Buyer and sellers receive late section 338(h)(10) election relief

Plain-English summary

A corporate buyer acquired all the stock of an S corporation from its shareholders and their trusts in a transaction represented to be a qualified stock purchase. The parties intended to make a joint section 338(h)(10) election, which would treat the stock purchase as a deemed asset sale and liquidation, but their tax professionals failed to complete a valid election. The IRS found that the buyer and sellers acted reasonably and in good faith and requested relief before the IRS discovered the omission. It granted 75 days to file Form 8023 with the ruling attached. The parties also have 150 days to amend returns that were filed as though the election had been valid. Relief is conditioned on aggregate tax liability not being lower than with a timely election, and the IRS did not decide whether the acquisition otherwise qualifies.

Ruling snapshot

• Question: May the buyer and S corporation sellers file a late joint section 338(h)(10) election for the stock acquisition?
• Outcome: Approved, with 75 days for Form 8023 and 150 days for amended returns
• Key authorities: IRC §§ 338(d)(3) and 338(h)(10); Treas. Reg. §§ 1.338(h)(10)-1(c), 301.9100-1, and 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202315008                                             Third Party Communication: None
 Release Date: 4/14/2023                                       Date of Communication: Not Applicable
 Index Number: 9100.07-00
                                                               Person To Contact:
                                                               ----------------, ID No. -----------------
 -----------------------------------------                     Telephone Number:
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 --------------------------                                    Refer Reply To:
 -----------------------------                                 CC:CORP:B04
                                                               PLR-118826-22
                                                               Date:
                                                               January 19, 2023




Legend

Purchaser                 =        -------------------------------------------
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Sellers                   =        ---------------------------
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Target                    =        -------------------------------
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Trusts                    =        -----------------------------------------------------------
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Date 1                    =        -------------------

Company Official          =        -----------------------------------------
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Tax Professionals         =        --------------------------
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Dear ----------------------:

This letter responds to a letter dated September 23, 2022, 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
PLR-118826-22                                 2

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.

As of Date 1, Target was a corporation that was treated as an S corporation for federal
income tax purposes and all the stock of Target was owned by Sellers directly and
through two trusts (Trusts). On Date 1, Purchaser acquired all the stock of Target from
Sellers and Trusts (the "Purchase"). It is represented that the Purchase qualified as a
"qualified stock purchase" within the meaning of 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).

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
PLR-118826-22                                  3

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 Professionals explain the circumstances that resulted in the failure to
timely file a valid Election. The information establishes that Purchaser reasonably relied
on qualified tax professionals who failed to make, or advise Purchaser 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 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(h)(10)-1(c) 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, Purchaser and Sellers, having
filed their returns as though a valid Election was made, must amend their returns to
attach to the returns a copy of this letter. Alternatively, taxpayers filing their returns
electronically may satisfy the requirement of attaching a copy of this letter by attaching a
statement to their returns that provides the date on, and control number (PLR-118826-
22) 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
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.
PLR-118826-22                                              4

For purposes of granting relief under §301.9100-3, we relied on certain statements and
representations made by Purchaser, Sellers, Company Official, and Tax Professionals.
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)

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