Parties get more time for section 336(e) election

Plain-English summary

A partnership purchased all the stock of an S corporation for cash, and the parties intended the stock sale to be treated as a deemed asset sale under section 336(e). They did not timely execute the required written agreement or file the election statement because they reasonably relied on a qualified tax professional who failed to advise them properly. They requested relief before the IRS discovered the failure, and the IRS found that they acted reasonably and in good faith. The IRS granted 45 days to execute the agreement and file the election statement. It also required all relevant parties to file or amend consistent returns within 120 days.

Ruling snapshot

• Question: May the purchaser, S corporation, and shareholders complete a late section 336(e) election for the stock acquisition?
• Outcome: approved, with 45 days for the agreement and election statement and 120 days for consistent returns
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-2(h) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201751009                                              Third Party Communication: None
Release Date: 12/22/2017                                       Date of Communication: Not Applicable
Index Numbers: 336.05-00, 9100.22-00
                                                               Person To Contact:
---------------------------------------------------------      ---------------------, ID No. ------------------
--------------------------------                               Telephone Number:
------------------------------                                 ----------------------
-----------------------------------                            Refer Reply To:
                                                               CC:CORP:B03
                                                               PLR-111919-17
                                                               Date:
                                                               September 18, 2017


LEGEND

Purchaser                                    =         -----------------------------------
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S Corporation Target                         =         --------------------------------
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S Corporation Shareholders                   =         --------------------------
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State A                                      =        --------------

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

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

Year                                         =        -------------------------------------------

Tax Professional                             =        ---------------------------------------------------------------
PLR-111919-17                                 2

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

This letter responds to a letter dated April 4, 2017, submitted on behalf of Purchaser, S
Corporation Shareholders, 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 Shareholders, 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 for S Corporation Target to file the election statement under
§ 1.336-2(h)(3)(iii) of the Income Tax Regulations (“Election Statement”) with respect to
Purchaser’s acquisition of all of the stock of S Corporation Target from S Corporation
Shareholders on Date 1. The material information submitted in the April 4, 2017, letter
and subsequent correspondence dated September 8, 2017, 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, an S corporation incorporated in State B, from S Corporation Shareholders 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).

Purchaser, S Corporation Shareholders, and S Corporation Target 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 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 Shareholders, 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.

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
PLR-111919-17                                 3

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 (§ 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
Shareholders and S Corporation Target to enter into the Agreement and for S
Corporation Target to file the Election Statement, provided Purchaser, S Corporation
Shareholders, 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
Shareholders, S Corporation Target, and Tax Professional explain the circumstances
that resulted in the failure to timely enter into the Agreement and to file the Election
Statement. The information establishes that Purchaser, S Corporation Shareholders,
and S Corporation Target reasonably relied on a qualified tax professional who failed to
advise them to properly 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 Purchaser, S Corporation Shareholders, 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 enter into the Agreement and file the Election Statement with
respect to the Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation Target and S
Corporation Shareholders must enter into a written, binding agreement to make the
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 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
PLR-111919-17                                  4

the return by attaching a statement to its return that provides the date on, and control
number (PLR-111919-17) 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, and S Corporation Shareholders’) 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.

Pursuant to the power of attorney on file in this office, copies of this letter are being sent
to your authorized representatives.

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



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