Investor whose late K-1s pushed the return past its deadline gets 60 more days to make a section 1045 election deferring gain on small-business stock

Plain-English summary

Section 1045 lets an investor who sells "qualified small business stock" (QSBS) held more than six months roll the gain into new QSBS bought within 60 days, deferring tax on the sale. The election that triggers this rollover must be made by the tax return's due date, including extensions. Here the taxpayer sold QSBS through a partnership, reinvested proceeds into two other qualifying companies within 60 days, and wanted the section 1045 deferral, but could not file the return on time because the many Schedule K-1s from the taxpayer's partnership interests arrived late, past the extended due date. As a result, the section 1045 election was missed. The taxpayer asked for relief under Treasury Regulation section 301.9100-3, which allows a late regulatory election when the taxpayer acted reasonably and in good faith and the government is not prejudiced. The IRS agreed: the taxpayer requested relief before the IRS caught the miss, the failure was due to events beyond the taxpayer's control (the delayed K-1s), and granting relief would not lower the taxpayer's aggregate tax or reach a closed year. The IRS granted 60 days from the letter to file an amended return making the election, while expressly not ruling on whether the stock actually qualifies as QSBS or whether the other section 1045 requirements were met.

Ruling snapshot

• Question: Should the taxpayer get an extension under Treas. Reg. § 301.9100-3 to file an amended return making a late section 1045 election to defer QSBS gain?
• Outcome: Approved (60-day extension granted; failure caused by late partnership K-1s, government not prejudiced)
• Key authorities: IRC §§ 1045, 1202(c); Rev. Proc. 98-48; Treas. Reg. §§ 1.1045-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202244004 [Third Party Communication:
Release Date: 11/4/2022 Date of Communication: Month DD, YYYY]
Index Number: 1045.00-00
Person To Contact:
------------ ----------------------, ID No. ------------------
------------------------------ Telephone Number:
------------------------------ --------------------
Refer Reply To:
CC:ITA:B05
PLR-104802-22
Date:
August 09, 2022

TY: -------

LEGEND:

Taxpayer = ---------------------------------------------------------------------------------------------
Accounting Firm = -------------------
Partnership = ----------------------------------------
Company X = --------------------------------------
Company Y = ------------------------
Company Z = ----------------------------------
Date 1 = ----------------------
Date 2 = -----------------------
Date 3 = --------------------------
Date 4 = -------------------
Date 5 = ------------------------
Year 1 = ---------------------------
$A =---------------
$B = -------------
$C = -------------
$D = ----------
$E = -------------
$F = -------------

Dear ---------:

This is in response to a letter sent on your behalf by your representatives dated March
7, 2022. In the letter, your representatives requested on your behalf an extension of
time to file an amended return to make an election under section 1045 of the Internal
Revenue Code pursuant to Rev. Proc. 98-48, 1998-2 C.B. 367, for the tax year ending
Year 1. The request is based on sections 301.9100-1 and 301.9100-3 of the Procedure
and Administrative Regulations.
PLR-104802-22 2

FACTS

On Date 1, Taxpayer indirectly, through its interest in Partnership, recognized $A of
long-term capital gain from the sale of $B of stock in Company X which it represents
qualifies as qualified small business stock (QSBS) meeting the requirements described
in section 1202. Taxpayer also represents that the partnership interest was held at the
time the QSBS was purchased and was held for greater than 6 months prior to the
disposition. Taxpayer subsequently reinvested $C of the proceeds within 60 days in the
following transactions: $D of proceeds reinvested in Company Y on Date 2; $E of
proceeds reinvested in Company Z on Date 3; $F of proceeds reinvested in Company Y
on Date 4. Taxpayer represents that shares in both Company Y and Z are QSBS,
meeting the requirements of section 1202.

Taxpayer represents that the preparation of Taxpayer's federal individual income tax
return is complex due to numerous interests in partnerships. Each year, Taxpayer
receives schedule K-1s reporting Taxpayer's share of partnership activity which are
utilized to complete Taxpayer's return. Due to delay in the preparation and receipt of
schedule K-1s necessary to accurately complete the tax return for the tax year ending
Year 1 beyond Taxpayer’s control, Taxpayer filed its tax return electronically on Date 5,
past the extended due date. Thus, the election under section 1045(a) was not made on
a timely basis with regard to the deferral of the gain from the sale of the QSBS during
the tax year ending Year 1. Taxpayer’s failure to elect deferral under section 1045(a) for
the tax year ending Year 1 was not discovered by the Internal Revenue Service prior to
Taxpayer filing its request for an extension of time to file an amended return to make an
election under section 1045.

LAW AND ANALYSIS

Section 1045(a) provides, in part, that in the case of any sale of QSBS held by a
taxpayer other than a corporation for more than 6 months and with respect to which
such taxpayer elects the application of this section, gain from such sale shall be
recognized only to the extent that the amount realized on such sale exceeds -

(1) the cost of any qualified small business stock purchased by the taxpayer during the
60-day period beginning on the date of such sale, reduced by

(2) any portion of such cost previously taken into account under this section.

