Taxpayers get more time to complete section 336(e) election

Plain-English summary

A corporate group intended to make a section 336(e) election for a disposition of all the target company's stock. The seller and target did not timely enter the written binding agreement required for the election because they relied on tax professionals who failed to complete or advise them to complete the election requirements. The IRS found that the taxpayers acted reasonably and in good faith, requested relief before the IRS discovered the failure, and would not prejudice the government's interests. It granted 45 days to execute the election agreement and attach the ruling to the seller's return, plus 120 days for all relevant parties to file consistent returns. Relief was conditioned on aggregate tax liabilities not being lower than if the election had been timely made, and the IRS did not rule that the transaction was a qualified stock disposition.

Ruling snapshot

• Question: Could the seller and target receive an extension to complete their section 336(e) election?
• Outcome: approved, with 45-day and 120-day corrective filing deadlines
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2, and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                  Department of the Treasury
                                                          Washington, DC 20224

Number: 201749004                                         Third Party Communication: None
Release Date: 12/8/2017                                   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:B04
                                                          PLR-108798-17
                                                          Date:
                                                          September 12, 2017
In Re: -------------------------




Legend

Corporation X                       =   -----------------------------------
                                        --------------------------

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

Seller                              =   -------------------------
                                        --------------------------------
                                        -------------------------

Target                              =   ------------------------------------------
                                        -------------------------------------------------
                                        -------------------------

Unrelated Corporation               =   --------------------------------------------
                                        -----------------------------------

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

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

Date 2                              =   ----------------------------
PLR-108798-17                                    2

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

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


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

       This letter responds to a letter dated March 13, 2017, submitted on behalf of
Target and Corporation X, successor-in-interest to Seller, requesting an extension of
time under § 301.9100-3 of the Procedure and Administration Regulations to make an
election. Corporation X and Target are requesting an extension of time for Corporation
X and Target to make an election under § 1.336-2(h)(1) of the Income Tax Regulations
(“Election”) with respect to Seller’s disposition of all of the stock of Target on Date 1 (the
“Stock Disposition”). The material information submitted in the March 13, 2017, letter
and in subsequent correspondence is summarized below.

         Immediately prior to the Stock Disposition, Purchaser was a State A limited
liability company that was taxed as a partnership. Purchaser owned all of the
outstanding stock of Seller, a State A corporation, and Seller owned all of the
outstanding stock of Target, a State A limited liability company that was taxed as a
corporation. Seller was the common parent of a consolidated group that included
Target (“Seller Group”).

       On Date 1, Seller distributed all of the stock of Target to Purchaser in redemption
of a portion of Seller’s outstanding stock. On Date 2, as part of the same plan,
Purchaser sold all of the outstanding Seller stock to Unrelated Corporation. It has been
represented that the Stock Disposition qualified as a “qualified stock disposition” as
defined in § 1.336-1(b)(6)(i).

       Purchaser, Seller, and Target intended to make a section 336(e) election for the
Stock Disposition but, for various reasons, a timely election was not fully made, as
Seller and Target failed to enter into a written, binding agreement to make a section
336(e) election prior to the due date of the Seller Group’s consolidated return.
Subsequently, this request was submitted, under § 301.9100-3 of the Procedure and
Administration Regulations, for an extension of time to make the Election. It has been
represented that neither Seller (by Corporation X) nor 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 and for which the new position requires
or permits a regulatory election for which the relief is requested.
PLR-108798-17                                3

        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)(1) provides that if the seller and target corporations are
members of the same consolidated group, a section 336(e) election is made by
completing the following requirements: (i) seller and target must enter into a written,
binding agreement, on or before the due date (including extensions) of the consolidated
group’s consolidated Federal income tax return for the taxable year that includes the
disposition date, to make a section 336(e) election; (ii) the common parent of the
consolidated group must retain a copy of the written agreement; (iii) the common parent
must attach the section 336(e) election statement, described in § 1.336-2(h)(5) and (6),
to the group’s timely filed (including extensions) consolidated Federal income tax return
for the taxable year that includes the disposition date; and (iv) the common parent must
provide a copy of the section 336(e) election statement to target on or before the due
date (including extensions) of the consolidated group’s consolidated Federal income tax
return.

       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 making the Election is fixed by the regulations (i.e., § 1.336-2(h)).
Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an
extension of time for Seller (by Corporation X) and Target to make the Election,
provided Seller (and Corporation X) and 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 Corporation X, Target,
Company Official, and Tax Professionals explain the circumstances that resulted in the
failure to timely make the Election. The information establishes that Seller and Target
reasonably relied on qualified tax professionals who failed to make, or advise them to
timely make, the Election in full accordance with section 1.336-2(h)(1)(i) through (iv),
PLR-108798-17                                   4

and that the request for relief was filed before the failure to properly make 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 Seller (and Corporation X) and 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 Seller to make the Election with respect to the Stock Disposition.

        WITHIN 45 DAYS OF THE DATE ON THIS LETTER: (i) Seller (by Corporation
X) and Target must enter into an agreement in accordance with § 1.336-2(h)(1)(i) to
make the Election; and (ii) Seller (by Corporation X), having already filed its tax return
with the section 336(e) election statement, must attach a copy of this letter to the return.
The latter requirement may be satisfied by amending Seller’s return to attach a copy of
this letter to such return. Alternatively, if Seller’s tax return was filed electronically, this
requirement may be satisfied by attaching a statement to the return that provides the
date and control number (PLR-108798-17) of this letter.

        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 all relevant taxpayers’ tax liabilities
(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 made (taking
into account the time value of money). No opinion is expressed as to the taxpayers’ tax
liabilities 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 Stock 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 making the
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,
making 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 Seller (by Corporation X), Target, Company
Official, and Tax Professionals. However, the Director should verify all essential facts.
PLR-108798-17                                  5

In addition, notwithstanding that an extension is granted under § 301.9100-3 to make
the Election, penalties and interest that would otherwise be applicable, if any, continue
to apply.

      This letter ruling is directed only to the taxpayers requesting it. Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.

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