S corporation receives late section 336(e) election relief

Plain-English summary

A partnership acquired all the stock of an S corporation from its shareholders in a transaction represented to be a qualified stock disposition. The shareholders and target timely entered a binding agreement to make a section 336(e) election, but the target did not timely file its return with the required election statement. The parties reasonably relied on a qualified tax professional and sought relief before the IRS discovered the omission. The IRS granted 45 days for the target to attach the ruling to its return and 120 days for all relevant parties to file consistent returns. The relief was subject to an aggregate-tax-liability condition, and the IRS did not decide whether the stock disposition itself qualified.

Ruling snapshot

• Question: Could the S corporation target file a late section 336(e) election statement for the stock acquisition?
• Outcome: Approved, subject to the 45-day and 120-day filing requirements and the 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: 201636011                                           Third Party Communication: None
Release Date: 9/2/2016                                      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:B1
                                                            PLR-104636-16
                                                            Date:
                                                            June 02, 2016


                                                       LEGEND
Purchaser                 = -----------------------------------------------------------
                            ----------------------

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

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

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

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

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

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

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

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

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

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

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

Company Official          = -----------------------------
                            --------------------------------------------------------
PLR-104636-16                                         2



Tax Professional        = --------------------
                          -------------------------------------------------------------------------------

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

This letter ruling responds to a letter from your authorized representative, dated January
25, 2016, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to file an election. Specifically, S
Corporation Shareholders and S Corporation Target are requesting an extension of time
for S Corporation Target to file an election statement under § 1.336-2(h)(3)(iii) of the
Income Tax Regulations (“Election Statement”) with respect to Purchaser’s acquisition
of the stock of S Corporation Target from S Corporation Shareholders on Date 1. The
material information provided in that letter is summarized below.

On Date 1, Purchaser, a State A limited liability company that is treated as a partnership
for Federal income tax purposes, acquired all of the stock of S Corporation Target, a
State B limited liability company that has elected to be treated as an S corporation for
Federal income tax purposes, from S Corporation Shareholders (the “Disposition”). It
has been represented that the Disposition qualified as a “qualified stock disposition” as
defined in § 1.336-1(b)(6).

Prior to the due date for S Corporation Target’s tax return for the taxable year that
included Date 1 (“Year 1”), S Corporation Shareholders and S Corporation Target
entered into a written, binding agreement providing that a section 336(e) election would
be made with respect to the Disposition, but S Corporation Target did not timely file its
tax return for Year 1. Subsequently, a request was submitted under § 301.9100-3 of the
Procedure and Administration Regulations, for an extension of time to file the Election
Statement. It has been represented that neither S Corporation Shareholders nor 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 336(e) election; (ii) the S corporation target retaining a
PLR-104636-16                                 3

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 filing the Election Statement is fixed by the regulations (i.e., § 1.336-
2(h)(3)(iii)). Therefore, the Commissioner has discretionary authority under § 301.9100-
3 to grant an extension of time for S Corporation Target to file the Election Statement,
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 Professional explain the circumstances
that resulted in the failure to timely file the Election Statement. The information
establishes that Purchaser, S Corporation Shareholders, and S Corporation Target
reasonably relied on a qualified tax professional who failed to file, or advise them to
timely file, the Election Statement, and that the request for relief was filed before the
failure 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 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 Target to file the Election Statement with respect to
the Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target, having
already filed a return with the 336(e) election statement attached, must attach a copy of
PLR-104636-16                                  4

this letter to S Corporation Target’s return. Alternatively, if S Corporation 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-104636-16) 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
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 Statement 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 Statement 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 Statement 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 Statement, penalties and interest that
would otherwise be applicable, if any, continue to apply.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
PLR-104636-16                                 5



In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.

                                       Sincerely,


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




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