Parties received more time to complete a section 336(e) election

Plain-English summary

Purchasers acquired more than 80 percent of an S corporation's stock in a transaction represented to be a qualified stock disposition. The parties intended to elect under section 336(e) to treat the stock sale as an asset disposition, but they did not timely complete the written agreement and election statement required by the regulations. The IRS found that they reasonably relied on a qualified tax professional, acted reasonably and in good faith, and sought relief before the IRS discovered the failure. It granted 45 days to execute the agreement and file the election statement, plus 120 days for all affected parties to file consistent returns. The relief was conditioned on aggregate tax liabilities not being lower than they would have been with a timely election.

Ruling snapshot

• Question: May the parties complete a late section 336(e) election for the S corporation stock disposition?
• Outcome: approved, with 45 days for the election documents and 120 days for consistent returns
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201934005                                             Third Party Communication: None
Release Date: 8/23/2019                                       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:2
                                                              PLR-135397-18
                                                              Date:
                                                              May 28, 2019

Legend

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

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Company Official           =          ------------------------------------------------------------------------------
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Tax Professional           =          ------------------------------------------------------------------------------
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Attorney 1                 =          ------------------------------------------------------------------------------
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Attorney 2                =   ------------------------------------------------------------------------------
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%X                        =   --------------


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

This letter responds to a letter dated November 29, 2018, submitted on behalf of
Purchasers, 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. Additional information was received subsequently.

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 the Purchasers acquisition, through respective disregarded entities, of %X of
the stock of S Corporation from Shareholders (who owned the stock through respective
disregarded entities) on Date 1. The material information submitted is summarized
below.

Immediately before Date 1, Shareholders owned all of the stock of S Corporation
through respective trusts that were disregarded from Shareholders for federal income
tax purposes. On Date 1, Purchasers, through respective trusts that were disregarded
from Purchasers for federal income tax purposes, acquired %X (more than 80 percent)
of the stock of S Corporation, a State A corporation that elected to be treated as an S
corporation for federal income tax purposes, from Shareholders’ respective trusts that
were disregarded from Shareholders for federal income tax purposes (the “Stock
Disposition”). It has been represented that the Stock Disposition qualified as a
“qualified stock disposition” as defined in §1.336-1(b)(6).

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. 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: (1) 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; (2) the S
corporation target retaining a copy of the written agreement; and (3) 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 (the “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,
Tax Professional, Attorney 1 and Attorney 2 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 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-135397-18) of this letter ruling.

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 Stock 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) 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 the Parties, Company Official, Tax
Professional, Attorney 1 and Attorney 2. 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 taxpayers 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,



                                       T. Ian Russell
                                       Branch Chief, Branch 1
                                       Office of Associate Chief Counsel (Corporate)