Consolidated group receives 90 days to make a late intercompany-stock election

Plain-English summary

A consolidated corporate group inherited deferred gains from stock distributions completed before new intercompany-transaction regulations took effect in July 1995. The former parent had missed the election under Treas. Reg. Section 1.1502-13(l)(3) to apply the new rules to those stock-elimination transactions because it reasonably relied on a tax professional who failed to make or recommend the election. The IRS found that the parent acted reasonably and in good faith and requested relief before the IRS discovered the omission. It granted 90 days to attach the election to an amended return for the period containing July 12, 1995. Relief was conditioned on the groups' aggregate tax liability not being lower than it would have been with a timely election, after accounting for the time value of money.

Ruling snapshot

• Question: May the former parent make the Section 1.1502-13(l)(3) election decades after its original due date?
• Outcome: approved
• Key authorities: Treas. Reg. §§ 1.1502-13(l)(3), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201810002 Third Party Communication: None
Release Date: 3/9/2018 Date of Communication: Not Applicable
Index Number: 1502.13-01, 9100.22-00
Person To Contact:
-------------------------- ---------------------------, ID No. ---------------
--------------------------- -----------------
-------------------------------- Telephone Number:
------------------------------------------------- --------------------
Refer Reply To:
CC:CORP:5
PLR-111644-17
Date:
September 18, 2017

Legend

Taxpayer = -------------------------------------------------
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Parent = --------------------------
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New Parent = ------------------------
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Sub 1 = -----------------------------
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Sub 2 = --------------------------------------
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Sub 3 = -------------------------------------
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Sub 4 = ----------------------------------------
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Sub 5 = ----------------------------------------------------
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Sub 6 = --------------------------------
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                --------------------------------

Sub 7 = ----------------------------------------------------------
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Sub 8 = ------------------------------
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Sub 9 = --------------------------------------
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Sub 10 = ----------------------------------------------
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Sub 11 = -------------------------------
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Sub 12 = ---------------------------------
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LLC 2 = --------------
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Date 1 = --------------------

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

Date 3 = ------------------------

Date 4 = -------------------

Date 5 = ----------------------------

Date 6 = --------------------

Date 7 = ---------------------------

Date 8 = --------------------------

Date 9 = ---------------------------

Date 10 = ----------------------------

Date 11 = -------------------
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Date 12 = --------------------

Date 13 = ---------------

Date 14 = -----------------

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

Tax Professional = -----------------------------------------------------------

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

   This letter is in response to your authorized representative's letter dated March

23, 2017, requesting an extension of time under §§ 301.9100-1 through 301.9100-3 of
the Procedure and Administration Regulations for Parent to file an election under
§ 1.1502-13(l)(3) of the Income Tax Regulations (the “Election”). The material
information submitted in your letter and subsequent correspondence is summarized
below.

   As of Date 1, Parent was the common parent of an affiliated group of

corporations that filed consolidated federal income tax returns (the "Parent Group").
Parent wholly owned Sub 1. Sub 1 wholly owned Sub 2. Sub 2 wholly owned each of
Sub 3 and Sub 4. Sub 3 wholly owned Sub 5. Sub 4 wholly owned each of Sub 6 and
Sub 7.

  Prior to July 12, 1995, members of the Parent Group entered into the following

transactions, certain of which gave rise to deferred gain:

1. On Date 1, Sub 4 formed Sub 8. On Date 2, Sub 4 distributed all of the issued
   and outstanding stock of each of Sub 6 and Sub 7 to Sub 2 (respectively, the
   “Sub 6 Distribution” and the “Sub 7 Distribution”). The Sub 6 Distribution and the
   Sub 7 Distribution were treated as intercompany distributions to which §§ 301
   and 311 applied, and on which Sub 4 recognized gain under § 311(b), all of
   which was deferred under the regulations effective at that time.

2. Also on Date 2, Sub 2 formed Sub 9 and Sub 2 contributed all of the issued and
   outstanding stock of Sub 3, Sub 6, and Sub 7 to Sub 9.

3. On Date 3, Sub 9 distributed all of the issued and outstanding stock of Sub 3 to
   Sub 2 (the “Sub 3 Distribution”) and Sub 2 contributed the stock of Sub 9 to
   Sub 3. The Sub 3 Distribution was treated as an intercompany distribution to

PLR-111644-17 4

 which §§ 301 and 311 applied, and on which Sub 9 recognized gain under
 § 311(b), which was deferred under the regulations effective at that time.

4. On Date 4, Sub 4 distributed Sub 8 to Sub 2, (the “First Sub 8 Distribution”),
   which in turn distributed Sub 8 to Sub 1 (the “Second Sub 8 Distribution”). The
   First Sub 8 Distribution and the Second Sub 8 Distribution were treated as
   intercompany distributions to which §§ 301 and 311 applied, and on which Sub 4
   and Sub 2, respectively, recognized any gain under § 311(b), all of which was
   deferred under the regulations effective at that time.

   Subsequent to these transactions, the following transactions occurred:

5. On Date 5, Sub 9 merged into Sub 3 with Sub 3 surviving, a transaction that
   qualified for nonrecognition treatment under § 332.

