Late section 336(e) election relief granted after buyer and S corporation missed the deadline

Plain-English summary

A partnership bought all the stock of an S corporation in a deal that qualified
as a "qualified stock disposition." The parties wanted to make a section 336(e)
election, which lets a stock sale be treated as an asset sale for tax purposes,
but they missed the deadline to sign the required written agreement and attach
the election statement to the S corporation's return. They asked the IRS for
more time under the section 301.9100-3 relief rules. The IRS granted the
extension, finding that the parties acted reasonably and in good faith (they
relied on a tax professional who failed to advise them of the step) and that
giving relief would not prejudice the government. The parties now have 45 days
to enter the agreement and file the election statement, and 120 days to file or
amend all affected returns consistently, on the condition that their total tax
liability is no lower than it would have been with a timely election. This
matters because a missed procedural election can otherwise cost a large tax
benefit, and 9100 relief offers a second chance when the failure was an honest
oversight.

Ruling snapshot

• Question: Should the IRS grant an extension of time to make a late section 336(e) election after the taxpayers missed the deadline due to reliance on a tax professional?
• Outcome: approved (extension granted under Treas. Reg. § 301.9100-3)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h)(3), 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201848010 Third Party Communication: None
Release Date: 11/30/2018 Date of Communication: Not Applicable
Index Number: 9100.22-00, 336.05-00
Person To Contact:
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----------------------- Telephone Number:
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Refer Reply To:
----------------------- CC:CORP:2
----------------------- PLR-110320-18
Date:
September 06, 2018

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

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

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

Tax Professionals = ---------------------------------------------------------------
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PLR-110320-18 2

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Company Officials = ---------------------------------------------------------------
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Dear --------------:

This letter ruling responds to a letter from your authorized representative, dated March
26, 2018, as supplemented by letters dated April 10, 2018, and April 18, 2018,
requesting an extension of time on behalf of S Corporation Target, S Corporation
Shareholders, and Purchaser to properly execute the agreement referenced in § 1.336-
2(h)(3)(i) (the “Agreement”) and to file an election statement under § 1.336-2(h)(3)(iii) of
the Income Tax Regulations (the “Election Statement”) with respect to Purchaser’s
acquisition of all of the stock of S Corporation Target from S Corporation Shareholders
on Date 1.

On Date 1, Purchaser, a State A limited partnership that is treated as a partnership
for Federal income tax purposes, acquired all of the stock of S Corporation Target, a
State B limited liability company that has elected to be treated as an S corporation for
Federal income tax purposes, from S Corporation Shareholders (the “Disposition”). It
has been represented that the Disposition qualified as a “qualified stock disposition” as
defined in § 1.336-1(b)(6).
PLR-110320-18 3

S Corporation Target, S Corporation Shareholders, and Purchaser 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 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 S Corporation Target, S
Corporation Shareholders, or Purchaser 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 filing of the request (taking into account any qualified amended return filed within
the meaning of § 1.6664-2(c)(3)) and for which a new position requires or permits a
regulatory election for which relief is requested.

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 entering into the Agreement and filing the Election Statement is fixed by the
regulations (i.e., § 1.336-2(h)(3)(i) and (iii)). Therefore, the Commissioner has
discretionary authority under § 301.9100-3 to grant an extension of time to enter into the
PLR-110320-18 4

Agreement and file the Election Statement, provided S Corporation Target, S
Corporation Shareholders, or Purchaser 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 S Corporation Target, S
Corporation Shareholders, Purchaser, Company Officials, and Tax Professionals
explain the circumstances that resulted in the failure to timely enter into the Agreement
and file the Election Statement. The information establishes that S Corporation Target,
S Corporation Shareholders, and Purchaser reasonably relied on a qualified tax
professional who failed to advise them to 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 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 S Corporation Target, S Corporation Shareholders, and Purchaser 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.

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 a
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 the taxable year including 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 its return that
provides the date on and control number (PLR-110320-18) 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 taxpayers’ (i.e., S Corporation
Target’s, S Corporation Shareholders', and Purchaser’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 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.
PLR-110320-18 5

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 enter into the Agreement and file the Election
Statement, penalties and interest that would otherwise be applicable, if any, continue to
apply.

This letter is directed only to the taxpayers 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
                                    Senior Technician Reviewer, Branch 3
                                    Office of Associate Chief Counsel (Corporate)