Laid-off startup employee gets more time to make a QSBS gain-rollover election

Plain-English summary

An early startup employee held qualified small business stock (QSBS), sold some of it after being laid off, and within 60 days used the proceeds to buy more stock in the same company. Section 1045 lets a taxpayer defer the gain on a QSBS sale by rolling the proceeds into new QSBS, but the deferral only applies if the taxpayer elects it on the tax return for the year of sale. He prepared his own return with consumer tax-prep software, which never prompted him about the § 1045 rollover, so he reported and paid tax on the full gain. He later learned about the election from an article and hired a representative to seek relief. He asked the IRS for more time under the § 301.9100-3 rules. The IRS granted a 60-day extension to file an amended return making the election, finding he acted reasonably and in good faith and that relief would not harm the government (he also agreed to extend the assessment period). The IRS expressed no opinion on whether the stock actually qualified as QSBS.

Ruling snapshot

• Question: May a taxpayer who missed the § 1045 QSBS gain-rollover election get an extension of time under § 301.9100-3 to make it on an amended return?
• Outcome: Approved (60-day extension to file an amended return granted).
• Key authorities: IRC §§ 1045, 1202; Treas. Reg. §§ 301.9100-1 to -3; Rev. Proc. 98-48

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202317008 Third Party Communication: None
Release Date: 4/28/2023 Date of Communication: Not Applicable
Index Number: 9100.00-00, 1045.00-00
Person To Contact:
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---------------------------------- ID No. -----------------
-------------------------------- Telephone Number:
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Refer Reply To:
CC:ITA:B04
PLR-115136-22
Date:
February 02, 2023

                                            LEGEND

Taxpayer = ---------------------------------------------------

Representative = --------------

Year 0 = -------

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

Year 5 = -------

Year 6 = -------

Month A = ------

Month B = ------

Company = -------------------

Software = ----------------
PLR-115136-22 2

v = ---------

w = ---------

x = -----------

y = ---------

z = -----------

$t = -----------

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

This letter is in response to your letter, dated July 27, 2022, requesting an extension of
time, under § 301.9100-1 and -3 of the Regulations on Procedure and Administration, to
make an election pursuant to § 1045 of the Internal Revenue Code. Taxpayer, for Year
4, failed to make an election under § 1045 to defer the recognition of gain realized on
the sale of qualified small business stock ("QSBS").

                                     FACTS

In Year 1, Taxpayer was employed by Company as the second employee of the startup.
Company is represented as having been formed with the intention to be a qualified
small business. In Year 1, Taxpayer was granted v shares of Company stock subject to
vesting schedule. Taxpayer represents that he filed the appropriate § 83(b) election and
followed appropriate § 83(b) procedures for the year of grant.

In Year 2, Taxpayer was granted incentive stock options (ISOs) that entitled Taxpayer
to acquire w shares of Company subject to a four-year vesting schedule. In Year 3,
Taxpayer was granted ISOs that entitled Taxpayer to acquire x shares of Company
subject to a four-year vesting schedule.

In Year 4, Taxpayer was laid off from employment with Company. The ISOs granted in
Year 2 and Year 3 were expiring due to the layoff. In Month A of Year 4, Taxpayer sold
y shares of Company, granted to him in Year 1, to an unrelated party. At the time of
sale, Taxpayer had held the shares for less than 4.5 years.

In Month B of Year 4, Taxpayer used $t of the proceeds from the sale to purchase z
shares of Company, amounting to an exercise of only a portion of the total Year 2 and
Year 3 ISO grants.
PLR-115136-22 3

In Year 5, Taxpayer prepared his Year 4 Federal income tax return using Software, a
computerized tax return preparation software program sold to the general public.
Taxpayer represents that he has used Software to prepare his Federal tax returns since
Year 0. Taxpayer represents that he relied on Software's on-screen prompts and
instructions to aid him in the preparation process. Taxpayer further represents that
Software did not provide any prompts relating to potential § 1045 rollovers. As a result,
Taxpayer prepared and filed his Year 4 Federal income tax return reporting the sale of y
shares of Company and included all gain derived from the transaction.

In Year 6, Taxpayer came across an article that provided information on the § 1045
deferral election. Taxpayer then reached out to accounting firms and law firms to
determine how to address not having made the election. Following Taxpayer's
discovery of the article discussing the § 1045 deferral election, Taxpayer engaged
Representative to request a private letter ruling seeking relief.

                      APPLICABLE LAW AND ANALYSIS

Section 1045(a) of the Internal Revenue Code provides, in part, that in the case of any
sale of qualified small business stock 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.

Section 1045(b)(1) provides that the term "qualified small business stock" has the
meaning given such term by § 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.

