S corporation receives 45 days to file late Section 336(e) election statement

Plain-English summary

An S corporation recapitalized into voting and nonvoting shares before two purchasers acquired its stock. A second shareholder received shares before the sale, sold them to one purchaser, and then bought back no more than 20 percent of the target after the shares were recombined into one class. The transaction documents required a section 336(e) election, but the target's tax professional failed to file or advise the parties to file the required statement. The IRS found reasonable reliance, good faith, and no government prejudice. It granted 45 days to file or amend the target's return with the election statement and 120 days for all parties to file consistently, conditioned on aggregate tax not being lower than with a timely election.

Ruling snapshot

• Question: May the S corporation late-file the section 336(e) election statement for the recapitalization and stock-sale transactions?
• Outcome: Approved, with 45-day and 120-day filing deadlines and a no-lower-aggregate-tax condition.
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201808008 Third Party Communication: None
Release Date: 2/23/2018 Date of Communication: Not Applicable
Index Number: 9100.22-00, 336.05-00
Person To Contact:
-------------------------------------- --------------------------, ID No. ----------------
-----------------
-------------------------------- Telephone Number:
-------------- ----------------------
---------------------------- Refer Reply To:
Attn: CC:CORP:3
PLR-121918-17
Date:
November 27, 2017

Legend

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

Shareholder A = -----------------------

Shareholder B = --------------------

Purchaser A = -------------------

Purchaser B = --------------------

Trust = ------------------------------------------
------------------------------------------------------------------------
------------------------------------------

aa = -----

bb = --

cc = ----

dd = ----

ee = ----

ff = ----

gg = --

PLR-121918-17 2

hh = ------

ii = ------

JJ = ------

kk = ----

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

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

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

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

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

This letter responds to a letter from your authorized representative, dated July 14, 2017,
requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to file an election. Shareholder A, Shareholder B,
Purchaser A, Purchaser B, 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 A's
and Purchaser B’s acquisition of the stock of S Corporation Target on Date 2. Additional
information was submitted in a letter dated August 14, 2017. The material information
submitted is summarized below.

Prior to Date 1, Shareholder A owned all aa shares of the only class of stock of S
Corporation Target outstanding. On Date 1, the stock of S Corporation Target was
recapitalized into two classes of common stock, Class A voting and Class B non-voting,
and the aa shares were converted into bb shares of Class A stock and cc shares of
Class B stock. Subsequently, between Date 1 and Date 2, Shareholder A transferred a
portion of the Class B stock to Trust. It has been represented that under the "grantor
trust" provisions of the Internal Revenue Code, Shareholder A continued to be treated
as the owner of the stock held by Trust. Accordingly, for purposes of this letter, the
transfer of the stock to Trust will be disregarded and any transaction between
Shareholder A and Trust will be disregarded and any transfer of the stock by Trust to
Shareholder B will be treated as if made by Shareholder A.

PLR-121918-17 3

On Date 2, Shareholder A (and Trust) transferred dd shares of the Class B stock to
Shareholder B. It has been represented that for federal income tax purposes, this
transfer will be treated as if Shareholder A transferred the dd shares to S Corporation
Target which then transferred the dd shares to Shareholder B.

Also on Date 2, pursuant to a stock purchase agreement of the same date: Shareholder
A sold ee shares of Class A stock and ff shares of Class B stock to Purchaser A;
Shareholder A sold ee shares of Class A stock and gg shares of Class B stock to
Purchaser B; and Shareholder B sold all of Shareholder B's dd shares to Purchaser B.
Immediately after these sales, the shares of S Corporation Target were recapitalized
into a single class of common stock, resulting in Purchaser A owning hh shares (ee + ff)
of S Corporation Target and Purchaser B owning the remaining ii shares (ee + gg + dd).
Immediately following this recapitalization, Shareholder B purchased JJ shares of the
stock of S Corporation Target from Purchaser A and kk shares from Purchaser B (the
sum of JJ and kk is no greater than 20 percent of the outstanding stock of S Corporation
Target. It has been represented that the Date 2 transactions qualified as a “qualified
stock disposition” as defined in § 1.336-1(b)(6).

Pursuant to the stock purchase agreement, of which Shareholder A, Shareholder B,
Purchaser A, Purchaser B, and S Corporation Target were all parties, a section 336(e)
election was required to be made. The Election Statement, required as part of the
section 336(e) election, was required to be filed by the due date (with extensions) of the
S Corporation Target tax return for the tax year that included Date 2. However, 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 none of
Shareholder A, Shareholder B, Purchaser A, Purchaser 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 request for relief.

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 1.336-1(b)(5)(v) provides, in part, that stock disposed of by an S corporation
shareholder to another person under § 1.336-1 that is reacquired by the S corporation
shareholder or by a person related (within the meaning of § 1.336-1(b)(12)) to the S
corporation shareholder during the 12-month disposition period shall not be considered
as disposed of.

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

PLR-121918-17 4

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-
3 to grant an extension of time for S Corporation Target to file the Election Statement,
provided Shareholder A, Shareholder B, Purchaser A, Purchaser 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 will not prejudice the interests of the
government.

Information, affidavits, and representations submitted Shareholder A, Shareholder B,
Purchaser A, Purchaser B, 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 the parties 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 Shareholder A, Shareholder B, Purchaser A, Purchaser 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

PLR-121918-17 5

§ 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 Date 2 transactions.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target must file or
amend its tax return for the tax year that includes Date 2 and must attach the Election
Statement and a copy of this ruling letter to such return. Alternatively, if S Corporation
Target files its return electronically, in lieu of attaching a copy of this ruling letter to the
return, S Corporation Target may attach a statement to the return that provides the date
on, and the control number of, this ruling letter (November 27, 2017; PLR-121918-17).

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., Shareholder A,
Shareholder B, Purchaser A, Purchaser B, and S Corporation Target's) 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.

We express no opinion whether Shareholder A should properly be treated for federal tax
purposes as the owner of any property held by Trust. We express no opinion whether
the transfer by Shareholder A of dd shares of the Class B stock to Shareholder B should
be treated as if Shareholder A transferred the dd shares to S Corporation Target which
then transferred the dd shares to Shareholder B. We express no opinion regarding the
proper treatment of the Date 2 transactions, as to whether the Date 2 transactions
qualify as a “qualified stock disposition”, or of any tax consequences arising from the
section 336(e) election. We also express and imply no opinion regarding the application
of sections 83, 409A, 404 or other provision to the pre-sale transfer by Shareholder A to
Shareholder B.

Lastly, we express no opinion as to the tax consequences of filing the Election
Statement or return 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.

PLR-121918-17 6

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
                                   Chief, Branch 3
                                   Office of Associate Chief Counsel (Corporate)