Late section 336(e) election statement received filing extension

Plain-English summary

Shareholders sold all stock of an S corporation to a partnership through a disregarded entity, and the parties had a timely written agreement to make a section 336(e) election treating the stock sale as an asset disposition. A qualified tax professional failed to complete the election by attaching the required statement to the S corporation's return. The IRS found that the parties acted reasonably and in good faith and granted 45 days to file the election statement. It also required all relevant parties to file consistent original or amended returns within 120 days and conditioned relief on aggregate tax liabilities not being lower than if the election had been timely. The ruling did not decide whether the sale was a qualified stock disposition.

Ruling snapshot

• Question: May the parties receive additional time to file the statement required for a section 336(e) election?
• Outcome: approved
• 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: 202016012                                               Third Party Communication: None
Release Date: 4/17/2020                                         Date of Communication: Not Applicable
Index Number: 336.05-00, 9100.22-00
                                                                Person To Contact:
--------------------                                            ----------------------------
------------------------------------------                      ID No. ---------------
---------------------------                                     Telephone Number:
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                                                                Refer Reply To:
                                                                CC:CORP:5
                                                                PLR-118406-19
                                                                Date:
                                                                January 14, 2020

Legend

S Corporation                       = -----------------------------------------
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LLC                                 = -----------------------------------------
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Selling Shareholders                = --------------------
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Purchaser                           = -------------------------
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DE                                  = ------------------------------------------
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PLR-118406-19                                             2

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

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

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

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

This letter responds to a letter dated August 2, 2019, submitted on behalf of LLC (as
successor of S Corporation), Selling Shareholders, and Purchaser (collectively, the
“Parties”), requesting an extension of time under §301.9100-3 of the Procedure and
Administration Regulations to file the election statement under §1.336-2(h)(3)(iii) of the
Income Tax Regulations (the “Election Statement”) with respect to Selling Shareholders’
disposition of all the stock of S Corporation. The material information submitted is
summarized below.

S Corporation was a State A corporation that elected to be treated as an S corporation
for federal income tax purposes. Selling Shareholders owned all the stock of S
Corporation. Purchaser is a limited liability company that is classified as a partnership
for federal income tax purposes. On Date 1, Purchaser, through DE, a disregarded
entity for federal income tax purposes, acquired all the stock of S Corporation from
Selling Shareholders (the “Disposition”). It has been represented that the Disposition
qualified as a “qualified stock disposition” as defined in §1.336-1(b)(6). On Date 2, S
Corporation converted under State A law to a limited liability company (“LLC”). LLC is a
disregarded entity for federal income tax purposes, whose sole owner, for federal
income tax purposes, is Purchaser.

Prior to Date 1, Selling Shareholders and S Corporation entered into a written, binding
agreement providing that a section 336(e) election would be made with respect to the
Disposition. However, for various reasons, a timely election was not fully made.
Subsequently, a request was submitted under §301.9100-3 for an extension of time to
file the Election Statement. The Parties each represent 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.

PLR-118406-19                                 3

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)(3) provides that a section 336(e) election for an S corporation target
is made by completing the following requirements: (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 must enter 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 must retain a copy of the written
agreement; and (iii) the S corporation target must attach 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 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 file
the Election Statement. 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
properly 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

PLR-118406-19                                  4

§§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 file the Election Statement
with respect to the Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER: LLC, as successor of 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 federal income tax return for
the taxable year including Date 1. In addition, a copy of this letter must be attached to
the 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, and control number (PLR-118406-19) 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 Disposition was consummated (and for any other affected taxable year).

The above extension of time is conditioned on 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 Election Statement had been timely made (taking into
account the time value of money). No opinion is expressed as to the Parties’ 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 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 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, making 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, and
Tax Professional. 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, if any, continue to
apply.

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.

PLR-118406-19                                  5

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
                                       Chief, Branch 1
                                       Office of Associate Chief Counsel (Corporate)