase as an asset purchase.
Discussion:
In general, IRC Section 338 allows a corporation that has purchased a controlling interest (80%
or more) in another corporation (the "target") to elect to have the acquisition of the target's stock
treated as a purchase of the assets of the target and to have the target corporation treated as if it
had repurchased its assets. In this way, the purchasing corporation receives a stepped up basis in
the assets acquired from the target and the target recognizes a gain or loss on the sale.
Generally, for Federal purposes, the due date of the final return of the target corporation is 2 1/2
months after the month in which the acquisition date occurs. However, the purchasing
corporation has until the 15th day of 9th month after the month in which the acquisition date
occurs to decide whether to make the Section 338 election.
When the target corporation is a member of a consolidated group, however, the target is
generally not treated as a member of that group with respect to the sale. As a result, the tax
liability of the target is separate from the group and is not taken into account on the group's
consolidated income tax return in the absence of an IRC Section 338(h)(10) election. The target
corporation must file a final return that is a separate return referred to as a "deemed sale return".
A Section 338(h)(10) election allows the transaction to be treated as if the target had sold all of
its assets in a single, fully taxable transaction and distributed the proceeds of the sale to the seller
(the consolidated group) in liquidation. Gain or loss on the deemed sale of assets is recognized
by the seller on its consolidated return.
IRS Temp. Reg. Section 1.338-IT(h)(1) waive certain penalties due to circumstances that would
not exist but for an election under Section 338. Interest on any underpayment of tax runs from
the due date of the return and is not subject to the waiver rule. Further, the deemed sale is not
taken into account for estimated tax purposes.
South Carolina has adopted IRC Section 338 and related regulations. S.C. Section 12-7-1410
provides that a taxpayer's taxable year must be the same as the taxpayer's taxable year for federal
purposes. Y corporation will have a Federal taxable year that ends on the date of the sale.
Without the 338(h)(10) election, the "deemed sale" final Federal return would be a separate
return due 2 1/2 months after the end of the month in which the sale takes place. With the
338(h)(10) election, Y would file this final return as part of the consolidated group. For South
Carolina purposes, Y must file a return that includes operating income or loss and gain or loss on
the deemed sale 2 1/2 months after the month in which the sale takes place. A request for an
extension should have been filed on or before November 15, 1988. South Carolina will allow an

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extension for the same period allowed for Federal purposes. As the adoption of the Federal
taxable year has changed the requirements for filing a South Carolina short period return, the
failure to file and failure to pay penalties will be waived if the return is filed or an extension
requested on or before March 15, 1989. S.C. Code Section 12-54-160 will prohibit the waiver of
interest, thus interest must be paid from November 15, 1988. South Carolina will waive
penalties attributable to the 338 election as provided in IRS Temp. Reg. 1.338-IT(h)1. The tax
attributable to the deemed sale will be disregarded for purposes of computing the estimated tax
penalty pursuant to IRS Temp. Reg. 1.338-IT(h)(1).
Conclusion:
1.

Y's S.C. corporate tax return will be due November 15, 1988 whether or not the IRC
Section 338(h)(10) election is made.

2.

An extension can be granted through the period ending with the due date of Y's Federal
return (including Federal extensions). The extension should be requested by filing a
tentative South Carolina return on or before November 15, 1988.

3.

Failure to file and failure to pay penalties will be waived through the period ending
March 15, 1989 if the return is filed or an extension is requested on or before March 15,
1989. Interest will be assessed on the balance due from November 15, 1988 until the
date of payment.

4.

The tax attributable to the deemed sale that results from the IRC Section 338(h)(10)
election will be disregarded for purposes of the estimated tax penalty.
SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard, Jr.
S. Hunter Howard, Jr., Chairman

s/A. Crawford Clarkson, Jr.
A. Crawford Clarkson, Jr., Commissioner

s/T. R. McConnell
T. R. McConnell, Commissioner

Columbia, South Carolina
April 19
1989

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