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Washington Tax Alert December 10, 2007 (9100 relief for IRC § 362(e)(2)(C) elections)

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
December 10, 2007

The Service recently issued two private letter rulings granting taxpayers 9100 relief where the taxpayer transferred assets that had declined in value to a controlled corporation under IRC § 351, but failed to make an election to avoid the basis limitation imposed on the controlled corporation under IRC § 362(e)(2)(A). See PLR 200749003 and 200749004.

Where the fair market value of assets transferred in an IRC § 351 transaction is less than what the aggregate carryover basis of the assets would be in the hands of the controlled corporation, the controlled corporation's aggregate adjusted bases of the assets transferred is limited to the fair market value of the assets immediately after the transaction. See IRC § 362(e)(2)(A). However, the taxpayer and controlled corporation can make an election under IRC § 362(e)(2)(C) not to have this limitation apply to the controlled corporation, in which case the taxpayer's basis in the stock received is limited to its fair market value rather than a substituted basis. This election is made by the taxpayer attaching a statement to its original tax return for the taxable year in which the asset transfer takes place. If the election is not timely filed, the taxpayer must seek 9100 relief from the National Office.