The time and manner for making the election allowed by section 1045(a) is prescribed
by Rev. Proc. 98-48. Under the revenue procedure, the election must have been made
no later than the due date (including extensions) for filing the tax return for the
applicable tax year.
PLR-104802-22 3

Section 1045(b)(1) provides that the term “qualified small business stock” has the
meaning given such term by section 1202(c). Section 1202(c)(1)(B) provides as one of
the defining characteristics of qualified small business stock that it be acquired by the
taxpayer at its original issue (directly or through an underwriter) in exchange for money
or other property or in exchange for services provided to such corporation was acquired.

Section 1.1045-1(a) of the Income Tax Regulations provides that a partnership that
holds QSBS for more than 6 months, sells such QSBS, and purchases replacement
QSBS may elect to apply section 1045. An eligible partner of a partnership that sells
QSBS, may elect to apply section 1045 if the eligible partner purchases replacement
QSBS directly or through a purchasing partnership.

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory election. Section 301.9100-2 provides
automatic extensions of time for making certain elections. Section 301.9100-3 provides
extensions of time for making elections that do not meet the requirements of section
301.9100-2.

Section 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice, or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that the Commissioner may 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.

Section 301.9100-3 provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
government.

Section 301.9100-3(b)(1) states that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer --

(i) requests relief before the failure to make the regulatory election is discovered by the
Service;

(ii) failed to make the election because of intervening events beyond the taxpayer's
control;
PLR-104802-22 4

(iii) failed to make the election because, after exercising due diligence, the taxpayer was
unaware of the necessity for the election;

(iv) reasonably relied on the written advice of the Service; or

(v) reasonably relied on a qualified tax professional, including a tax professional
employed by the taxpayer, and the tax professional failed to make, or advise the
taxpayer to make the election.

Under section 301.9100-3(b)(3), a taxpayer will not be considered to have acted
reasonably and in good faith if the taxpayer --

(i) seeks to alter a return position for which an accuracy related penalty has been or
could be imposed under section 6662 at the time the taxpayer requests relief (taking
into account section 1.6664-2(c)(3)) and the new position requires or permits a
regulatory election for which relief is requested;

(ii) was informed in all material respects of the required election and related tax
consequences, but chose not to file the election; or

(iii) uses hindsight in requesting relief.

If specific facts have changed since the original deadline that make the election
advantageous to a taxpayer, the Service will not ordinarily grant relief.

Taxpayer in this case has represented that it requested relief before the failure to make
the regulatory election was discovered by the Service and that it failed to make the
election because Taxpayer did not receive necessary K-1s to file his Year 1 return by
the extended due date for Year 1. Thus, under sections 301.9100-3(b)(1)(i) and (ii),
Taxpayer will be deemed to have acted reasonably and in good faith. Taxpayer has
also represented that none of the circumstances listed in section 301.9100-3(b)(3)
apply.

Section 301.9100-3(c)(1)(i) provides, in part, that the interests of the government are
prejudiced if granting relief would result in the taxpayer having a lower tax liability in the
aggregate for all taxable years affected by the election than the taxpayer would have
had if the election had been timely made (taking into account the time value of money).
Section 301.9100-3(c)(1)(ii) provides, in part, that the interests of the government are
ordinarily prejudiced if the taxable year in which the regulatory election should have
been made, or any taxable years that would have been affected by the election had it
been timely made, are closed by the period of limitations on assessment under
section 6501(a) before the taxpayer’s receipt of a ruling granting relief.

Under these criteria, the interests of the government are not prejudiced in this case.
Taxpayer has represented that granting relief would not result in a lower tax liability in
PLR-104802-22 5

the aggregate for all taxable years affected by the election than Taxpayer would have
had if the election had been timely made (taking into account the time value of money).
Furthermore, Taxpayer has represented that the taxable year in which the regulatory
election should have been made and any taxable years that would have been affected
had it been timely made, are not closed by the period of assessment.

CONCLUSION

Taxpayer's election is a regulatory election, as defined under section 301.9100-1(b),
because the due date of the election is prescribed in Rev. Proc. 98-48. In the present
situation, the requirements of sections 301.9100-1 and 301.9100-3(b)(1)(i) and (ii) have
been satisfied. The information and representations made by Taxpayer establish that
Taxpayer acted reasonably and in good faith. Furthermore, granting an extension will
not prejudice the interests of the Government. Taxpayer represented that it will not
have a lower tax liability in the aggregate for all taxable years affected by the election if
given permission to make the election than Taxpayer would have if the election were
made by the original deadline for making the election. Taxpayer also represented that
the period of assessment for Year 1 will not be closed before receipt of a ruling.
Accordingly, Taxpayer is granted an extension of time until 60 days following the date of
this letter to file an amended return to make a section 1045 election under Rev. Proc.
98-48 for the tax year ending Year 1.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling including whether the stock sold by Taxpayer indirectly through
Partnership or the stock purchased by Taxpayer constituted QSBS under section 1202
(or was otherwise eligible to be treated as such) or whether the other statutory and
regulatory prerequisites for deferral under section 1045 were satisfied.

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.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.
PLR-104802-22 6

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                 Sincerely,



                                 Amy Pfalzgraf
                                 Acting Branch Chief
                                 (Income Tax & Accounting)

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