Late section 336(e) asset-sale election was allowed

Plain-English summary

A purchaser acquired all the stock of an S corporation, and the parties intended to elect under section 336(e) to treat the stock sale as a deemed asset sale. They did not timely execute the required written agreement or attach the election statement because they relied on a tax professional who failed to advise them of those steps. The IRS found that the parties acted reasonably and in good faith, requested relief before the IRS discovered the failure, and would not prejudice the government's interests. It gave them 45 days to execute the agreement and file the election statement, and 120 days to file or amend all affected returns consistently. Relief was conditioned on the election not lowering their aggregate tax liability compared with a timely election, and the IRS did not decide whether the sale was a qualified stock disposition.

Ruling snapshot

• Question: May the parties make a late section 336(e) election to treat an S corporation stock sale as an asset disposition?
• Outcome: approved, with 45-day election and 120-day return deadlines
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201733003                                              Third Party Communication: None
Release Date: 8/18/2017                                        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:B01
----------------------------                                   PLR-103240-17
                                                               Date:
                                                               May 22, 2017




LEGEND

Purchaser                                    =        ---------------------------------------
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S Corporation Shareholder                    =         ---------------------------
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S Corporation Target                         =        ----------------------------------------------------
                                                      -------------------
                                                      ------------------------
                                                      ---------------------------------------

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

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

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

A Year                                       =        ---------------------------------------------------------------

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

Tax Professional                             =        ----------------------------
                                                      --------------------------
PLR-103240-17                                 2

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

This letter responds to a letter dated January 18, 2017, 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 properly execute the agreement referenced in
§ 1.336-2(h)(3)(i) (the “Agreement”) and to file an election statement under § 1.336-
2(h)(3)(iii) of the Income Tax Regulations (the “Election Statement”) 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.

On Date 1, Purchaser, a State A limited liability company which is treated as a
partnership for federal income tax purposes, acquired all of the stock of S Corporation
Target, a State B corporation which had elected to be treated as an S corporation for
federal income tax purposes, 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 treat the
stock sale as a deemed asset sale, but, for various reasons, a timely section 336(e)
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 enter into
the Agreement and file the Election Statement. 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 filing of the request under § 301.9100-3, 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
PLR-103240-17                                3

(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 entering into the Agreement and filing the Election Statement is fixed by the
regulations (i.e., § 1.336-2(h)(3)(i) and (iii)). Therefore, the Commissioner has
discretionary authority under § 301.9100-3 to grant an extension of time to enter into the
Agreement and file the Election Statement, 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, Company Official, and Tax Professional explain the
circumstances that resulted in the failure to timely enter into the Agreement and file the
Election Statement. The information establishes that Purchaser, S Corporation
Shareholder and S Corporation Target reasonably relied on a qualified tax professional
who failed to advise them to enter into the Agreement and to timely file the Election
Statement and that the request for relief was filed before the failure to enter into the
Agreement or 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 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 with respect to the
Disposition, until 45 days from the date on this letter, to enter into the Agreement and
file the Election Statement.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target and S
Corporation Shareholder must enter into a written, binding agreement to make the
PLR-103240-17                                  4

Election Statement and S Corporation Target must file the Election Statement in
accordance with § 1.336-2(h). The Election Statement must be attached to S
Corporation Target’s tax return for A 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-103240-17) 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, 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 Agreement had been timely entered into and 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
making the section 336(e) 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 section 336(e) 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 enter into the Agreement and file the Election
Statement, penalties and interest that would otherwise be applicable, if any, continue to
apply. This letter is directed only to the taxpayers who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.
PLR-103240-17                                  5



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




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