Parties receive extra time for section 336(e) election

Plain-English summary

A purchaser acquired all stock of an S corporation from its shareholders, and the parties intended the stock sale to be treated as an asset sale under section 336(e). They failed to execute the required agreement and file the election statement on time, but requested relief before the IRS discovered the failure. The IRS found that the parties acted reasonably and in good faith and that relief would not prejudice the government. It gave them 45 days to execute the binding agreement and file the election statement, and 120 days to file or amend all affected returns consistently. Relief was conditioned on aggregate tax liabilities not being lower than with a timely election, and the IRS did not decide whether the transaction was a qualified stock disposition.

Ruling snapshot

• Question: May the parties make a late section 336(e) election to treat an S corporation stock sale as an asset disposition?
• Outcome: approved, subject to filing deadlines and the aggregate-tax-liability condition
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201802008                                                 Third Party Communication: None
Release Date: 1/12/2018                                           Date of Communication: Not Applicable
Index Number: 336.05-00, 9100.22-00
                                                                  Person To Contact:
------------------------------------                              ---------------------------
--------------------------------                                  Telephone Number:
--------------                                                    ----------------------
------------------------------------                              Refer Reply To:
                                                                  CC:CORP:B05
------------------------------------------------------------      PLR-121743-17
----------------                                                  Date:
                                                                  October 17, 2017




LEGEND

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

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

Shareholders               =         ---------------------------------
--------------------------------------------------------------
-------------------------------------------------------------------

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

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

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

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

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

Tax Professional           =         ---------------------
---------------------------------------------------------------------------------
PLR-121743-17                                 2



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

This letter responds to a letter dated July 13, 2017, submitted on behalf of Purchaser, S
Corporation, and Shareholders (collectively, the “Parties”), requesting an extension of
time under § 301.9100-3 of the Procedure and Administration Regulations to file an
election. The Parties are requesting an extension of time to properly execute the
agreement referenced in § 1.336-2(h)(3)(i) of the Income Tax Regulations (the
“Agreement”) and to file the election statement under § 1.336-2(h)(3)(iii) (the “Election
Statement”) with respect to Purchaser’s acquisition, through a disregarded entity, of all
of the stock of S Corporation from Shareholders on Date 1. The material information
submitted is summarized below.

On Date 1, Purchaser, a State A limited partnership, acquired all of the stock of S
Corporation, a State B corporation that elected to be treated as an S corporation for
federal income tax purposes, from 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).

The Parties intended for the stock sale to be treated as an asset sale, but for various
reasons, a timely election was not made. Subsequently, this request was submitted,
under § 301.9100-3, for an extension of time to enter into the Agreement and file the
Election Statement. The Parties each represented that they are not 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 (taking into account any qualified
amended return 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.
PLR-121743-17                                 3

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 to file the Election Statement, 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.

Information, affidavits, and representations submitted by the Parties, 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 the request for relief was filed before the failure to timely enter into the Agreement
and file the Election Statement 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 the Parties 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 enter into the Agreement and
file the Election Statement.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation and Shareholders
(1) must enter into a written, binding agreement in accordance with § 1.336-2(h)(3)(i) to
make the section 336(e) election, and (2) S Corporation must file the Election Statement
in accordance with § 1.336-2(h)(3)(iii). The Election Statement must be attached to S
Corporation’s tax return for the taxable year including Date 1. In addition, a copy of this
letter must be attached to S Corporation’s return. Alternatively, if S Corporation 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 on this letter and
control number (PLR-121743-17) of this letter ruling.
PLR-121743-17                                  4

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., the Parties’) 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 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 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.

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
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) 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, Company Official, and Tax
Professional. However, the Director should verify all essential facts. In addition,
notwithstanding that an extension is granted under § 301.9100-3 to file the section
336(e) election, penalties and interest that would otherwise be applicable, if any,
continue to apply.

This letter 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.

Pursuant to 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)