"Check-the-box" election avoided FPHCI taint.

• Author: Whittall, Robert E.
• Position: Foreign personal holding company income

It would appear that Dover Corp., 122 TC No. 19 (2004), is the first opportunity that a court has had to opine on the effect and interplay of the "check-the-box" regulations and Sec. 954(c)(1)(B)(iii) (foreign personal holding company income (FPHCI)).

Facts

Dover is the common parent of an affiliated group of corporations filing a consolidated return. It is a Delaware corporation that maintains its principal place of business in New York. During and before 1997, the group's business activities were divided into five groups, one of which was Dover Elevator. Dover Elevator was managed by Dover Elevator International, Inc. (DEI), a domestic corporation. In 1997, DEI's United Kingdom (U.K.) elevator business was conducted by Hammond & Champness Limited (H&C), a U.K. corporation that installed and serviced elevators. H&C was wholly owned by a U.K. holding company, Dover U.K. Holdings Limited (Dover U.K.), which was wholly owned by a Delaware Corporation, Delaware Capital Formation (DCF), which, finally, was wholly owned by Dover.

On June 30, 1997, Dover U.K. and Dover entered into an agreement with Thyssen Industrie Holdings U.K. PLC (Thyssen), a German corporation registered in England and Wales, and its German parent, for the sale by Dover U.K. to Thyssen of the entire issued share capital of H&C. The agreement provided that all documents would be held in escrow until July 11, 1997. Dover U.K. agreed to carry on the H&C business "in the normal course without any interruption" between June 30 and July 11, 1997. On July 11, 1997, the deal closed and Dover received the purchase price for H&C.

On Dec. 3, 1998, Dover sought relief from the IRS, under Regs. Sec. 301.9100-1(c) and -3, for an extension for H&C to file a retroactive election to be treated as a disregarded entity for Federal income tax purposes. Dover specifically requested this for U.S. tax purposes, also asking that the election be effective immediately before the sale of H&C stock to Thyssen.

Initially, the IRS was reluctant to grant the request, partly because it did not want the election to allow the sale to escape FPHCI taxation under the subpart F provisions. Finally, on March 31, 2000, it granted the relief and allowed H&C to be treated as a disregarded entity effective June 30, 1997. However, it added a caveat to the requested ruling: "[N]o inference should be drawn from this letter that any gain from the sale of [H&C's] assets immediately following its election to be...