Rev. Proc. 98-48, 1998-2 C.B. 367, provides at section 3.01 that a § 1045 election must
be made on or before the later of December 31, 1998, or the due date (including
extensions) for filing the income tax return for the taxable year in which the qualified
small business stock is sold. Rev. Proc. 98-48 generally provides at section 3.02 that
the election is made by:

  (a) reporting the entire gain from the sale of qualified small business stock on
  Schedule D, Capital Gains and Losses, of the return in accordance with
  instructions for Schedule D;

PLR-115136-22 4

   (b) writing "section 1045 rollover" directly below the line on which the gain is
   reported; and

   (c) entering the amount of the gain deferred under § 1045 on the same line as (b)
   above, as a loss, in accordance with the instructions for Schedule D.

The Service uses standards set forth in §§ 301.9100-1 through 301.9100-3 to determine
whether to grant an extension of time to make a regulatory election. Under § 301.9100-
3(a), the Service will grant requests for extensions of time for regulatory elections (other
than automatic extensions of time covered in § 301.9100-2) when the taxpayer provides
evidence (including affidavits) to establish that the taxpayer acted reasonably and in
good faith and granting relief will not prejudice the interests of the Government.

Sections 301.9100-2 and 301.9100-3 provide the standards the Commissioner uses to
determine whether to grant an extension of time to make a regulatory election. An
extension of time is available for elections that a taxpayer is otherwise eligible to make.
However, the granting of an extension of time to make elections is not a determination
that the taxpayer is otherwise eligible to make one.

For this purpose, § 301.9100-1(b) defines the term regulatory election to include an
election whose deadline is prescribed by a regulation published in the Federal Register,
or a revenue ruling, revenue procedure, or notice or announcement published in the
Internal Revenue Bulletin. Section 301.9100-3(a) provides, in part, that requests for
relief will be granted when the taxpayer provides evidence (including affidavits
described in paragraph (e) of this section) to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
relief will not prejudice the interests of the government.

Except as provided in in paragraphs § 301.9100-3(b)(3)(i) through (iii), § 301.9100-
3(b)(1) provides that a taxpayer is 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;
   (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, and the tax professional
   failed to make, or advise the taxpayer to make, the election.

Per § 301.9100-3(b)(3), a taxpayer is considered to have not acted reasonably and in
good faith if the taxpayer:
PLR-115136-22 5

   (i) seeks to alter a return position for which an accuracy-related penalty could be
   imposed under § 6662 at the time the taxpayer requests relief, and the new
   position requires a regulatory election for which relief is requested;
   (ii) was fully informed 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.

Section 301.9100-3(c)(1) provides that the Service will grant a reasonable extension of
time only when doing so will not prejudice the interests of the Government. Section
301.9100-3(c)(1)(i) states that the interests of the Government are prejudiced if granting
relief would result in a 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.

Under § 301.9100-3(c)(1)(ii), the interests of the Government may be prejudiced if the
taxable year in which the regulatory election should have been made, or any taxable
years affected by the election had it been timely made, are closed by the period of
limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling
granting relief under this section.

In addition, § 301.9100-3(e)(3) provides that the taxpayer must provide a detailed
affidavit from the individuals having knowledge or information about the events leading
to the failure to make a valid regulatory election. The affidavit must describe the
engagement and responsibilities of the individual as well as the advice that the
individual provided to the taxpayer.

Taxpayer has requested relief in the form of a grant of an extension of time to make a
regulatory election pursuant to the provisions of § 301.9100-3. Taxpayer represents that
none of the circumstances listed in § 301.9100-3(b)(3) apply. Further, Taxpayer has
agreed to extend the period of limitations on assessment.

                                  CONCLUSION

Based on the facts and information submitted and the representations made, we
conclude that Taxpayer acted reasonably and in good faith, and that the granting of
relief will not prejudice the interests of the government. Therefore, we grant Taxpayer
an extension of 60 days from the date of this letter ruling to file an amended return to
make a § 1045 election under Rev. Proc. 98-48 for the tax year ending Year 4.

The ruling is based upon information and representations submitted by Taxpayer and
accompanied by a penalty of perjury statement executed by appropriate parties. This
office has not verified any of the material submitted in support of the request for a ruling.
PLR-115136-22 6

However, as part of the examination process, the IRS may verify the information,
representations, and other data submitted.

Except as expressly provided herein, no opinion is expressed or implied concerning the
application of any provision of the Code or the tax consequences of any item discussed
or referenced in this letter. Specifically, no opinion is expressed or implied concerning
whether the stock sold or purchased by Taxpayer constituted QSBS under § 1202 (or
was otherwise eligible to be treated as such) nor whether any shares purchased
constituted replacement stock under § 1045.

This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. A copy of the letter is enclosed
showing the deletions proposed to be made when it is disclosed under § 6110.

Pursuant to the Form 2848, Power of Attorney and Declaration of Representation, on
file, we are sending a copy of this letter to Taxpayer's authorized representative.
This letter is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-
21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.

                                  Sincerely,



                                  Mon Lam
                                  Senior Counsel, Branch 4
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

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