Late section 336(e) election statement accepted

Plain-English summary

A partnership purchaser acquired all the stock of an S corporation through a disregarded entity, and the parties intended to elect under section 336(e) to treat the stock sale as an asset disposition. The target and its shareholders entered a timely binding election agreement, but the target did not attach the required election statement to its timely return because the parties reasonably relied on a qualified tax professional. The IRS found that they acted reasonably and in good faith and that relief would not prejudice the government. It gave the target 45 days to amend its return with the election statement and ruling letter, and required all relevant parties to file consistent returns within 120 days. Relief was conditioned on their aggregate tax liabilities, taking the time value of money into account, being no lower than with a timely election. The IRS did not decide whether the sale was a qualified stock disposition or address other tax consequences.

Ruling snapshot

• Question: May the S corporation target file its section 336(e) election statement after the regulatory deadline?
• 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: 201740003                                              Third Party Communication: None
Release Date: 10/6/2017                                        Date of Communication: Not Applicable
Index Number: 9100.22-00, 336.05-00
                                                               Person To Contact:
---------------------                                          ---------------------------, ID No. ---------------
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--------------------------------------------                   Telephone Number:
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                                                               Refer Reply To:
                                                               CC:CORP:1
                                                               PLR-104585-17
                                                               Date:
                                                               July 11, 2017

                  TY: ------------------

Legend

Purchaser                                    =        ---------------------------------------------------------------
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DE                                  =                  -----------------------------------------------
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S Corporation Target                         =         -----------------------------
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S Corporation Shareholders                   =         -------------------------------------------------
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PLR-104585-17                                             2

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

Date 2                                       =        -------------------

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

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

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

This letter responds to a letter from your authorized representative, dated January 31,
2017, requesting an extension of time under §§ 301.9100-1 and 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 for S
Corporation Target 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
(through DE) of all the stock of S Corporation Target from S Corporation Shareholders
on Date 1. Additional information was submitted in correspondence dated March 20,
2017. The material information submitted is summarized below.

On Date 1, Purchaser, a limited liability company that is treated as a partnership for
Federal income tax purposes, through DE, an entity disregarded as separate from its
owner for Federal income tax purposes, acquired by means of a merger of a transitory
subsidiary of DE into Target, all of the stock of S Corporation Target, an S corporation
formed under the laws of State A, from S Corporation Shareholders (the “Disposition”).
It has been represented that the Disposition qualified as a “qualified stock disposition”
as defined in § 1.336-1(b)(6).
PLR-104585-17                                 3


Prior to Date 2, the due date for S Corporation Target’s tax return for the taxable year
that included Date 1, S Corporation Shareholders and S Corporation Target entered into
a written, binding agreement providing that a section 336(e) election would be made
with respect to the Disposition. The Election Statement was required to be filed by Date
2, but for various reasons, the Election Statement was not timely filed. Subsequently, a
request was submitted under § 301.9100-3 of the Procedure and Administration
Regulations, for an extension of time to file the Election Statement. It has been
represented that Purchaser, S Corporation Shareholders, nor S Corporation Target are
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 request for relief (taking into
account any qualified amended return filed within the meaning of § 1.6664-2(c)(3)).

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 filing the Election Statement is fixed by the regulations (i.e., § 1.336-
2(h)(3)(iii)). Therefore, the Commissioner has discretionary authority under § 301.9100-
PLR-104585-17                                 4

3 to grant an extension of time for S Corporation Target to file the Election Statement,
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 will not prejudice the interests of the government.

Information, affidavits, and representations submitted by Purchaser, S Corporation
Shareholders, S Corporation Target, Company Official, and Tax Professional explain
the circumstances that resulted in the failure to timely file the Election. The information
establishes that Purchaser, S Corporation Shareholders, and S Corporation Target
reasonably relied on a qualified tax professional who failed to timely file, or to advise
them to timely file, the Election Statement, and that the request for relief was filed
before the failure to 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 Shareholder, 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, for S Corporation Target to file the Election Statement with respect to
the Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target, having
already filed a return as though a valid Election Statement was filed, must amend its
previously filed return to attach a copy of this ruling letter along with the Election
Statement to such return. Alternatively, if S Corporation Target files its return
electronically, this requirement may be satisfied by attaching a statement to the return
that provides the date on, and the control number of, this ruling letter (July 11, 2017;
PLR-104585-17).

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, and S Corporation Shareholders’) tax liabilities (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 Statement had been timely filed (taking into account the
time value of money). No opinion is expressed as to the taxpayers’ tax liabilities 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.
PLR-104585-17                                  5

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 Election
Statement 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 Statement 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 Statement, penalties and interest that would otherwise
be applicable, in any, continue to apply.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                       Sincerely,


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