Parties receive more time to make a section 336(e) election

Plain-English summary

An individual purchased all the stock of an S corporation, and the buyer, seller, and target intended to make a section 336(e) election to treat the stock sale as an asset disposition. They missed the regulatory deadline after relying on qualified tax professionals and sought relief before the IRS discovered the failure. The IRS found that the parties acted reasonably and in good faith and that granting relief would not prejudice the government. It allowed 45 days to enter the required binding agreement and file the election statement, and 120 days to file or amend all affected returns consistently. The ruling did not decide whether the transaction substantively qualified as a qualified stock disposition.

Ruling snapshot

• Question: Could the parties make a late section 336(e) election for the sale of an S corporation's stock?
• Outcome: approved, with 45 days for the election and 120 days for consistent returns
• 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: 201711007 Third Party Communication: None
Release Date: 3/17/2017 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:3
PLR-131803-16
Date:
December 15, 2016

LEGEND

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

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

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

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

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

B Year = -----------------------------------------------

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

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

This letter responds to a letter received on October 11, 2016, 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 to file an election under § 1.336-2(h)(3) of the Income
Tax Regulations (“Election”) with respect to Purchaser’s acquisition of all of the stock of
S Corporation Target from S Corporation Shareholder on Date 1. The material
information submitted is summarized below.
PLR-131803-16 2

On Date 1, Purchaser, an individual, acquired all of the stock of S Corporation Target, a
State A corporation that elected to be treated as an S corporation for federal income tax
purposes, from S Corporation Shareholder in exchange for cash and an interest bearing
note payable in three annual installments (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 at the time of the request for relief (taking
into account any qualified amended return filed within the meaning of §1.6664-2(c)(3))
and for which the new position requires or permits a regulatory election for which relief
is requested.

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.
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
PLR-131803-16 3

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 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, S Corporation
Shareholder, S Corporation Target, and Tax Professionals explain the circumstances
that resulted in the failure to timely file the Election. The information establishes that
Purchaser, S Corporation Shareholder, and S Corporation Target reasonably relied on
qualified tax professionals who failed to file, or advise them to timely file, 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 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, to file the Election with respect to the Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target and the S
Corporation Shareholder must enter into a written, binding agreement to make a section
336(e) election and S Corporation Target must file the section 336(e) election statement
in accordance with § 1.336-2(h). The section 336(e) election statement must be
attached to S Corporation Target’s tax return for B 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-131803-16) 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 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
PLR-131803-16 4

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
                                    Chief, Branch 3
                                    Office of Associate Chief Counsel (Corporate)

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