Buyer and sellers get more time to make a late section 338(h)(10) election to treat an S corporation stock purchase as an asset sale

Plain-English summary

When a corporation buys the stock of an S corporation in a qualified stock purchase, the buyer and the selling shareholders can jointly elect under section 338(h)(10) to treat the deal as if the target sold all of its assets and then liquidated, which often gives the buyer a stepped-up basis in the assets. The election is made on Form 8023 by a regulatory deadline. Here the buyer and sellers intended to make the election on their acquisition of an S corporation but, for various reasons, never filed a valid one. They asked for late-election relief under Treasury Regulation § 301.9100-3, representing they were not altering a penalty-exposed return position and had requested relief before the IRS discovered the failure. The IRS found they acted reasonably and in good faith and that relief would not prejudice the government, and granted 75 days to file the Form 8023 (and 150 days to file or amend the affected returns). The relief is conditioned on the parties' total tax liability not being lower than if the election had been timely, and the IRS did not rule on whether the purchase actually qualifies for section 338(h)(10) treatment.

Ruling snapshot

• Question: May a buyer and S corporation sellers get more time under § 301.9100-3 to make a late section 338(h)(10) election?
• Outcome: Approved (75 days to file Form 8023; conditioned on no lower aggregate tax liability).
• Key authorities: IRC § 338(a) and (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: 202224004 Third Party Communication: None
Release Date: 6/17/2022 Date of Communication: Not Applicable
Index Number: 338.00-00, 338.01-02,
9100.00-00, 9100.07-00 Person To Contact:
---------------------, ID No. -----------------
------------------------------------ Telephone Number:
---------------------------- --------------------
---------------------------------------------- Refer Reply To:
---------------------------- CC:CORP:1
PLR-119843-21
Date:
March 23, 2022

Legend

Purchaser = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
----------------------------------------------

DE = -------------------------------------------------------------------------------
--------------------------------------------------------

Target = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
------------------------------------------

Sellers = -------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
----------------------------------------------------

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

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

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

Dear --------------:
PLR-119843-21 2

This letter responds to a letter dated September 29, 2021, submitted on behalf of
Purchaser and Sellers, requesting an extension of time under §301.9100-3 of the
Procedure and Administration Regulations to file an election. Purchaser 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 1 as described below (the "Election"). The material
information submitted for consideration is summarized below.

On Date 1, Purchaser acquired, through DE (a disregarded entity for federal income 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
Purchase qualified as a "qualified stock purchase" as defined in section 338(d)(3).

Purchaser and Sellers intended to file the Election, but for various reasons, a valid
Election was not made. Subsequently, this request was submitted, under §301.9100-3,
for an extension of time to file the Election. Purchaser 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.

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 the
purchasing corporation 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. §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
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).
PLR-119843-21 3

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 Purchaser and Sellers to file the Election, provided
Purchaser 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 Purchaser, Sellers, Company
Official, and Tax Professional 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 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 Purchaser 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
Purchaser and Sellers to file the Election with respect to the Purchase.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, Purchaser and Sellers must file
the Election on Form 8023, in accordance with §1.338-2(d) 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-119843-21) of, the letter ruling.

The above extension of time is conditioned on Purchaser's, Sellers', 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). We express no opinion 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.

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
PLR-119843-21 4

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 Purchaser, Sellers, 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 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 representatives.

                                    Sincerely,


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

cc: