Late section 336(e) election receives conditional relief

Plain-English summary

A purchaser acquired all the stock of an S corporation target in a transaction represented to be a qualified stock disposition. The parties intended to make a section 336(e) election, but the shareholder agreement was not timely executed, the election statement was incorrectly executed, and the target's return was late. The IRS found that the target, shareholders, and purchaser acted reasonably and in good faith and requested relief before the IRS discovered the failure. It granted 45 days to execute a new election statement and attach it, with the ruling, to an amended target return. It also required all affected parties to file consistently within 120 days and conditioned relief on their aggregate tax liability not being lower than it would have been with a timely election.

Ruling snapshot

• Question: May the parties make a late section 336(e) election for the S corporation stock transaction?
• Outcome: approved; 45-day and 120-day corrective filing periods were granted
• Key authorities: Treas. Reg. §§ 1.336-2(h)(3), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201702024 Third Party Communication: None
Release Date: 1/13/2017 Date of Communication: Not Applicable
Index Numbers: 9100.22-00, 336.05-00
Person To Contact:
------------------- -----------------------, ID No. --------------
-------------------------------- Telephone Number:
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-------------------- Refer Reply To:
------------------------------------------- CC:CORP:B04
PLR-114547-16
Date:
October 17, 2016

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

the S Corporation Target Shareholders = -----------------------------------------------------
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Purchaser = ---------------------------------

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Corporation = -----------------------------------

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

State B = -------------------

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

Year 1 = -------
PLR-114547-16 2

Company Official = -----------------------------------------------------

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

Tax Professionals = -----------------------------------------------------

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

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

  This letter responds to a letter dated May 2, 2016, submitted on behalf of S

Corporation Target, the S Corporation Target Shareholders, and Purchaser requesting
an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations to file an election. S Corporation Target, the S Corporation Target
Shareholders, and Purchaser are requesting an extension of time for S Corporation
Target to file a section 336(e) election statement under § 1.336-2(h)(3)(iii) of the Income
Tax Regulations with respect to Purchaser’s acquisition, through disregarded entities
and Corporation, of all of the stock of S Corporation Target from the S Corporation
Target Shareholders on Date 1 (the “Stock Transaction”) and for S Corporation Target
and the S Corporation Shareholders to properly execute the agreement referenced in
§ 1.336-2(h)(3)(i) (together, “the Election”). The material information submitted is
summarized below.

     Immediately prior to the Stock Transaction, Purchaser was a State A limited

liability company that was taxed as a partnership. Purchaser owned a disregarded
entity, which in turn owned a disregarded entity. The latter entity wholly owned
Corporation, a State A corporation.

  On Date 1, Purchaser acquired all of the stock of S Corporation Target, an S

corporation incorporated in State B, from the S Corporation Target Shareholders by
Corporation merging into S Corporation Target in the Stock Transaction. It has been
represented that the Stock Transaction qualified as a "qualified stock disposition" as
defined in § 1.336-1(b)(6)(i).

   Subsequent to the Stock Transaction, a decision was made to file a section

336(e) election for the Stock Transaction. Accordingly, S Corporation Target and the S
Corporation Target Shareholders entered into a written, binding agreement (the
“agreement”) that provided that a § 336(e) election would be made with respect to the
Stock Transaction, and S Corporation Target filed its tax return for Year 1 (along with a
section 336(e) election statement) on what it believed was a timely basis. However, for
PLR-114547-16 3

various reasons, the agreement was not timely executed, the section 336(e) election
statement was not correctly executed, and S Corporation Target’s tax return for Year 1
was not timely filed. 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 the S Corporation Target Shareholders,
S Corporation Target, or Purchaser is seeking to alter a return position for which an
accuracy-related penalty has been or could be imposed under § 6662.

    Regulations promulgated under § 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
§ 336(e) election is made.

    Section 1.336-2(h)(3) provides that a § 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 § 336(e) election; (ii) the S corporation target retaining a
copy of the written agreement; and (iii) the S corporation target attaching the § 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.

    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)).

Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an
extension of time to file the Election, provided the parties 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.
PLR-114547-16 4

    Information, affidavits, and representations submitted by S Corporation Target,

the S Corporation Target Shareholders, Purchaser, Company Official, and Tax
Professionals explain the circumstances that resulted in the failure to timely file the
Election. The information establishes that the request for relief was filed before the
failure was discovered by the Internal Revenue Service. See § 301.9100-3(b)(1)(i).

   Based on the facts and information submitted, including the representations

made, we conclude that S Corporation Target, the S Corporation Target Shareholders,
and Purchaser have shown that they 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 Stock Transaction.

    WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target must

execute a new section 336(e) election statement in accordance with §§ 1.336-2(h)(5)
and (6). The new election statement must then be attached to an amended tax return
that S Corporation Target must file (within the same 45-day period) for Year 1. A copy
of this letter ruling must also be attached to the amended return. Alternatively, if S
Corporation Target files the amended return electronically, it may satisfy the
requirement of attaching a copy of this letter to the amended return by attaching a
statement to the return that provides the date and control number (PLR-114547-16) of
this letter ruling.

   In addition, 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 Stock Transaction consistently with the making of a § 336(e)
election for Year 1 (and for any other affected taxable year).

    The above extension of time is conditioned on the taxpayers' (i.e., S Corporation

Target's, the S Corporation Target Shareholders’, and Purchaser’s) tax liability (if any)
being not lower, in the aggregate, for all years to which the § 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
year(s) 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 Stock Transaction qualifies as a

"qualified stock disposition" or (2) any other tax consequences arising from the § 336(e)
election.

   In addition, we express no opinion as to the tax consequences of filing S

Corporation Target’s tax return for Year 1 and/or the Election late under the provisions
of any other section of the Code and regulations, or as to the tax treatment of any
PLR-114547-16 5

conditions existing at the time of, or resulting from, filing that return and/or 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 parties. However, the Director should
verify all essential facts. In addition, notwithstanding that an extension of time is
granted under § 301.9100-3 to timely file the Election, penalties and interest that would
otherwise be applicable, if any, continue to apply.

  This ruling 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 a power of attorney on file in this office, copies of this letter are being

sent to your authorized representatives.

                                    Sincerely,


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