Late-election relief granted for an S corporation to file its §336(e) statement

Plain-English summary

Two individuals bought all the stock of an S corporation for cash and a note, and the buyers, sellers, and company signed a binding agreement to treat the stock sale as an asset sale under IRC Section 336(e), which can step up the basis of the company's assets. Making the election also requires attaching an election statement to the company's timely return, and here both the return and the statement were filed late. The parties asked the IRS for more time under the "9100" relief regulations (Treas. Reg. § 301.9100-3), which allow the IRS to excuse a missed regulatory election when the taxpayer acted reasonably and in good faith and the government is not prejudiced. Finding that the parties reasonably relied on a tax professional who failed to file, and came forward before the IRS noticed, the IRS granted 45 days to file the statement, conditioned on the parties' aggregate tax liability being no lower than if it had been timely filed. The IRS did not rule on whether the deal actually qualifies.

Ruling snapshot

• Question: Should the S corporation and the parties get an extension of time under § 301.9100-3 to file the § 336(e) election statement they missed?
• Outcome: Approved (45-day extension granted, subject to the no-lower-liability condition)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1(b)(6), 1.336-2(h)(3), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201836003 Third Party Communication: None
Release Date: 9/7/2018 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:B05
------------------------------------------------------------ PLR-113449-18
------ Date:
June 12, 2018

Legend

S Corporation = ----------------------------------------

Purchasers = --------------------------

                                 --------------------------

Shareholders = ----------------------------

                                 --------------------

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

Date 2 = ---------------------

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

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

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

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

This letter responds to a letter dated April 6, 2018, submitted on behalf of S
Corporation, Purchasers, and Shareholders (collectively, "the Parties"), requesting an
extension of time under § 301.9100-3 of the Procedure and Administration Regulations
to file an election. The Parties are requesting an extension of time to file the election
statement under § 1.336-2(h)(3)(iii) (the "Election Statement") with respect to
Purchasers' acquisition of all of the stock of S Corporation from Shareholders on Date

1. The material information submitted is summarized below.

On Date 1, Purchasers, two individuals, acquired all of the stock of S Corporation, a
State A corporation that elected to be treated as an S corporation for federal income tax
purposes, from Shareholders 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).

Prior to Date 2, the due date for S Corporation's tax return for the taxable year that
included Date 1, the Parties entered into a written, binding agreement providing that a
section 336(e) election would be made with respect to the Disposition. The Election
statement and S Corporation's tax return for the taxable year ending Date 1 were
required to be filed by Date 2. However, for various reasons, the tax return and Election
Statement were not timely filed. Subsequently, a request was submitted under
§ 301.9100-3 of the Procedure and Administration Regulations for an extension of time
to file the Election Statement. The Parties each represented that they are not 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
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 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 to file the Election Statement, provided
the Parties 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 the Parties, Company Official,
and Tax Professional explain the circumstances that resulted in the failure to timely file
the Election Statement. The information establishes that the Parties reasonably relied
on a qualified tax professional who failed to timely file, or to advise them to timely file,
the Election Statement, and 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 the Parties 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 to file the
Election Statement.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, S Corporation must file the
Election Statement in accordance with § 1.336-2(h)(iii). The Election Statement must be
attached to S Corporation's tax return for the taxable year including Date 1. In addition,
a copy of this letter must be attached to S Corporation's return. Alternatively, if S
corporation 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 and control number (PLR-113449-18) 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 Parties' 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 Statement had been timely filed (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 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) 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 Parties, Company Official, and Tax
Professional. 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 ruling is directed only to the taxpayer requesting 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 with this office, copies of this letter are being
sent to your authorized representatives.

                                   Sincerely,


                                   _Ken Cohen_________________
                                   Ken Cohen
                                   Senior Technician Reviewer, Branch 3
                                   Office of Associate Chief Counsel (Corporate)