Parties get extra time for a section 336(e) asset-sale election

Plain-English summary

A disregarded buyer acquired all the stock of an S corporation, and the parties intended to treat the transaction as an asset sale under section 336(e). They missed the deadline to execute the required written agreement and attach the election statement to the S corporation's return because they reasonably relied on tax professionals who failed to advise them. The IRS found that the parties acted reasonably and in good faith and requested relief before the IRS discovered the failure. It gave them 45 days to execute the agreement and file the election statement, and 120 days for all relevant parties to file consistent original or amended returns. The relief was conditioned on aggregate tax liabilities not being lower than with a timely election, and the IRS did not decide whether the stock sale was a qualified stock disposition.

Ruling snapshot

• Question: Could the parties make a late section 336(e) election to treat an S corporation stock acquisition as an asset sale?
• Outcome: approved, with 45-day election and 120-day return-filing deadlines
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2, and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 202002005                                                 Third Party Communication: None
Release Date: 1/10/2020                                           Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.22-00,
              336.00-00, 336.05-00                                Person To Contact:
                                                                  -------------------------, ID No. -----------------
------------------------------------------------------------      -----------------------------------------------------
-----                                                             Telephone Number:
------------------------------------------------------------      ---------------------
------------------------------------------                        Refer Reply To:
                                                                  CC:CORP:B05
---------------------------------------------------               PLR-110236-19
                                                                  Date:
                                                                  October 16, 2019




Legend


Holdco                              =         --------------------------------------
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Direct Purchaser                    =         -----------------------------------------------------------------
                                    --------------------------------

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

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

Tax Professionals                   =         ------------------------------------
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Dear --------------:

This letter responds to a letter dated April 30, 2019, submitted on behalf of Holdco,
Direct Purchaser, S Corporation Target, and Shareholder (collectively, the “Parties”),
PLR-110236-19                                  2

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 Direct Purchaser’s acquisition of all of the
stock of S Corporation from Shareholder on Date 1. Additional material was submitted
subsequently. The material information is summarized below.

On Date 1, Direct Purchaser, an entity disregarded as separate from its owner, Holdco,
for Federal income tax purposes, acquired all of the stock of S Corporation Target from
Shareholder 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 Disposition 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 represent that they are not seeking to alter a return
position for which an accuracy-related penalty 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 did 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 366(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 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
PLR-110236-19                                 3

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 and Tax
Professionals 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 was filed before the failure to timely enter into the Agreement and file the
Election Statement was discovered by the Internal Revenue Service, and 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. 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 Target and
Shareholder (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 Target must file the
Election Statement in accordance with §1.336-2(h)(3)(iii). The Election Statement must
be attached to S Corporation Target’s tax return for the taxable year including Date 1.
In addition, a copy of this letter must be attached to S Corporation Target’s return.
Alternatively, if S Corporation Target 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-110236-19) 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).
PLR-110236-19                                  4

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 opinions 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) 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 and Tax Professionals.
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.

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,


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