A consolidated group gets more time to make a section 336(e) election on a stock sale

Plain-English summary

A section 336(e) election lets certain sales of a corporation's stock be treated for tax purposes as if the corporation had sold its assets, which can give the buyer a stepped-up basis in those assets. When the seller and the target are in the same consolidated group, the regulations require the group's parent to make the election by signing a binding agreement and attaching an election statement to the group's timely filed consolidated return for the year of the sale. Here a consolidated group sold all the stock of a subsidiary (a "qualified stock disposition"), and the buyer, as the purchase agreement allowed, elected to have a section 336(e) election made, but the parent failed to attach the required election statement to its return, so the election was not fully made on time. The parties sought relief under section 301.9100-3, which lets the IRS extend a missed regulatory election deadline when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. The IRS found the parties reasonably relied on tax professionals who failed to make the election and asked for relief before the IRS caught the lapse, so it granted a 45-day extension to file the election statement (with 120 days to conform all returns), conditioned on their tax liability being no lower than if the election had been timely. The IRS expressed no opinion on whether the sale actually qualifies as a qualified stock disposition. This lets the parties secure the asset-sale tax treatment they bargained for despite the late filing.

Ruling snapshot

• Question: Should a consolidated group that failed to timely attach its section 336(e) election statement get a section 9100 extension to make the election?
• Outcome: approved (45-day extension to file the election statement granted)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h)(1), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201910015                                             Third Party Communication: None
Release Date: 3/8/2019                                        Date of Communication: Not Applicable
Index Number: 336.05-00, 9100.22-00
                                                              Person To Contact:
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----------------                                              ID No. ---------------
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-----------------------------------------------------         Refer Reply To:
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                                                              PLR-127782-18
                                                              Date:
                                                              December 04, 2018




Legend

Seller Parent              = ------------------
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Seller                     = -------------------------
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Target                     = -------------------------------------------
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Purchaser Parent = ------------------------------------------
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Purchaser                  = -----------------------------------------
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Date 1                     = ---------------------

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

Date 3                     = ------------------

Company Official = -------------------
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Tax Professionals = ---------------------
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PLR-127782-18                                                2

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

This letter responds to a letter dated August 29, 2018, submitted on behalf of Seller
Parent, requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations to make an election. Seller Parent, the common parent of a
consolidated group that included Seller and Target (the “Seller Parent Group”), is
requesting an extension of time to make an election under § 1.336-2(h)(1) of the Income
Tax Regulations (the “Election”) with respect to Seller’s disposition of all the issued and
outstanding stock of Target. Additional material was submitted in a letter dated
November 14, 2018. The material information submitted is summarized below.

On Date 1, Seller and Purchaser entered into a purchase agreement pursuant to which
Purchaser, a limited liability company disregarded as separate from Purchaser Parent
for U.S. federal tax purposes, agreed to purchase all the issued and outstanding shares
of Target’s stock from Seller (the “Stock Disposition”). The purchase agreement
included a provision conferring upon Purchaser the sole discretion to decide whether a
section 336(e) election should be made with respect to the Stock Disposition and
requiring cooperation among Seller, Target, and Purchaser to make the election in the
event that Purchaser determined one should be made.

On or about Date 2, Purchaser informed Seller’s legal counsel that, in accordance with
the power granted to it in the purchase agreement, Purchaser had determined that a
section 336(e) election should be made with respect to the Stock Disposition.

On Date 3, Purchaser acquired all the issued and outstanding shares of Target’s stock
from Seller in the Stock Disposition. The section 336(e) election agreement was
executed by Seller and Target on or about the same date. It has been represented that
the Stock Disposition qualified as a “qualified stock disposition” as defined in § 1.336-
1(b)(6). Target subsequently converted under state law to a limited liability company.

The parties intended to make a section 336(e) election for the Stock Disposition but, for
various reasons, a timely election was not fully made, as Seller Parent failed to include,
as required by § 1.336-2(h)(1)(iii), the section 336(e) election statement with the Seller
Parent Group’s timely filed consolidated federal income tax return for the taxable year
PLR-127782-18                                  3

that included Date 3. Subsequently, this request was submitted, under § 301.9100-3 of
the Procedure and Administration Regulations, for an extension of time to make the
Election. It has been represented that the parties are not seeking to alter a return
position for which an accuracy-related penalty has been or could be imposed under
section 6662.

Regulations promulgated under section 336(e) permit certain sales, exchanges, or
distributions of stock of a corporation to be treated as asset dispositions if (i) the
disposition is a “qualified stock disposition” as defined in § 1.336-1(b)(6); and (ii) a
section 336(e) election is made.

Section 1.336-2(h)(1) provides that if the seller and target corporations are members of
the same consolidated group, a section 336(e) election is made by completing the
following requirements: (i) seller and target must enter into a written, binding agreement,
on or before the due date (including extensions) of the consolidated group’s
consolidated federal income tax return for the taxable year that includes the disposition
date, to make a section 336(e) election; (ii) the common parent of the consolidated
group must retain a copy of the written agreement; (iii) the common parent must attach
the section 336(e) election statement, described in § 1.336-2(h)(5) and (6), to the
group’s timely filed (including extensions) consolidated federal income tax return for the
taxable year that includes the disposition date; and (iv) the common parent must
provide a copy of the section 336(e) election statement to target on or before the due
date (including extensions) of the consolidated group’s consolidated federal income tax
return.

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 making the Election is fixed by the regulations (i.e., § 1.336-2(h)).
Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an
extension of time for Seller and Target to make the Election, provided Seller Parent,
Seller, Purchaser, and 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.
PLR-127782-18                                4

Information, affidavits, and representations submitted by Seller Parent, Purchaser,
Target, Company Official, and Tax Professionals explain the circumstances that
resulted in the failure to timely make the Election. The information establishes that
Seller and Target reasonably relied on qualified tax professionals who failed to make, or
advise them to timely make, the Election in full accordance with § 1.336-2(h)(1)(i)
through (iv), and that the request for relief was filed before the failure to properly make
the Election 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 Seller Parent, Seller, Purchaser, and 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, to make the Election with respect to the Stock Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER: Seller Parent must file the section
336(e) election statement in accordance with § 1.336-2(h)(1)(iii) and provide a copy to
Target. The section 336(e) election statement must be attached to Seller Parent
Group’s consolidated federal income tax return for the taxable year including Date 3. In
addition, a copy of this letter must be attached to the return. Alternatively, if Seller
Parent Group’s tax return was filed electronically, this latter requirement may be
satisfied by attaching a statement to the return that provides the date and control
number (PLR-127782-18) on 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 Stock Disposition was consummated (and for any other affected taxable
year).

The above extension of time is conditioned on Seller Parent Group’s tax liability (if any)
being not lower, in the aggregate, for all years to which the Election applies than it
would have been if the Election had been timely made (taking into account the time
value of money). No opinion is expressed as to Seller Parent Group’s 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 Stock Disposition qualifies as a “qualified
stock disposition,” or (2) any other tax consequences arising from the Election.

In addition, we express no opinion as to the tax consequences of making the Election
late under the provisions of any other section of the Code and regulations, or as to the
PLR-127782-18                                  5

tax treatment of any conditions existing at the time of, or resulting from, making the
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 Seller Parent, Purchaser, Target, Company
Official, and Tax Professionals. However, the Director should verify all essential facts. In
addition, notwithstanding that an extension is granted under § 301.9100-3 to make the
Election, penalties and interest that would otherwise be applicable, if any, continue to
apply.

This letter 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
                                        Senior Technician Reviewer, Branch 3
                                        Office of Associate Chief Counsel (Corporate)