Buyer and seller of an S corporation get extra time to make a late Section 336(e) election treating the stock sale as an asset sale

Plain-English summary

A § 336(e) election lets the parties to certain stock sales treat the deal as if the company had sold its assets instead of its stock, which can give the buyer a stepped-up basis in the underlying assets. For an S corporation, making the election requires the shareholders and the company to sign a binding agreement and attach an election statement to the company's tax return, both by the return's due date. Here an LLC (taxed as a partnership) bought all the stock of an S corporation in a "qualified stock disposition," the parties later decided they wanted the § 336(e) election, but they missed the deadline to sign the agreement and file the statement. They asked the IRS for relief under Treas. Reg. § 301.9100-3. The IRS granted it: 75 days from the letter to sign the agreement and file the election statement, and 150 days to file or amend all affected returns consistently. The relief is conditioned on the election not lowering the parties' aggregate tax (accounting for the time value of money), and the IRS did not rule on whether the sale actually qualifies or on any resulting tax consequences.

Ruling snapshot

• Question: May the parties to an S corporation stock sale get an extension of time to make a late § 336(e) election?
• Outcome: approved (75-day extension to make the election; 150 days to conform returns)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h)(3); Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202220005
Third Party Communication: None
Release Date: 5/20/2022
Date of Communication: Not Applicable
Index Number: 336.05-00, 9100.22-00
Person To Contact:

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ID No. -----------------
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Refer Reply To:
CC:CORP:2
PLR-119059-21
Date:
February 24, 2022

Legend

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

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

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

Company Officials = ---------------------------------
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Tax Professional = ----------------------------------
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Dear -------------:

This letter responds to a letter dated September 13, 2021, submitted on behalf of S Corporation Target, Shareholder, and Purchaser (collectively, the "Parties"), requesting an extension of time under §301.9100-3 of the Procedure and Administration
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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 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, a State A limited liability company taxable as a partnership for federal income tax purposes, acquired all the stock of S Corporation Target 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).

Subsequent to the Disposition, a decision was made to file a section 336(e) election for the Disposition. However, for various reasons, the Agreement was not entered into on or before the due date of the federal income tax return of S Corporation Target for the taxable year that includes the disposition date, nor was the Election Statement timely filed, and consequently, 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 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: (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 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.
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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 Officials, and Tax Professional 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 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).

Based on the facts and information submitted, including the representations made, we conclude that the taxpayers 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 enter into the Agreement and file the Election Statement.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, (a) S Corporation Target and Shareholder must enter into a written, binding agreement to make the section 336(e) election, and (b) 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's return is filed electronically, the requirement of attaching a copy of this letter to the return may be satisfied by attaching a statement that provides the date on, and control number (PLR-119059-21) of, this letter.

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 liability (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
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Election Statement had been timely filed (taking into account the time value of money). No opinion is expressed as to the parties' tax liability 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 whether the Disposition qualifies as a "qualified stock disposition" or 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 Officials, and Tax Professional. However, the Director should verify all essential facts. In addition, notwithstanding that an extension is granted under §301.9100-3 to enter into the Agreement and file the Election Statement, penalties and interest that would otherwise be applicable, if any, continue to apply.

This letter is directed only to the taxpayer(s) 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, copies of this letter are being sent to your authorized representatives.

Sincerely,

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

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