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TAX CLINIC

extraordinary disposition. Depending on FSub recognized gain in the contributed effect — would have if the transaction
whether the distributee is a Sec. 245A assets, and Taxpayer’s aggregate basis in remained regarded.
shareholder or a CFC, the extraordinary the assets increased by the amount of Based on Taxpayer’s representations,
disposition regulations render the divi- gain that FSub recognized. the IRS ruled that these conditions
dend (in whole or in part) ineligible for After FSub executed the contribu- had been satisfied. Taxpayer had failed
a dividends-received deduction under tion, Treasury and the IRS issued the to make the check-the-box election
Sec. 245A or for the exception to foreign extraordinary disposition regulations, because, “after exercising reasonable
personal holding company income in which (retroactively) encompassed the diligence,” Taxpayer was unaware of
Sec. 954(c)(6). Accordingly, the extraor- contribution. Because the contribution the “negative tax consequences” that
dinary disposition regulations can cause constituted an extraordinary disposi- could result “if an election was not
a dividend to give rise to net taxable tion, the regulations could cause future made.” Taxpayer was not informed in all
income (in the case of a CFC distribu- dividends from FSub to be wholly or material respects of the election and its
tee, Subpart F income) when, absent the partially taxable. consequences because “its tax advisors
extraordinary disposition regulations, If Taxpayer had been classified as a did not advise [Taxpayer] of the negative
this result would not occur. Addition- disregarded entity for U.S. federal tax tax consequences that could result if an
ally, a 21% rate now applies to the gain purposes at the time of the contribution election was not made.”
from the extraordinary disposition, (rather than as a corporation), the con- Though the extraordinary disposition
rather than the reduced effective rate for tribution would have been disregarded. regulations had been issued after the
GILTI inclusions (currently, 10.5%) that FSub would have recognized no gain, the election deadline, Taxpayer had not used
might have applied if the gain had been basis of the contributed assets would not hindsight in requesting relief. The issu-
recognized after the gap period. have increased, and the extraordinary ance of the regulations was not a rele-
Responding to complaints from disposition regulations would not apply. vant event, at least where the regulations
taxpayers and tax practitioners that the Having missed the deadline for were (retroactively) effective continu-
simultaneous application of the disquali- making a check-the-box election to be ously since prior to the election deadline.
fied basis regulations and extraordinary classified as a disregarded entity as of the The interests of the government would
disposition regulations resulted in contribution, Taxpayer requested a ruling not be prejudiced by granting relief
double taxation, Treasury and the IRS from the IRS allowing it to make the because the relief would produce the
subsequently issued new regulations election and “unwind” the contribution. same result as if the election had been
(the “coordination regulations,” at Regs. timely. The letter ruling did not mention
Secs. 1.245A-6 et seq.). The coordination Analysis the disqualified basis regulations (or the
regulations effectively subjected gain to To obtain the requested relief, Regs. Sec. coordination regulations).
one of the two sets of regulations but 301.9100-3 required Taxpayer to dem-
not both. The coordination regulations onstrate (among other things) that it Implications
are extremely complex, however, and “acted reasonably and in good faith” and Before Letter Ruling 202135006 was
complying with them requires signifi- that granting the relief would not “preju- issued, it was not clear whether the IRS
cant time and expense. dice the interests of the government.” would permit taxpayers to “unwind” gap
Although the relief requested (a period transactions. In this letter ruling,
Facts late check-the-box election) was fairly the IRS allowed a taxpayer to achieve
In Letter Ruling 202135006, U.S. routine, the context arguably was that result, albeit by granting Taxpayer
Parent, a publicly traded corporation, not. The late election would cause a relief to make a late check-the-box elec-
owned the stock of non-U.S. subsidiar- transaction (one Taxpayer presum- tion that would cause the transaction to
ies. Parent’s CFC, FSub, owned all the ably had fully intended to undertake be disregarded.
outstanding equity interests of a foreign as of the original election deadline) Many taxpayers undertook gap
corporation (Taxpayer). to become disregarded. Taxpayer period transactions in 2018. Many of
On an unspecified date (presumably sought to satisfy the conditions of those transactions (like the one in this
during FSub’s gap period), FSub con- Regs. Sec. 301.9100-3 based on the letter ruling) would become disregarded
tributed assets to Taxpayer in exchange adverse effect that the extraordinary if a late check-the-box election could be
for Taxpayer’s stock (the contribution). disposition regulations — which had made. Taxpayers that undertook such a
Taxpayer represented that the contribu- not existed at the time of the deadline, transaction may want to evaluate wheth-
tion did not qualify as a tax-free trans- probably could not then have been er they, too, might be eligible for relief,
action under Sec. 351(a). Accordingly, foreseen, and which had retroactive enabling them to cause their transaction

12 January 2022 The Tax Adviser