Successor LLC receives more time to file a late section 336(e) election

Plain-English summary

A partnership-taxed purchaser acquired all the stock of an S corporation through a disregarded entity. The parties intended to elect under IRC § 336(e) to treat the qualified stock disposition as an asset sale, but their tax professionals did not timely file or advise them to file the election statement. After the target dissolved, a disregarded limited liability company became its state-law successor. The IRS found that the parties acted reasonably and in good faith and granted the successor 75 days to file the election statement. All relevant parties also received 150 days to file or amend affected returns, subject to the condition that aggregate tax liabilities, including the time value of money, would not be lower than if the election had been timely filed.

Ruling snapshot

• Question: May the target's successor and the other parties file a late § 336(e) election for the S corporation stock acquisition?
• Outcome: Approved (75 days for the election statement and 150 days for affected returns)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h), 301.9100-1, and 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                          Department of the Treasury
                                                                   Washington, DC 20224

 Number: 202109004                                                 Third Party Communication: None
 Release Date: 3/5/2021                                            Date of Communication: Not Applicable
 Index Numbers: 9100.22-00, 336.05-00
                                                                   Person To Contact:
 -----------------------------                                     ------------------, ID No. -----------------
 ---------------------------------                                 Telephone Number:
 ---------------------------------                                 --------------------
 -------------------------------                                   Refer Reply To:
                                                                   CC:CORP:B01
                                                                   PLR-115881-20
                                                                   Date:
                                                                   December 10, 2020




Legend

LLC                                  =       ---------------------------------
                                             ------------------------

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


Purchaser                           =        ------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
                                             ------------------------------------------------------------------------

DE                                   =       ---------------------------------------------------
                                             ------------------------

Shareholders                         =       --------------------
                                             ----------------
                                             ------------------------

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

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

Partnership                          =       --------------------------------------------------
                                             ------------------------

State                                =       ----------------
PLR-115881-20                                   2

Company Official            =      ---------------------------------------------------
                                   ---------------------------------------------

Tax Professionals           =      -----------------------
                                   ------------------------------------

                                   -----------------------------
                                   -----------------------

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

This letter responds to a letter dated July 21, 2020, submitted on behalf of LLC (as
successor of S Corporation Target), Purchaser, and Shareholders (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, through a disregarded entity, of all the stock of S Corporation
Target from Shareholders on Date 1. The material information submitted is summarized
below.

On Date 1, Purchaser, a limited liability company treated as a partnership for federal
income tax purposes, acquired through DE, a disregarded entity for federal income tax
purposes, all the stock of S Corporation Target from Shareholders (the “Disposition”). It
has been represented that the Disposition qualified as a “qualified stock disposition” as
defined in §1.336-1(b)(6). After subsequent restructuring, on Date 2, S Corporation
Target dissolved under State law and LLC became the State law successor to S
Corporation Target. LLC, a limited liability company treated as a disregarded entity for
federal income tax purposes, is wholly owned by Partnership, an entity treated as a
partnership for federal income tax purposes.

The Parties intended for the stock sale to be treated as an asset sale, but for various
reasons, a timely election was not made. Subsequently, a request was submitted under
§301.9100-3 of the Procedure and Administration Regulations 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
PLR-115881-20                                 3

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
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 Parties reasonably relied
on a qualified tax professional who failed to timely file, or to advise them to timely file,
the Election Statement, and 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) 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 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, LLC, as successor of 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. Alternatively, if S Corporation Target files
PLR-115881-20                                  4

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-115881-20) 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 all relevant 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 (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 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
                                        Chief, Branch 1
                                        Office of Associate Chief Counsel (Corporate)
cc: