Late section 336(e) election receives extension

Plain-English summary

A purchaser acquired all stock of an S corporation target in a transaction the parties represented was a qualified stock disposition. The parties intended to elect under section 336(e) to treat the stock sale as an asset disposition, but relied on a tax professional who failed to make or advise them to make the election on time. The IRS granted 45 days to execute the binding election agreement and file the election statement, plus 120 days to file or amend affected returns consistently. Relief was conditioned on the parties' aggregate tax liability not being lower than it would have been with a timely election.

Ruling snapshot

• Question: May the purchaser, S corporation shareholders, and target receive additional time to make a section 336(e) election?
• Outcome: approved
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-2(h), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201652014 Third Party Communication: None
Release Date: 12/23/2016 Date of Communication: Not Applicable
Index Numbers: 9100.22-00, 336.05-00
Person To Contact:
------------------------------- ---------------------, ID No. ------------------
---------------------- Telephone Number:
--------------------------- --------------------
---------------------------------------------- Refer Reply To:
---------------------------------------- CC:CORP:B03
PLR-118298-16
Date:
September 23, 2016

LEGEND

Purchaser = ----------------------------------------------

S Corporation Shareholders = ---------------------
---------------------------

                                                  ---------------------

S Corporation Target = ------------------------------------------------
------------------------
---------------------------------------------------

State A = ---------------

Date 1 = ------------------------

B Year = ------------------------------------------------

Company Officials = ------------------------------------

Tax Professional = -----------------------------------------------

Dear -----------------:

This letter responds to a letter dated May 23, 2016, submitted on behalf of Purchaser, S
Corporation Shareholders, and S Corporation Target, requesting an extension of time
PLR-118298-16 2

under § 301.9100-3 of the Procedure and Administration Regulations to file an election.
Purchaser, S Corporation Shareholders, and S Corporation Target are requesting an
extension of time to file an election under § 1.336-2(h)(3)(iii) of the Income Tax
Regulations (“Election”) with respect to Purchaser’s acquisition of all of the stock of S
Corporation Target from S Corporation Shareholders on Date 1. The material
information submitted is summarized below.

On Date 1, Purchaser, a State A limited liability company which is treated as a
partnership for federal income tax purposes, acquired all of the stock of S Corporation
Target, a State A limited liability company which has elected to be treated as an S
corporation for federal income tax purposes, from S Corporation Shareholders in
exchange for cash (the “Disposition”). It has been represented that the Disposition
qualified as a “qualified stock disposition” as defined in § 1.336-1(b)(6).

S Corporation Target, S Corporation Shareholders and Purchaser intended to make a
section 336(e) election but, for various reasons, a timely election was not made.
Subsequently, this request was submitted, under § 301.9100-3 of the Procedure and
Administration Regulations, for an extension of time to file the Election. It has been
represented that none of Purchaser, S Corporation Shareholders or S Corporation
Target is seeking to alter a return position for which an accuracy-related penalty has
been or could be imposed under section 6662 and for which the new position requires
or permits a regulatory election for which relief is requested.

Regulations promulgated under section 336(e) permit certain sales, exchanges, or
distributions of stock of a corporation to be treated as asset dispositions if: (1) the
disposition is a “qualified stock disposition” as defined in § 1.336-1(b)(6); and (2) a
section 336(e) election is made.

Section 1.336-2(h)(3) provides that a section 336(e) election for an S corporation target
is made by: (i) all of the S corporation shareholders, including those who do not dispose
of any stock in the qualified stock disposition, and the S corporation target entering into
a written, binding agreement, on or before the due date (including extensions) of the
federal income tax return of the S corporation target for the taxable year that includes
the disposition date, to make a section 336(e) election; (ii) the S corporation target
retaining a copy of the written agreement; and (iii) the S corporation target attaching the
section 336(e) election statement, described in § 1.336-2(h)(5) and (6), to its timely filed
(including extensions) federal income tax return for the taxable year that includes the
disposition date.

Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable
extension of time to make a regulatory election or a statutory election (but no more than
six months except in the case of a taxpayer who is abroad) under all subtitles of the
Internal Revenue Code except subtitles E, G, H, and I.
PLR-118298-16 3

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make a regulatory election.
Section 301.9100-1(a). Section 301.9100-2 provides automatic extensions of time for
making certain elections. Requests for relief under § 301.9100-3 will be granted when
the taxpayer provides evidence to establish to the satisfaction of the Commissioner that
the taxpayer acted reasonably and in good faith and that granting relief will not prejudice
the interests of the government. Section 301.9100-3(a).

The time for filing the Election is fixed by the regulations (i.e., § 1.336-2(h)(3)(iii)).
Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an
extension of time to file the Election, provided Purchaser, S Corporation Shareholders,
and S Corporation Target acted reasonably and in good faith, the requirements of
§§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief would not prejudice the
interests of the government.

Information, affidavits, and representations submitted by Purchaser, S Corporation
Shareholders, S Corporation Target, Company Officials, and Tax Professional explain
the circumstances that resulted in the failure to timely file the Election. The information
establishes that S Corporation Shareholders and S Corporation Target reasonably
relied on a qualified tax professional who failed to file, or advise them to timely file, the
Election and that the request for relief was filed before the failure to file the Election was
discovered by the Internal Revenue Service. See §§ 301.9100-3(b)(1)(i) and (v).

Based on the facts and information submitted, including the representations made, we
conclude that Purchaser, S Corporation Shareholders, and S Corporation Target have
acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3
are satisfied, and granting relief will not prejudice the interests of the government.
Accordingly, an extension of time is granted under § 301.9100-3, until 45 days from the
date on this letter, to file the Election with respect to the Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target and the S
Corporation Shareholders must enter into a written, binding agreement to make the
Election and S Corporation Target must file the section 336(e) election statement in
accordance with § 1.336-2(h). The section 336(e) election statement must be attached
to S Corporation Target’s tax return for B Year. In addition, a copy of this letter must be
attached to S Corporation Target’s return. Alternatively, if S Corporation Target files its
return electronically, it may satisfy the requirement of attaching a copy of this letter to
the return by attaching a statement to its return that provides the date and control
number (PLR-118298-16) of this letter ruling.

WITHIN 120 DAYS OF THE DATE ON THIS LETTER, all relevant parties must file or
amend, as applicable, all returns and amended returns (if any) necessary to report the
PLR-118298-16 4

transaction consistently with the making of a section 336(e) election for the taxable year
in which the transaction was consummated (and for any other affected taxable year).

The above extension of time is conditioned on the taxpayers’ (i.e., Purchaser’s, S
Corporation Target’s, and S Corporation Shareholder’s) tax liability (if any) being not
lower, in the aggregate, for all years to which the section 336(e) election applies than it
would have been if the Election had been timely filed (taking into account the time value
of money). No opinion is expressed as to the taxpayers’ tax liability for the years
involved. A determination thereof will be made by the applicable Director’s office upon
audit of the federal income tax returns involved.

We express no opinion as to: (1) whether the Disposition qualifies as a “qualified stock
disposition”; or (2) any other tax consequences arising from the section 336(e) election.

In addition, we express no opinion as to the tax consequences of filing the return or
Election late under the provisions of any other section of the Code and regulations, or
as to the tax treatment of any conditions existing at the time of, or resulting from, filing
the Election late that are not specifically set forth in the above ruling. For purposes of
granting relief under § 301.9100-3, we have relied on certain statements and
representations made by the taxpayers. However, the Director should verify all
essential facts. In addition, notwithstanding that an extension is granted under
§ 301.9100-3 to file the Election, penalties and interest that would otherwise be
applicable, if any, continue to apply.

This letter is directed only to the taxpayer(s) who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

Pursuant to the power of attorney on file in this office, copies of this letter are being sent
to your authorized representatives.

                                       Sincerely,



                                       _Ken Cohen________________________
                                       Ken Cohen
                                       Chief, Branch 3
                                       Office of Associate Chief Counsel (Corporate)

cc: