Late-election relief to enter the agreement and statement treating an S corporation stock sale as an asset sale under section 336(e)

Plain-English summary

When a buyer purchases all the stock of an S corporation, the parties can jointly elect under section 336(e) to treat the sale as if the company sold its assets. Making that election requires two on-time steps: a written binding agreement among the shareholders and the target, and an election statement attached to the target's tax return. Here the parties decided to make the election after the sale but, relying on their tax advisors, missed both deadlines. They asked the IRS for an extension of time under the "9100 relief" regulations (Treas. Reg. § 301.9100-3). The IRS granted relief, finding the parties acted reasonably and in good faith and that relief would not prejudice the government, and gave them 75 days from the letter date to enter the agreement and file the statement. The IRS expressed no opinion on whether the deal actually qualified as a "qualified stock disposition" or on any other tax consequences.

Ruling snapshot

• Question: Should the IRS grant more time to both execute the section 336(e) binding agreement and file the election statement for a stock sale the parties wanted treated as an asset sale?
• Outcome: Approved (extension of 75 days from the letter date granted).
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h)(3)(i) and (iii); Treas. Reg. §§ 301.9100-1 through 301.9100-3.

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202309012                                              Third Party Communication: None
 Release Date: 3/3/2023                                         Date of Communication: Not Applicable
 Index Number: 9100.22-00, 336.05-00
                                                                Person To Contact:
 ----------------------------------------                       --------------------, ID No. -----------------
 -----------------------------                                  Telephone Number:
 ------------------------------                                 --------------------
 ----------------------------------                             Refer Reply To:
                                                                CC:CORP:BO4
                                                                PLR-116022-22
                                                                Date:
                                                                December 08, 2022




Legend

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

Shareholder                        =        ---------------------

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

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

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

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


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

This letter responds to a letter dated August 5, 2022, 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
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, an individual, acquired all the stock of S Corporation Target from
Shareholder (the "Stock Disposition"). It has been represented that the Stock
Disposition qualified as a "qualified stock disposition" as defined in §1.336-1(b)(6).

After the Stock Disposition, a decision was made to file a section 336(e) election, but for
various reasons, 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 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.

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.
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 Official,
and Tax Professionals explain the circumstances that resulted in the failure to timely
enter into the Agreement and file the Election Statement. The information establishes
that the Parties reasonably relied on a qualified tax professional who failed to timely
advise them to enter into the Agreement and to file the Election Statement, and that the
request for relief was filed before the failure to enter into the Agreement and 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 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-116022-22) 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
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 Stock 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) 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 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 taxpayers 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)

cc:    -------------------------
       --------------------------------
       -------------------------------------------------
       -----------------------------

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