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

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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:

  • Purchasing corporations (buyers) may elect to treat certain stock purchases as asset acquisitions for tax purposes. See 26 U.S.C. §338(a).
  • If the buyer elects this option under Section 338, the target corporation (company which its stock is being bought by another company, the “old target”) in case of any qualified stock purchase shall be treated as, (1) having sold all its assets on the acquisition date at fair market value (in a single transaction); and then (2) a new corporation (“new target”) purchased all of the assets, on the day after the acquisition date. See id. at 338(a)(1)(2).
  • The fair market value may be determined on the basis of a formula provided in regulations prescribed by the Secretary which takes into account liabilities and other relevant items. See id. at 338(11).
  • A “qualified stock purchase” is the purchase of at least 80% of the total voting power and has a value equal to at least 80 percent of the total value of the stock of such corporation. See id. at 338(d)(3).


  • “Control foreign corporation” is any foreign corporation where more than 50% of (1) all voting power of all the classes of stock has a voting right, or (2) the total value of the stock, is owned by U.S. shareholders on any day within the taxable year of such corporation. See 26 U.S.C. § 957(a)
  • Under 26 U.S.C. § 338(b)(1), (2), to determine the basis of the target corporation after a “deemed purchase”, all assets shall be treated as if they were purchased and not the shares, for an amount equal to the sum of (1) The grossed-up basis of the buyer’s lately purchased stock, and (2) the basis of the buyer’s non-recently purchased stock.
  • “Recently purchased stock” is any stock held in the target company by the buyer on the acquisition date during the 12-month acquisition period. See id. at 338(b)(6)(a).
  • “Nonrecently purchased stock” is any stock which is not recently purchased stock held in the target company by the buyer as of the acquisition date. See id. at 338(b)(6)(b).
  • The amounts shall be adjusted under regulations prescribed by the Secretary for liabilities of the target and other relevant items. See id. at 338(d)(6)(a)).
  • The target must recognize gain or loss on the deemed sale of its assets.
  • The buyer should make the election to treat the purchase of the stock as a sale of assets, no later than the 15th day of the 9th month commencing after the month of the acquisition date. Once the election under this section is made by the buyer, such election is irrevocable. See id. at 338(g)(1), (3).
  • An extension will be grated to the taxpayer, if the latter provides supporting evidence to prove that he or she acted reasonably and in good faith, and that such relief will not prejudice the interests of the IRS. See Reg.  § 301.9100-3(a).
  • A taxpayer acted in good faith if (1) the relief is requested before failing to make the election is discovered by the IRS, (2) failing to make the election is due to events beyond its control, (3) after exercising diligence, the taxpayer was unaware of making such election, among others. See id. at 301.9100-3(b)(1).
  • Under the rules set forth in § 301.9100-2 and 301.9100-3 to make a regulatory election, the Commissioner may exercise its discretion to grant a reasonable extension of time, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. See § 301.9100-1(c)

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.

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