On January 3, 2025, the IRS Office of Associate Chief Counsel (International) released Chief Counsel Advice (CCA) 202501008, which applied section 269 to the deemed incorporation resulting from a check-the-box (CTB) election and disallowed tax benefits that resulted from a tax year election under section 898(c)(2) for the checked entity. Although the CCA itself involves a narrow set of facts implicating the differing effective dates of Tax Cuts and Jobs Act of 2017 (TCJA) provisions, the IRS's application of the anti-avoidance rule of section 269 to a CTB election has raised some eyebrows. 

Under the facts of the CCA, Corporation Y, a controlled foreign corporation (CFC), owned Company Z, a foreign disregarded entity, and in March 2018, a CTB election was made to convert Company Z to a corporation (Corporation Z). At the same time, Corporation Z, a newly formed CFC, elected to adopt a November 30 fiscal year pursuant to section 898(c)(2). As a result of these transactions, the taxpayer took the position that income earned by Corporation Z during its first tax year ended November 30, 2018 (the Gap Income) was not subject to the global intangible low-taxed income (GILTI) rules. The CCA concludes that section 269 applies to the CTB election of Company Z, with the result that either (1) the section 898(c)(2) tax year election is disallowed, or (2) the Gap Income earned by Corporation Z during its tax year is allocated to its owner Corporation Y. In the alternative, the IRS determined that Treas. Reg. § 1.245A-5T applied to cause 50 percent of a dividend paid by Corporation Z to Corporation Y to be treated as subpart F income. 

Section 269, which was enacted in 1943, provides that the IRS may disallow a deduction, credit, or other allowance if: (1) "any person or persons acquire, directly or indirectly, control of a corporation," and (2) "the principal purpose" of the acquisition is "evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy." In the CCA, the IRS undertook a lengthy analysis to conclude that section 269 applied to the taxpayer. It determined that a deemed incorporation pursuant to the CTB election is treated as an actual incorporation and is thus an "acquisition of control." It further concluded that "the principal purpose" of the transaction was tax avoidance, citing the failure of the taxpayer "to provide a business purpose for making the CTB Election and making that election effective December 30, 2017 rather than January 1, 2018," the fact that neither the CTB election nor the section 898 tax year election had any "effect on the taxpayer's operations," and the fact that the taxpayer revoked the section 898 tax year election in 2020. The IRS concluded that the tax benefit at issue was not one that the taxpayer would "otherwise enjoy" because Corporation Y, the owner of Company Z, was precluded at the time from making a section 898(c)(2) election as a result of Revenue Procedure 2018-17. 

Over the years courts have interpreted section 269 relatively narrowly, in particular in situations where the tax benefit in dispute is one that is clearly contemplated by statute. As a result, the deployment of section 269 in the CCA has taken some observers by surprise. Tax elections such as CTB elections and section 898(c)(2) tax year elections by their nature have no effect other than federal tax. It may be difficult for taxpayers to articulate a non-tax business purpose for making an election whose sole effect is federal tax. It remains to be seen whether the IRS intends to use section 269 to challenge the business purpose of CTB elections and other transactions more broadly, but taxpayers will be well advised to dust off their tax history books and consider section 269 relevant going forward.

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5966

Katherine Lewis, klewis@milchev.com, 202-626-5894

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