Grants late Section 336(e) stock-disposition election

Plain-English summary

A partnership-taxed buyer acquired all stock of an S corporation from its shareholders for cash. The parties later decided to make a Section 336(e) election so the qualified stock disposition would be treated as an asset disposition, but their binding agreement and election statement were not timely completed. The IRS found that the parties reasonably relied on a qualified tax professional and requested relief before the IRS discovered the failure. It granted 45 days to complete the election statement and attach it to the S corporation's return. All relevant parties also received 120 days to file or amend returns consistently with the election, subject to an aggregate-tax-liability condition.

Ruling snapshot

• Question: Could the S corporation, buyer, and shareholders make a late Section 336(e) election for the stock acquisition?
• Outcome: Approved, with 45 days for the election statement and 120 days for all consistent original or amended 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: 201827001 Third Party Communication: None
Release Date: 7/6/2018 Date of Communication: Not Applicable
Index Number: 9100.22-00, 336.05-00
Person To Contact:
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------------------------------- Telephone Number:
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---------------- Refer Reply To:
-------------------------------------- CC:CORP:2
PLR-103171-18
Date:
April 05, 2018

Legend

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

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

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

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

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

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

This letter responds to a letter dated December 21, 2017, submitted on behalf of S
Corporation, Purchaser, and Shareholders (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 file the election statement under § 1.336-2(h)(3)(iii) (the “Election
Statement”) with respect to Purchaser’s acquisition of all of the stock of S Corporation
from Shareholders on Date 1. Additional material was submitted in a letter dated March
22, 2018. The material information submitted is summarized below.

On Date 1, Purchaser, a State A limited liability company taxable as a partnership for
federal income tax purposes, 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).

Subsequent to the Disposition, a decision was made to file a section 336(e) election for
the Disposition. S Corporation and Shareholders entered into a written, binding
agreement that provided that a section 336(e) election would be made with respect to
the Disposition. However, for various reasons, the Agreement was not entered into on
or before the due date of the federal income tax return of S Corporation for the taxable
year that includes the disposition date, nor was the Election Statement timely filed, and
consequently, 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.

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 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 Parties reasonably relied on a qualified tax professional who failed to advise
them to timely enter into the Agreement and to timely file the Election Statement and
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) and (v).

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, having already
entered into a written, binding agreement, 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-103171-18) of this letter.

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 Parties’ 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 Parties’ 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 whether the Disposition qualifies as a “qualified stock
disposition” or 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 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 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
                                   Senior Technician Reviewer, Branch 3
                                   Office of Associate Chief Counsel (Corporate)

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