IRS Matching Program for Forms 8023 and 8883 May Result in Invalid Sec. 338 Election

By Kevin Curran, J.D., LL.M., and Andrew Stroot, J.D., Washington, DC

Editor: Annette B. Smith, CPA


Procedure & Administration

The IRS recently launched a program to match the filing of Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases, by a foreign purchasing corporation acquiring a foreign target, with Form 8883, Asset Allocation Statement Under Section 338, which is filed to report the effect of the Sec. 338 election. The IRS Large Business & International Division (LB&I) is administering this program with the goal of achieving greater transparency in tracking the effect of the Sec. 338 election on the U.S. shareholder or shareholders of the foreign purchasing corporation. While there is no official published guidance from the IRS as of May 2011 regarding this program, the authors’ firm represents companies that have been contacted under the program.

If information regarding the U.S. shareholder is missing from a Form 8023 and the IRS is unable to identify the U.S. shareholder that will file the Form 8883, the IRS will contact the purchasing corporation by mail to request the missing information. The IRS may invalidate the Sec. 338 election if it is not provided with the requested U.S. shareholder information. Consequently, a company that receives a Form 8023 letter from the IRS must respond promptly to protect the Sec. 338 election.

Forms 8023 and 8883

A purchasing corporation that has made a qualified stock purchase of a target corporation must file Form 8023 to make an election under either Sec. 338(g) or Sec. 338(h)(10). The form must be filed by the 15th day of the ninth month following the date of acquisition. Form 8023 is filed directly with the Ogden Service Center; it is not filed with either the purchaser’s or the target’s U.S. tax return, if such a return is filed. Relief for a late-filed Form 8023 may be available under Rev. Proc. 2003-33.

Both the old target and the new target must file Form 8883, which is attached to the income tax return on which the effects of the Sec. 338 deemed sale and purchase of the target’s assets are reported. For a foreign target that must be reported on Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, filed with the U.S. owner’s return, the Form 8883 usually is attached to the Form 5471.

Depending on the date the target is acquired and on the due date (including extensions) of the return to which Form 8883 must be attached, Form 8883 may be filed up to one year after Form 8023 is filed.

Matching Program

The IRS has started to scan all Forms 8023 filed with the Ogden Service Center by LB&I corporate taxpayers into a database accessible only to specified LB&I technicians. These technicians are trained to use the database to match Form 8023 with the Form 8883 that subsequently is filed with either the old target’s or the new target’s tax return.

The LB&I set up the database because the IRS has determined that many LB&I corporations are filing Form 8023 with incomplete information regarding either:

  • The common parent of the purchasing corporation (Form 8023, Section A-2); or
  • The U.S. shareholders of a controlled foreign purchasing corporation.

This prevents the IRS from linking the Form 8023 with the subsequently filed Form 8883. The problem appears most acute with foreign purchasing corporations.

The Ogden Service Center appears to have received a considerable number of incomplete Form 8023 filings that do not contain U.S. shareholder information and do not allow the IRS to identify the company or person (i.e., the direct or indirect U.S. shareholder) that will file the Forms 8883. The LB&I has responded by letter to foreign purchasing corporations that filed incomplete Forms 8023 with the following statement:

To make this election, complete Form 8023 and attach a statement to the form showing the name, address, identifying number, country in which organized, and stock interest of each U.S. shareholder. The statement must be signed by each U.S. shareholder . . . . Please provide a statement with the above information and return to the above address or fax it in to the above fax within 28 days or your election will not be valid.

Regs. Sec. 1.338-2(e)(3) sets forth the content of the statement that must be attached to Form 8023 if the Sec. 338 election is made by the U.S. shareholders on behalf of a foreign purchasing corporation that is a controlled foreign corporation under Sec. 957. The IRS may assert that failure to substantially comply with this regulatory provision can result in the Sec. 338 election being invalid. However, rather than making a determination that a Form 8023 with missing information is invalid, or demanding that a new and complete Form 8023 be filed under Rev. Proc. 2003-33, as a practical matter the IRS has been offering filers an opportunity to perfect an otherwise incomplete Form 8023.

What a Taxpayer Should Do After Receiving a Form 8023 Letter from the IRS

Form 8023 usually is filed to secure a tax benefit for a U.S. person. While there are circumstances where a Form 8023 is filed without any immediate consequences to a U.S. person (e.g., a stepped-up basis in a foreign target is required before a U.S. person acquires an ownership interest in the target), the LB&I understands that most Sec. 338(g) or (h)(10) elections are followed by a U.S. person filing Form 8883 to report the effect of the election. Accordingly, a foreign purchasing corporation that receives a letter from the IRS requesting additional information with respect to a recently filed Form 8023 should respond promptly and fully to the request.

The IRS has been receptive to requests for more time to gather the requested information. A company that receives a Form 8023 letter and that cannot respond within the time frame set forth in the letter should contact the IRS representative identified in the letter.

The filer should keep a complete copy of the submission to the LB&I so that it may be shown to an IRS examiner if the return to which the Form 8883 is attached is selected later for examination. Proof of mailing should also be retained. If the IRS is satisfied with the content of the statement, no additional correspondence will be sent to the company that filed the Form 8023. If the IRS is not satisfied with the content of the statement, another letter will be sent to the company asking for the still missing information.


EditorNotes

Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington, DC.

For additional information about these items, contact Ms. Smith at (202) 414-1048 or annette.smith@us.pwc.com.

Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.

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