An S corporation and its shareholders were prohibited from making a separate IRC §338 election for California corporation franchise and income tax purposes during the tax year at issue. The taxpayer was attempting to prevent the classification of the sale of the S corporation’s stock to the purchasing corporation as a sale of its assets at fair market value on the date of the sale and therefore avoid the tax on the resultant capital gains.
The court found that the plain language of the governing statute clearly prohibited an S corporation from making a separate §338 election. The court rejected the taxpayer’s contention that the statute was ambiguous, finding that the taxpayer failed to show how the plain language of the statute could be interpreted in more than one manner. Consequently, the court refused to look to the legislative history or bill analysis presented by the taxpayer to support its contention that the statute prohibiting a separate election applied only in instances in which the S corporation was acquiring a subsidiary, and not when it was the target of an acquisition.
Similarly, the court found that subsequent amendments made to the separate election prohibition provision that clarified that the prohibition applied to both the S corporation and its shareholders and also added a cross-reference to the personal income tax provision governing elections merely made more explicit what was already provided by the prior-year amendments that enacted the separate election prohibition and were not material changes.
Finally, even if taxpayer were allowed to make a separate election, the election filed by the taxpayer was not timely made. The taxpayer filed the election with its timely filed return. However, the statute governing the filing of the election required that the taxpayer make the election before either the 15th day of the ninth month beginning after the month in which the acquisition date occurs or May 15, 1998, whichever date was later. However, the taxpayer filed its election after these deadlines had lapsed. Although another provision allowed for the election to be filed with the taxpayer’s timely filed return, this provision applied only to the acquiring corporation, and not the target corporation. ELS Educational Services, Inc. v. Franchise Tax Board, Court of Appeal of California, Third Appellate District, No. C063450, August 10, 2011