Parties received 45 days to make a late Section 336(e) election

Plain-English summary

An individual bought all the stock of an S corporation from its shareholder for cash. The parties intended to elect under Section 336(e) to treat the qualified stock disposition as an asset disposition, but their tax professional failed to make or advise them to make the election on time. They requested relief before the IRS discovered the failure and represented that they were not trying to change a return position subject to an accuracy-related penalty. The IRS found that they acted reasonably and in good faith and granted 45 days to execute the election agreement and file the election statement. Relevant returns also had to be filed or amended within 120 days. Relief was conditioned on the parties' aggregate tax liabilities being no lower than if the election had been timely made, and the IRS did not decide whether the sale qualified for the election.

Ruling snapshot

• Question: Could the seller, buyer, and S corporation make a late Section 336(e) election for the stock sale?
• Outcome: Approved, with 45-day and 120-day compliance deadlines and a no-lower-tax condition.
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1(b)(6), 1.336-2(h)(3), and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201824011                                              Third Party Communication: None
Release Date: 6/15/2018                                        Date of Communication: Not Applicable
Index Number: 9100.22-00, 336.05-00
                                                               Person To Contact:
---------------------------                                    ------------------------, ID No. ------------------
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-----------------------------------------                      Telephone Number:
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-------------------------                                      Refer Reply To:
                                                               CC:CORP:B01
                                                               PLR-137805-17
                                                               Date:
                                                               March 13, 2018


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

S Corporation Target                         =         ------------------------------------------
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Date 1                                       =        ---------------------

Corporate Officer                            =         ------------------------------------
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Tax Professional 1                           =         -----------------------------------
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Tax Professional 2                           =         -------------------------------------
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Dear ------------:

       This letter responds to a letter dated December 11, 2017, submitted on behalf of
S Corporation Shareholder, Purchaser, and S Corporation Target, requesting an
extension of time under § 301.7701-3 of the Procedure and Administration Regulations
to make an election. S Corporation Shareholder, Purchaser, and S Corporation Target
are requesting an extension of time to make an election under § 1.336-2(h)(3) of the
Income Tax Regulations (the “Election”) with respect to the sale by S Corporation
Shareholder of all of the stock of S Corporation Target to Purchaser on Date 1 (the
PLR-137805-17                                 2

"Disposition"). The material information submitted for consideration is summarized
below.
       S Corporation Target is a professional corporation that elected to be treated as
an S corporation for federal income tax purposes. On Date 1, Purchaser, an individual,
acquired all of the stock of S Corporation Target from S Corporation Shareholder for
cash. The parties have represented that this transaction qualifies as a “qualified stock
disposition” as defined in § 1.336-1(b)(6) of the Income Tax Regulations.

      S Corporation Shareholder, Purchaser, and S Corporation Target intended to
make a section 336(e) election, but for various reasons, a timely election was not made.
Subsequently this request was submitted, under § 301.9100-3, for an extension of time
to make the Election. It has been represented that none of S Corporation Shareholder,
Purchaser, 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 under section 336(e) permit certain sales, exchanges, or
dispositions 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 that 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 the 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.

       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 301.9100-2 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).
PLR-137805-17                                 3

       The time for making the Election is fixed by the regulations (i.e., § 1.336-2(h)(3)).
Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an
extension of time to make the Election, provided, S Corporation Shareholder,
Purchaser, 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 will not
prejudice the interests of the government.

       Information, affidavits, and representations submitted by S Corporation
Shareholder, Purchaser, S Corporation Target, Corporate Officer, Tax Professional 1,
and Tax Professional 2 explain the circumstances that resulted in the failure to timely
make the Election. The information establishes that S Corporation Shareholder,
Purchaser, and S Corporation Target reasonably relied on a qualified tax professional
who failed to make, or advise them to make, the Election, and that the request for relief
was filed before the failure to timely 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 affidavits submitted
and representations made, we conclude that S Corporation Shareholder, Purchaser,
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 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 make the Election with
respect to the Disposition.

        NO LATER THAN 45 DAYS AFTER THE DATE ON THIS LETTER,
(1) S Corporation Target and S Corporation Shareholder must enter into a written,
binding agreement, in accordance with § 1.336-2(h)(3)(i)), to make a section 336(e)
election and (2) S Corporation Target must file the section 336(e) election statement in
accordance with § 1.336-2(h)(3)(iii). The section 336(e) election statement must be
attached to S Corporation Target’s tax return for the taxable year that includes 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
the return that provides the date on and control number (PLR-137805-17) 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 any other affected taxable
year).

      The above extension of time is conditioned on the taxpayers’ (i.e., S Corporation
Target’s, Purchaser’s, and S Corporation Shareholder’s) tax liabilities (if any) being not
PLR-137805-17                                  4

lower, in the aggregate, for all years to which the 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 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 any tax
returns or making the Election late under the provisions of any other section of the Code
or regulations, or as to the tax treatment of any conditions existing at the time of, or
effects 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 S Corporation Shareholder, Purchaser,
S Corporation Target, Corporate Officer, Tax Professional 1, and Tax Professional 2.
However, the Director should verify all essential facts. Moreover, notwithstanding that
an extension is granted under § 301.9100-3 to make the Election, any penalties and
interest that would otherwise be applicable, if any, continue to apply.

      This ruling is directed only to the taxpayer(s) who requested it. Section
6110(k)(3) of the Code 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)