How are stock purchases treated for tax purposes under 26 USC 338? An IRS Letter Ruling on asset acquisitions.

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Ms. Uribe is an international tax consultant with more than a decade of professional experience in Mexican taxation and international tax advisory matters.  She maintains a particular focus on acquisitions (including due diligence), transfers, mergers, spin-offs, and various corporate reorganizations. She is experienced with cross-border transactions, including advising clients with respect to federal and state tax obligations in Mexico; the application of international tax treaties and the avoidance of double taxation, including permanent establishment status; complex international tax strategies; expatriate compensation plans; and tax audits.

Stephanie received her law degree from the Facultad Libre de Derecho de Monterrey, in Monterrey, Mexico, where she graduated with honors, and holds a Master’s in Law in International Taxation from Vienna University of Economics and Business (WU), in Vienna, Austria. For her Master Thesis she published the Article “Taxation of Capital Gains: The Substantial Participation Clause in Article 13(5)” in Special Features of the UN Model Convention.

She is member of the International Fiscal Association and has participated as a speaker in several Mexican and international tax conferences. She holds a certification in Management (Harvard ManageMentor Program) from Harvard Business School.

How are stock purchases treated for tax purposes under 26 USC 338? An IRS Letter Ruling on asset acquisitions.

IRS Private Letter Ruling 202226008, 07/01/2022:

A foreign purchaser bought all the stock of a foreign target (controlled foreign corporation) which was a qualified stock purchase under 26 U.S.C. Section 338(d)(3). The taxpayer was not required to file a U.S. income tax return for its taxable year under Treas. Reg. § 1.6012-2(g) and § 1.6012-2(g)(2)(i)(B). After the due date to make the election to treat the acquired stock as assets under Section 338(a) and 338(g) the taxpayer discovered the election was not filed.

Consequently, on November 3, 2021, the taxpayer requested an extension of the time to the IRS under Treas. Reg. § 301.9100-3. The taxpayer mentioned that the request was not intended to amend, his or her, tax position regarding any accuracy-related penalty to be assessed by the IRS under Section 6662; and any qualified amended tax return filed under Treas. Reg. § 1.6664-2(c)(3).

The IRS under its discretion concluded the taxpayer acted in good faith, as the request was made before any discovery of non-compliance to make the election on the due date. The IRS granted an extension to the taxpayer to file the election for 75 days regarding the acquisition of the stock of the foreign target as of the date on the letter under Form 8023. The taxpayer must amend any relevant return to attach a copy of this letter and a copy of Form 8883. Additionally, to deliver written notice of the election, and a copy of Forms 8023 and 8883, their attachments and instructions, to any the U.S. persons sellers of stock in the foreign target as provided in Treas. Reg. § 1.338-2(e)(4). The extension was conditioned on the taxpayer’s liability, which shall not be lower than if the Election was timely made. The IRS did not make any pronunciations on whether the stock qualify as qualified stock.

Key points of law:

 

Insights:

In certain cases, if a taxpayer does not comply with the due date to file an election, the taxpayer can request an extension to the IRS to extend the filing due date of such election. However, the taxpayer shall provide sufficient evidence to the IRS to demonstrate, that he or she, does not have the intention to harm IRS interest. Those involved in these transactions are wise to seek out and obtain legal and tax advice, if a tax election was not made within the due date, to determine if there are any other alternatives to make the election and correct the taxpayer’s position.