Parties receive late section 336(e) election relief for S corporation stock sale

Plain-English summary

A partnership purchased a specified percentage of an S corporation's stock, and the parties intended to treat the qualified stock disposition as a deemed asset sale under IRC § 336(e). They did not timely execute the required written agreement or attach the election statement because the shareholders and target relied on a tax professional who failed to advise them of those steps. The IRS found that the parties acted reasonably and in good faith and granted 45 days to execute the binding agreement and file the election statement. All relevant parties also received 120 days to file consistent original or amended returns. Relief was conditioned on aggregate tax liability not being lower than it would have been with a timely election, and the IRS did not decide whether the sale qualified as a qualified stock disposition.

Ruling snapshot

• Question: May the purchaser, S corporation target, and shareholders make a late section 336(e) election for the stock acquisition?
• Outcome: Approved with conditions. They received 45 days for the agreement and election statement and 120 days for consistent returns.
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1(b)(6), 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: 201721011
Third Party Communication: None
Release Date: 5/26/2017
Date of Communication: Not Applicable
Index Numbers: 9100.22-00, 336.05-00
Person To Contact:
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Refer Reply To:
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CC:CORP:B05
PLR-134536-16
Date:
February 21, 2017

LEGEND

Purchaser = ---------------------------------------
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S Corporation Shareholders A = ----------------------------------------------
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S Corporation Shareholders B = -----------------------
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S Corporation Target = ---------------------------------------------------
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State A = --------------

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

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

A Year = -----------------------------------------------
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Purchase Percentage = ---------

Company Official = -------------------------------------
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Tax Professional = ----------------------------
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Dear -------------------:

This letter responds to a letter dated October 27, 2016, and a supplemental letter dated January 10, 2017, submitted on behalf of Purchaser, S Corporation Shareholders A, S Corporation Shareholders B, and S Corporation Target, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to file an election. Purchaser, S Corporation Shareholders A, S Corporation Shareholders B, and S Corporation Target are requesting an extension of time to properly execute the agreement referenced in § 1.336-2(h)(3)(i) (the “Agreement”) and to file an election statement under § 1.336-2(h)(3)(iii) of the Income Tax Regulations (the “Election Statement”) with respect to Purchaser’s acquisition of Purchase Percentage of the stock of S Corporation Target from S Corporation Shareholders A 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 Purchase Percentage of the stock of S Corporation Target, a State B corporation which had elected to be treated as an S corporation for federal income tax purposes, from S Corporation Shareholders A 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 A, S Corporation Shareholders B, and Purchaser intended to treat the stock sale as a deemed asset sale, but, for various reasons, a timely section 336(e) 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 enter into the Agreement and file the Election Statement. It has been represented that none of Purchaser, S Corporation Shareholders A, S Corporation Shareholders B, 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 at the time of the filing of this request under § 301.9100-3, and for which the new position requires or permits a regulatory election for which relief is requested.
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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.

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 entering into the Agreement and filing the Election Statement is fixed by the regulations (i.e., § 1.336-2(h)(3)(i) and (iii)). Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time to enter into the Agreement and file the Election Statement, provided Purchaser, S Corporation Shareholders A, S Corporation Shareholders B, 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 A, S Corporation Shareholders B, S Corporation Target, Company Official, and Tax Professional explain the circumstances that resulted in the failure to timely enter into the Agreement and file the Election Statement. The information establishes that S Corporation Shareholders A, S Corporation Shareholders B, and S 4
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Corporation Target reasonably relied on a qualified tax professional who failed to advise them to enter into the Agreement and to timely file the Election Statement and that the request for relief was filed before the failure to enter into the Agreement or file the Election Statement 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 A, S Corporation Shareholders B, 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 with respect to the Disposition, until 45 days from the date on this letter, to enter into the Agreement and file the Election Statement.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target, S Corporation Shareholders A, and S Corporation Shareholders B must enter into a written, binding agreement to make the Election Statement and S Corporation Target must file the Election Statement in accordance with § 1.336-2(h). The Election Statement must be attached to S Corporation Target’s tax return for A 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-134536-16) 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 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, S Corporation Shareholders A’s, and S Corporation Shareholders B’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 Agreement had been timely entered into and the Election Statement 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.
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In addition, we express no opinion as to the tax consequences of filing the return or making the section 336(e) 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 section 336(e) 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 enter into the Agreement and file the Election Statement, penalties and interest that would otherwise be applicable, if any, continue to apply.

This letter is directed only to the taxpayers 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
Chief, Branch 3
Office of Associate Chief Counsel (Corporate)

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