Parties granted late section 336(e) election relief

Plain-English summary

A purchaser acquired at least 80 percent of an S corporation's stock through a disregarded LLC. The purchaser, seller, and target intended to elect under IRC § 336(e) to treat the qualified stock disposition as an asset disposition, but they missed the regulatory filing steps. They requested relief before the IRS discovered the omission and represented that they were not trying to change a return position subject to an accuracy-related penalty. The IRS found reasonable action, good faith, and no prejudice to the government. It granted 45 days to execute the election agreement and file the election statement, plus 120 days to file all consistent returns, subject to conditions protecting the government's aggregate tax position.

Ruling snapshot

• Question: Could the parties make a late § 336(e) election for the S corporation stock disposition?
• Outcome: Approved, subject to 45-day and 120-day filing conditions
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-2(h)(3) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201622019                                                 Third Party Communication: None
Release Date: 5/27/2016                                           Date of Communication: Not Applicable
Index Numbers: 9100.22-00, 336.05-00
                                                                  Person To Contact:
-------------------------                                         --------------------, ID No. ----------------
---------------------------------------                           Telephone Number:
------------------------------------------                        ------------------
-------------------------------                                   Refer Reply To:
                                                                  CC:CORP:B03
                                                                  PLR-129939-15
                                                                  Date:
                                                                  February 22, 2016

LEGEND

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

LLC                                          =         -----------------------
----------------------------------------------------------------------------------------------------
                                                      ----------------------------------------------------------
----------------------------------------------------------------------------

S Corporation Shareholder                    =        ---------------------

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

State A                                      =        -----------

State B                                      =        ---------

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

D Year                                       =        --------------------------------------------------

x                                            =        ----

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

This letter responds to a letter dated August 21, 2015, submitted on behalf of
Purchaser, S Corporation Shareholder, and S Corporation Target, requesting an
extension of time under § 301.9100-3 of the Procedure and Administration Regulations
to file an election. Purchaser, S Corporation Shareholder, and S Corporation Target are
requesting an extension of time for S Corporation Target to file an election under
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PLR-129939-15

§ 1.336-2(h)(3) of the Income Tax Regulations (“Election”) with respect to Purchaser’s
acquisition, through LLC, of x percent of the stock of S Corporation Target from S
Corporation Shareholder on Date 1. The material information submitted is summarized
below.

On Date 1, LLC, a State A limited liability company which is disregarded for federal
income tax purposes, acquired x percent (at least 80 percent) of the stock of S
Corporation Target, an S corporation incorporated in State B, from S Corporation
Shareholder in exchange for cash (the “Disposition”). It has been represented that the
Disposition qualified as a “qualified stock disposition” as defined in § 1.336-1(b)(6).

S Corporation Target, S Corporation Shareholder, and Purchaser intended to make a
section 336(e) election but, for various reasons, a timely election was not made.
Subsequently, this request was submitted, under § 301.9100-3 of the Procedure and
Administration Regulations, for an extension of time to file the Election. It has been
represented that none of Purchaser, S Corporation Shareholder, or S Corporation
Target is 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.
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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 is fixed by the regulations (i.e., § 1.336-2(h)(3)).
Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an
extension of time for S Corporation Target to file the Election, provided Purchaser, S
Corporation Shareholder, and S Corporation Target 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 Purchaser and S Corporation
Shareholder explain the circumstances that resulted in the failure to timely file the
Election. The information establishes that this request 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 Purchaser, S Corporation Shareholder, and S Corporation Target 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 45 days from the
date on this letter, for S Corporation Target to file the Election with respect to the
Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target and S
Corporation Shareholder (1) must enter into an agreement in accordance with § 1.336-
2(h)(3)(i) to make the Election and (2) 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 D Year. 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 and
control number (PLR-129939-15) of this letter ruling.

WITHIN 120 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).
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PLR-129939-15

The above extension of time is conditioned on the taxpayers’ (i.e., Purchaser’s, S
Corporation Target’s, and S Corporation Shareholder’s) 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 Election had been timely filed (taking into account the time value
of money). No opinion is expressed as to the taxpayers’ 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: (1) whether the Disposition qualifies as a “qualified stock
disposition”; or (2) 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
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 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 taxpayers. However, the Director should verify all
essential facts. In addition, notwithstanding that an extension is granted under
§ 301.9100-3 to file the Election, penalties and interest that would otherwise be
applicable, if any, continue to apply.

This letter is directed only to the taxpayer(s) who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

Pursuant to the power of attorney on file in this office, a copy of this letter is being sent
to your authorized representative.



                                           Sincerely,



                                           _Ken Cohen_________________________
                                           Ken Cohen
                                           Senior Technician Reviewer, Branch 3
                                           Office of Associate Chief Counsel (Corporate)



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