Taxpayers received 60 days to make a late qualified-stock rollover election

Plain-English summary

One spouse sold shares of a company the spouse had co-founded and invested part of the proceeds in another company within 60 days. The taxpayers intended to elect under Section 1045 to defer gain by rolling proceeds from qualified small business stock into replacement stock. Their accounting firm knew of that intent but advised that filing the return late would create only possible penalties and interest, without warning that the election required a timely filed return. The firm discovered the election deadline only after it had passed and noted the intended election on the late return. The IRS granted 60 days to file an amended return making the Section 1045 election, but did not rule that either company's stock qualified or that late-filing penalties would not apply.

Ruling snapshot

• Question: Could the taxpayers receive extra time to elect Section 1045 rollover treatment for stock-sale gain?
• Outcome: approved, with a 60-day extension
• Key authorities: IRC §§ 1045, 1202(c); Treas. Reg. §§ 301.9100-1, 301.9100-3; Rev. Proc. 98-48

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202419010                                             Third Party Communication: None
Release Date: 5/10/2024                                       Date of Communication: Not Applicable
Index Number: 9100.00-00, 1045.00-00
                                                              Person To Contact:
----------------------------------                            ---------------------, ID No. -----------------
--------------------------                                    Telephone Number:
--------------------------                                    --------------------
                                                              Refer Reply To:
                                                              CC:ITA:B04
                                                              PLR-116242-23
                                                              Date:
                                                              February 14, 2024




                                                   LEGEND

Taxpayers                 = -------------------------------------------------------------

Taxpayer Spouse = ---------------------

Company 1                 = ------------------------------

Company 2                 = -------------------

Firm                      = -------------------------------

Accountant                = ----------------------

Year 0                    = -------

Year 1                    = -------

Year 2                    = -------

Year 3                    = -------

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

Date 2                    = ----------------------

Date 3                    = ---------------------------

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

PLR-116242-23                                       2

 y                        = ---------

 $a                       = -------------------

 $b                       = -----------------

 $c                       = ---------------


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

This is in response to a letter sent on Taxpayers’ behalf by your representative
requesting an extension of time to make an election under § 1045 of the Internal
Revenue Code (Code) concerning gain on the sale of certain qualified small business
stock for tax year Year 2. The request is based on §§ 301.9100-1 and 301.9100-3 of
the Procedure and Administration Regulations.

This letter ruling is being issued electronically in accordance with Rev. Proc. 2024-1,
2024-1 I.R.B. 1. A paper copy will not be mailed to Taxpayers.

                                                  FACTS

Taxpayer Spouse co-founded Company 1 in Year 1. Taxpayers represent that, during
the relevant period, Company 1 stock was qualified small business stock (QSBS) within
the meaning of §1.1045-1(g)(1). In Year 2, Taxpayer Spouse sold x amount of
Company 1 shares for $a on Date 1. Within weeks of the first sale, Taxpayer Spouse
sold y amount of Company 1 shares for $b on Date 2.

Also on Date 2, Taxpayer Spouse entered into a stock purchase agreement to use
proceeds from Company 1 shares sold on Date 1 and Date 2 to fund Company 2.

On Date 3, which was within 60 days of both Company 1 stock sale transactions,
Taxpayer Spouse used $c of the proceeds to fund Company 2. Taxpayers represent
that Company 2 stock constituted replacement QSBS with the meaning of §1.1045-
1(g)(2).

Taxpayers have engaged Firm in preparing their federal tax returns since Year 0. In
Year 3, while preparing Taxpayers’ Year 2 federal income tax return, Accountant in Firm
inquired about the details of the proceeds from the sale of Company 1. Taxpayer
Spouse confirmed that $c of the proceeds was used to fund Company 2 within 60 days
of the sale. Accountant was aware that Taxpayer Spouse intended to make a § 1045
election for the gain on the sale of stock in Company 1.

Firm filed Taxpayers’ federal income tax return for Year 2 after the extended due date of
Date 1. During the time leading up to the filing of the Year 2 return, Firm advised

PLR-116242-23                                 3

Taxpayers that the only risk of filing the Year 2 return late was any applicable late-filing
penalty and interest. Firm failed to advise Taxpayers that a § 1045 election must be
made on a timely-filed return.

During the process of reviewing and finalizing Taxpayers’ Year 2 return and after the
relevant deadline, Firm realized that the § 1045 election was required to be made on a
timely filed return. Accordingly, Firm filed Taxpayers’ Year 2 return with a note stating
that Taxpayers were seeking permission to make a late § 1045 election.

                           APPLICABLE LAW AND ANALYSIS

Section 1045(a) of the 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 .

Rev. Proc. 98-48, 1998-2 C.B. 367, provides that a § 1045 election must be made on or
before 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, § 3.01.

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.
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.

PLR-116242-23                                 4


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 § 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.

Section 301.9100-3(b)(3) provides that a taxpayer is considered to have not acted
reasonably and in good faith if the taxpayer:

       (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)(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.

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

PLR-116242-23                                 5

been made, or any taxable years affected by the election had it been timely made, are
closed by the period of limitations on assessment.

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.

Taxpayers have 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. Taxpayers represent
that none of the circumstances listed in § 301.9100-3(b)(3) apply.

                                      CONCLUSION

Based on the facts and information submitted and the representations made, we
conclude that Taxpayers acted reasonably and in good faith, and that the granting of
relief will not prejudice the interests of the government. Therefore, we grant Taxpayers
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 of Year 2.

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.

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:
(1) whether the stock sold or purchased by Taxpayer constituted QSBS within the
meaning of § 1.1045-1(g)(1) (or was otherwise eligible to be treated as such); (2)
whether the shares in Company 2 constituted replacement QSBS within the meaning of
§ 1.1045-1(g)(2); or (3) whether Taxpayers are subject to any applicable penalties or
interest for the late-filing of their original return for Year 2.

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 Taxpayers’ authorized representative.

PLR-116242-23                                 6

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.

                                       Sincerely,



                                       Angella L. Warren
                                       Branch Chief, Branch 4
                                       Office of Chief Counsel
                                       (Income Tax & Accounting)

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