6. On Date 6, Sub 3 merged into Sub 5 with Sub 5 surviving, a transaction that
   qualified as a reorganization described in § 368(a)(1)(A).

7. On Date 7, Sub 4 merged into Sub 2 with Sub 2 surviving, a transaction that
   qualified for nonrecognition treatment under § 332.

8. On Date 8, Sub 7 merged into Sub 5 with Sub 5 surviving, a transaction that
   qualified for nonrecognition treatment under § 332.

9. On Date 9, Sub 2 merged into Sub 1 with Sub 1 surviving, and Sub 1 merged into
   Parent with Parent surviving, each a transaction that qualified for nonrecognition
   treatment under § 332.

10. On Date 10, Parent contributed Sub 5 to Sub 10, a direct subsidiary of Parent,
    in an exchange qualifying for nonrecognition treatment under § 351.

11. On Date 11, Sub 10 merged into Sub 11, a direct subsidiary of Parent, with
    Sub 11 surviving, a transaction that qualified as a reorganization described in
    § 368(a)(1)(A).

12. On Date 12, (i) Sub 11 merged into Parent with Parent surviving, (ii) Parent
    formed Sub 12, to which it contributed Sub 5, and (iii) Sub 5 converted under
    state law from a corporation into a limited liability company (such converted
    entity, “LLC 1”) disregarded as an entity separate from its owner for federal
    income tax purposes (such conversion, together with the contribution, the “Sub 5
    Reorganization”), such contribution and conversion together a reorganization
    described in § 368(a)(1)(F).
    PLR-111644-17 5

13. After the Sub 5 Reorganization, LLC 1 contributed the stock of Sub 6 to LLC 2,
    a wholly owned subsidiary of LLC1 and an entity disregarded as separate from
    its owner for federal income tax purposes, and distributed the interests in LLC 2
    to Sub 12 in a transaction that was disregarded for federal income tax purposes.

14. On Date 13, Parent was contributed to New Parent in a reverse acquisition
    described in § 1.1502-75(d)(3).

15. On Date 14, Taxpayer, the common parent of an affiliated group of corporations
    that filed consolidated federal income tax returns (the "Taxpayer Group"),
    acquired the Parent Group through a taxable merger of an indirect subsidiary of
    Taxpayer into New Parent with New Parent surviving.

    Taxpayer has made the following representations:

a. Other than gain or loss recognized in the Sub 3 Distribution, the Sub 6
Distribution, the Sub 7 Distribution, the First Sub 8 Distribution, and the Second
Sub 8 Distribution, no member of the Taxpayer Group or any consolidated group
acquired by the Taxpayer Group had any deferred stock gain or loss from an
intercompany transaction at any time during or prior to the taxable year that
included July 12, 1995, that was not taken into account prior to July 12, 1995.

b. Neither the Parent Group nor the Taxpayer Group is seeking to alter a return
position for which an accuracy related penalty has been or could be imposed
under § 6662 at the time of its request (taking into account any qualified
amended return filed within the meaning of § 1.6664-2(c)(3)) and for which the
new return position requires or permits a regulatory election for which relief is
requested.

   In July 1995, the Treasury Department and the Internal Revenue Service

published new intercompany transaction regulations under § 1.1502-13 governing the
treatment of transactions between members of a consolidated group. The regulations
generally apply with respect to transactions occurring in taxable years beginning on or
after July 12, 1995. See § 1.1502-13(l)(1).

    Section 1.1502-13(l)(3) of the regulations permitted taxpayers to elect to apply

the new regulations to stock elimination transactions (described in § 1.1502-13(l)(3)(ii))
to which prior law would otherwise apply. To make the election under § 1.1502-13(l)(3),
taxpayers were required to include a statement making the Election with their timely
filed original return (including extensions) for the taxable year including July 12, 1995.

  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
PLR-111644-17 6

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 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 the regulations (i.e.,

§ 1.1502-13(l)(3)). Therefore, the Commissioner has discretionary authority under
§ 301.9100-3 to grant an extension of time for Parent to file the Election, provided
Parent shows it 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, Company

Official, and Tax Professional explain the circumstances that resulted in the failure to
timely file a valid Election. The information establishes that Parent reasonably relied on
a qualified tax professional who failed to make, or advise Parent to make, the Election,
and that the request for relief was filed before the failure to make the Election was
discovered by the Internal Revenue Service. See § 301.9100-3(b)(1)(i) and (v).

   Based on the facts and information submitted, including the representations

made, we conclude that Parent has shown it 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 90 days from the date on this letter, for Parent to file the
Election. The election must be attached to an amended return for the period including
July 12, 1995.

   The above extension of time is conditioned on the Taxpayer Group’s and the

Parent Group's consolidated 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 filed (taking into account the time value of money). We express no opinion as to
the 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.

   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. In particular, we express no opinion with respect to whether
Parent qualifies substantively to make the Election.
PLR-111644-17 7

   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, Company Official, and Tax
Professional. 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 taxpayer who requested it. Section 6110(k)(3)

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 their return that provides the date and control
number of this letter ruling.

   Pursuant to the power of attorney on file in this office, copies of this letter are

being sent to your authorized representatives.

                                    Sincerely,



                                    Ken Cohen
                                    Chief, Branch 3
                                    Office of Associate Chief Counsel (Corporate)