Extra time granted to file a late Section 336(e) election for an S corporation stock sale

Plain-English summary

A partnership bought all the stock of an S corporation, and the S corporation later merged into a disregarded LLC owned by the buyer. The parties intended to make a Section 336(e) election, which lets a qualifying stock sale be treated for tax purposes as if the company sold its assets (often giving the buyer a stepped-up basis in the assets). That election has to be made by attaching an election statement to a timely filed return under Treas. Reg. § 1.336-2(h)(3)(iii), but the return and election statement were not filed on time. The parties asked the IRS for more time under the § 301.9100-3 late-election rules, which allow relief when the taxpayer acted reasonably and in good faith and relief won't prejudice the government, and here the request came before the IRS caught the missed election. The IRS granted the extension: the S corporation target has 75 days from the ruling to file the election statement, and all parties have 150 days to file or amend returns consistently with the election. Relief is conditioned on total tax not being lower than if the election had been timely (accounting for the time value of money), and the IRS expressed no opinion on whether the deal actually qualifies as a "qualified stock disposition."

Ruling snapshot

• Question: May the parties get an extension under Treas. Reg. § 301.9100-3 to file a late Section 336(e) election statement for a qualified stock disposition?
• Outcome: approved
• Key authorities: IRC § 336(e); Treas. Reg. § 1.336-2(h)(3); Treas. Reg. § 301.9100-1 and § 301.9100-3; IRC § 6662

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202043002 Third Party Communication: None
Release Date: 10/23/2020 Date of Communication: Not Applicable
Index Number: 9100.00-00, 336.00-00,
336.05-00 Person To Contact:
--------------------------, ID No. ----------------
--------------------- -----------------
-------------------------------------- Telephone Number:
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Refer Reply To:
------------------------------------------------- CC:CORP:B5
PLR-104598-20
Date:
July 30, 2020

Legend

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

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

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

Company Official = -------------------
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Tax Professionals = ---------------
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PLR-104598-20 2

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

This letter responds to a letter dated January 6, 2020, submitted on behalf of LLC (as
successor of S Corporation Target), Shareholder, and Purchaser (collectively, “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 file an election statement under §1.336-2(h)(3)(iii) (“Election Statement”) with
respect to Purchaser's acquisition of all the stock of S Corporation Target from
Shareholder on Date 1. The material information submitted is summarized below.

On Date 1, Purchaser, an entity that elected to be treated as a partnership for federal
income tax purposes, acquired all the stock of S Corporation Target, a corporation that
elected to be treated as an S corporation for federal income tax purposes, from
Shareholder (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
Target merged with and into 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.

It was intended that a section 336(e) election would be made with respect to the
Disposition. However, for various reasons, the tax return and Election Statement were
not timely filed. Subsequently, a request was submitted under §301.9100-3 for an
extension of time to 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 for relief.

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
PLR-104598-20 3

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 will not prejudice the interests of the government.
Information, affidavits, and representations submitted by the Parties, Company Official,
and Tax Professionals explain the circumstances that resulted in the failure to timely file
the Election Statement. The information establishes that the request for relief was filed
before the failure to file the Election Statement was discovered by the Internal Revenue
Service. See §301.9100- 3(b)(1)(i).

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 75 days from the date on this letter, to file the Election Statement
with respect to the Disposition.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, 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, and control number (PLR-104598-20) of, this letter
ruling.

WITHIN 150 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 liabilities (if any) being
not lower, in the aggregate, for all years to which the section 336(e) election applies
than such liabilities would have been if the Election Statement had been timely filed
PLR-104598-20 4

(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 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) 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
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 ruling 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,



                                   Thomas I. Russell
                                   Branch Chief, Branch 1
                                   Office of Associate Chief Counsel (Corporate)

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