S corporation stock sale receives late asset-sale election relief

Plain-English summary

A buyer acquired all stock of an S corporation for cash, and the parties intended to elect under IRC § 336(e) to treat the deal as an asset acquisition. They missed the election because they reasonably relied on a qualified tax professional. The IRS granted 45 days for the shareholders and target to execute the required agreement and file the election statement. Relevant parties also received 120 days to file consistent original or amended returns, and the relief was conditioned on their aggregate tax liability not being lower than it would have been with a timely election.

Ruling snapshot

• Question: May the S corporation shareholders and target make a late § 336(e) election for the stock sale?
• Outcome: Approved, subject to 45-day election steps, 120-day return filings, and an aggregate-tax-liability condition
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-2(h) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201633013 Third Party Communication: None
Release Date: 8/12/2016 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:2
PLR-109402-16
Date:
May 11, 2016

Legend

S Corporation Shareholders = ------------------------------------

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

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

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

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

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

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

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

-

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

This letter responds to a letter dated March 18, 2016, submitted on behalf of S
Corporation Shareholders and S Corporation Target, requesting an extension of time
under § 301.9100-3 of the Procedure and Administration Regulations to file an election.
PLR-109402-16 2

S Corporation Shareholders and S Corporation Target are requesting an extension of
time for S Corporation Shareholders and S Corporation Target to file an election under
§ 1.336-2(h)(3) of the Income Tax Regulations (“Election”) with respect to Purchaser's
acquisition of the stock of S Corporation Target from S Corporation Shareholders on
Date 1. The material information submitted is summarized below.

On Date 1, Purchaser acquired all of the stock of S Corporation Target, a corporation
that elected to be treated as an S corporation for Federal income tax purposes, from S
Corporation Shareholders 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).

Purchaser, S Corporation Shareholders, and S Corporation Target intended for an
election to be made to treat Purchaser’s acquisition of the stock of S Corporation Target
as an asset acquisition, but for various reasons, the Election was not made.
Accordingly, 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 Shareholders, 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 at the time of the request for relief (taking
into account any qualified amended return within the meaning of § 1.6664-2(c)(3)).

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.
PLR-109402-16 3

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 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 Shareholders and S Corporation Target to file the
Election, provided Purchaser, S Corporation Shareholders, 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 S Corporation Shareholders, S
Corporation Target, Company Official, and Tax Professionals explain the circumstances
that resulted in the failure to timely file the Election. The information establishes that
Purchaser, S Corporation Shareholders, and S Corporation Target reasonably relied on
a qualified tax professional who failed to make, or advise them to timely make, the
Election, and that the request for relief was filed before the failure to file the Election
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 Purchaser, S Corporation Shareholders, 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 Shareholders and S Corporation Target to file the
Election with respect to the Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, (1) S Corporation Shareholders
and S Corporation Target 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 an 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 tax 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 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-109402-16) 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
PLR-109402-16 4

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 the taxpayers' (i.e., Purchaser's, S
Corporation Target's, and S Corporation Shareholders') 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 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
                                    Senior Technician Reviewer, Branch 3
                                    Office of Associate Chief Counsel (Corporate)