Extension of time to file a late section 336(e) election treating an S corporation stock sale as an asset sale

Plain-English summary

When a buyer purchases all the stock of an S corporation, the parties can
elect under section 336(e) to treat the stock sale as if the corporation
had sold its assets, which often gives the buyer a stepped-up tax basis
in the assets. That election has strict filing requirements: the
shareholders and the target must sign a binding agreement and attach an
election statement to the target's timely filed tax return. Here, the
buyer acquired all the stock of an S corporation target, the parties
meant to treat it as an asset sale, but they missed the deadline to file
the election statement. They asked the IRS for more time under the
section 9100 relief rules. Because the deadline is set by regulation and
the parties requested relief before the IRS discovered the failure and
represented they acted in good faith, the IRS granted a 75-day extension
to file the election statement (and 150 days to conform all affected
returns). The relief is conditioned on the parties' total tax not being
lower than if the election had been timely made, and the IRS did not
opine on whether the sale actually qualifies or on the resulting tax
consequences. This lets the parties secure the asset-sale treatment they
intended despite the paperwork slip.

Ruling snapshot

• Question: May the parties receive an extension of time under Treas.
  Reg. § 301.9100-3 to file a late section 336(e) election statement for
  a qualified stock disposition of an S corporation?
• Outcome: Approved (75-day extension to file the election statement)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 301.9100-1 through
  301.9100-3, 1.336-2(h)(3); IRC § 6662

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202237002                                            Third Party Communication: None
 Release Date: 9/16/2022                                      Date of Communication: Not Applicable
 Index Number: 9100.00-00
                                                              Person To Contact:
 ---------------------------------------                      -------------------, ID No. -----------------
 ------------------------------                               Telephone Number:
 -------------------------------                              --------------------
 -------------------------                                    Refer Reply To:
                                                              CC:CORP:B05
                                                              PLR-103998-22
                                                              Date:
                                                              June 22, 2022

Legend

S Corporation Target               =       [redacted]

Shareholder                        =       [redacted]

Purchaser                          =       [redacted]

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

Company Official                   =       [redacted]

Tax Professional                   =       [redacted]

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

This letter responds to a letter dated January 4, 2022, submitted on behalf of S
Corporation Target, Shareholder, and Purchaser (collectively, the "Parties"), requesting
an extension of time under §§301.9100-1 through 301.9100-3 of the Procedure and
Administrative 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 as described below. The material information submitted is summarized
below.

Pursuant to an agreement that closed on Date 1, Purchaser 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).

The Parties intended for the stock sale to be treated as an asset sale, but for various
reasons, a timely section 336(e) election was not made. 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 an asset disposition if: (1) the
disposition is a "qualified stock disposition" as defined in §1.366-1(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 for 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 Professional 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.

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 that includes the
disposition date. 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-103998-22)
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 it 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 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 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, 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 section 336(e) election, 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.

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,


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


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