Late section 336(e) agreement and election allowed

Plain-English summary

Two individuals bought all the stock of an S corporation for cash and a note, and the parties intended to elect under section 336(e) to treat the stock sale as an asset disposition. A qualified tax professional failed to advise them to enter the required binding agreement or file the election statement on time. The IRS found that the target, seller, and purchasers acted reasonably and in good faith and that relief would not prejudice the government. It gave them 45 days to enter the agreement and file the election statement, and required all relevant parties to file consistent returns within 120 days. Relief was conditioned on their aggregate tax liabilities, taking the time value of money into account, being no lower than with a timely election. The IRS did not decide whether the sale was a qualified stock disposition or address other tax consequences.

Ruling snapshot

• Question: May the parties enter the section 336(e) agreement and file the related election statement after the regulatory deadline?
• Outcome: approved
• Key authorities: IRC § 336(e); Treas. Reg. §§ 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: 201739005                                               Third Party Communication: None
Release Date: 9/29/2017                                         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-107199-17
                                                                Date:
                                                                July 05, 2017




LEGEND

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PLR-107199-17                                  2

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

This is in response to a letter dated February 23, 2017, submitted on behalf of S
Corporation Target, S Corporation Shareholder, and Purchasers, requesting an
extension of time under § 301.9100-3 of the Procedure and Administration Regulations
to file an election. S Corporation Target, S Corporation Shareholder, and Purchasers
are requesting an extension of time to properly execute the agreement referenced in
§ 1.336-2(h)(3)(i) (the “Agreement”) and to file the election statement under § 1.336-
2(h)(3)(iii) of the Income Tax Regulations (the “Election Statement”) with respect to
Purchasers' acquisition of the stock of S Corporation Target from S Corporation
Shareholder on Date 1. The material information submitted in your letter and
subsequent correspondence dated May 15, 2017, is summarized below.

On Date 1, Purchasers, two individuals, 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 a note
(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 Purchasers intended for the
stock sale be treated 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, for an extension of time to enter into the Agreement and file the Election
Statement. It has been represented that none of S Corporation Shareholder, S
Corporation Target, or Purchasers 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
PLR-107199-17                                 3

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 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 for S
Corporation Target and S Corporation Shareholder to enter into the Agreement and for
S Corporation Target to file the Election Statement, provided S Corporation Target, S
Corporation Shareholder, and Purchasers 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 Target, S
Corporation Shareholder, Purchasers, Company Officials, and Tax Professionals
explain the circumstances that resulted in the failure to timely enter into the Agreement
and file the Election Statement. The information establishes that, S Corporation Target,
S Corporation Shareholder, and Purchasers 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 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 S Corporation Target, S Corporation Shareholder, and Purchasers 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 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-107199-17                                  4

section 336(e) election, 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 the taxable 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 on (July 5, 2017) and control number of (PLR-107199-17) 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., S Corporation
Target’s, S Corporation Shareholder’s, and Purchasers') 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 file the section 336(e) 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.
PLR-107199-17                                  5


In accordance with the Power of Attorney on file with 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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