Late section 336(e) election relief granted

Plain-English summary

A purchaser acquired all the stock of an unrelated S corporation through a disregarded subsidiary, and the parties intended to elect under section 336(e) to treat the stock sale as an asset disposition. The target and its shareholder entered a timely binding election agreement, but the target did not timely file its return or attach the required election statement because the parties relied on a qualified tax professional. The IRS found that they acted reasonably and in good faith and that relief would not prejudice the government. It gave the target 45 days to file the statement and required all relevant parties to file consistent returns within 120 days. Relief was conditioned on their aggregate tax liability, taking the time value of money into account, being no lower than it would have been with a timely filing. The IRS did not decide whether the sale was a qualified stock disposition or address other tax consequences.

Ruling snapshot

• Question: May the S corporation target receive extra time to file the election statement required for a section 336(e) election?
• 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: 201740014                                 Third Party Communication: None
Release Date: 10/6/2017                           Date of Communication: Not Applicable
Index Number: 336.05-00, 9100.22-00
                                                  Person To Contact:
----------------------                            -------------------, ID No. ------------------
--------------                                    Telephone Number:
--------------------------------                  ----------------------
-------------------                               Refer Reply To:
 -------------------------------                  CC:CORP:B01
                                                  PLR-112839-17
                                                  Date:
                                                  July 07, 2017


Legend

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

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

Subsidiary                         =   -----------------------------------------------------------------
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                                       -----------------------------------------------------------------
                                       -------------------

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

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

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

      This is in response to a letter dated April 14, 2017, submitted on behalf of S
Corporation Target, and joined by Purchaser and S Corporation Shareholder,
requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations to file an election. S Corporation Target is requesting an
PLR-112839-17                                 2

extension of time for it 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 Shareholder on Date 1. The
material information submitted in your letter and subsequent correspondence dated
June 12, 2017, June 28, 2017, and June 30, 2017, is summarized below.

       Purchaser wholly owns Subsidiary, an entity that is disregarded as separate from
Purchaser for federal income tax purposes. On Date 1, Purchaser, through Subsidiary,
acquired all of the stock of S Corporation Target from S Corporation Shareholder, an
unrelated party, in exchange for cash (the “Disposition”). Prior to the Disposition, S
Corporation Target had been classified as an S corporation.

       Purchaser, S Corporation Target, and S Corporation Shareholder intended to
make a section 336(e) election. Prior to the due date for S Corporation Target’s tax
return for the taxable year that included Date 1 (“Year 1”), S Corporation Target and S
Corporation Shareholder entered into a written, binding agreement providing that a
section 336(e) election would be made with respect to the Disposition. However, S
Corporation Target did not timely file its tax return for Year 1. Subsequently, this
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 none of Purchaser, S Corporation Target, or S Corporation
Shareholder 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.

        Regulations promulgated under section 336(e) permit certain sales, exchanges,
or distributions of stock of a corporation to be treated as an asset disposition 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-112839-17                                  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 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 Target, and S Corporation Shareholder 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 Target, S Corporation Shareholder, and Tax Professional explain the
circumstances that resulted in the failure to timely file the Election Statement. The
information establishes that Purchaser, S Corporation Target, and S Corporation
Shareholder 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 Target, and S Corporation
Shareholder 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 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 Year 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-123263-16) 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
PLR-112839-17                                    4

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 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 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________________
                                    Ken Cohen
                                    Chief, Branch 3
                                    Office of Associate Chief Counsel (Corporate)