Successor gets 45 days to file late section 336(e) election statement

Plain-English summary

A partnership acquired all shares of an S corporation whose shareholders had agreed with the corporation to treat the stock sale as an asset sale under section 336(e). The purchaser then converted the acquired corporation into a successor entity, but the required election statement was not attached to the target's timely return. The IRS found that the parties reasonably relied on a qualified tax professional who failed to file or advise them to file the statement and that the IRS had not discovered the omission before relief was requested. It gave the successor 45 days to file the election statement and required all relevant parties to file consistent returns within 120 days. Relief was conditioned on the parties' aggregate tax liabilities not being lower than they would have been with a timely filing.

Ruling snapshot

• Question: May the target's successor file the section 336(e) election statement after the regulatory deadline?
• Outcome: Approved, with 45 days for the election statement and 120 days for consistent returns.
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201923024                                                Third Party Communication: None
Release Date: 6/7/2019                                           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:4
                                                                 PLR-126678-18
                                                                 Date:
                                                                 March 05, 2019


Legend

Old Target                          =         -------------------------------------------
------------------------------------------------------------------------------
---------------------------------------------------------------------

New Target                          =         --------------------------------------------
------------------------------------------------------------------------------------------------
---------------------------------------------------------------------

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

Selling Shareholders                =         ----------------------------
--------------------------------------------------------------------

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

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

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


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

Company Official                    =          -------------------------
PLR-126678-18                                             2

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

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

This letter ruling responds to a letter dated October 8, 2018, from your authorized
representative, submitted on behalf of New Target, requesting an extension of time
under § 301.9100-3 of the Procedure and Administration Regulations to file an election.
New Target, as successor to Old Target, is requesting an extension of time to file the
election statement under § 1.336-2(h)(3)(iii) (“Election Statement”) with respect to
Purchaser’s acquisition of all the stock of Old Target on Date 1 from Selling
Shareholders. Additional information was submitted in letters dated November 28, 2018
and February 13, 2019. The material information submitted for consideration is
summarized below.

       On Date 1, Purchaser, an entity taxable as a partnership for Federal income tax
purposes, acquired all the stock of Old Target, as S corporation, from Selling
Shareholders in exchange for valuable consideration (the “Disposition”). Old Target,
and Selling Shareholders entered into a written, binding agreement to treat the stock
sale as an asset sale pursuant to § 336(e) of the Internal Revenue Code. Immediately
after acquiring Old Target, Purchaser converted Old Target into New Target through the
use of state law conversion statutes.

        The Election Statement was required to be filed with Old Target's Federal income
tax return for the taxable year that included the Disposition, by the due date of such
return. However, for various reasons, the Election Statement was not timely filed.
Subsequently this request was submitted under § 301.9100-3 for an extension of time to
file the Election Statement. Old Target (by its successor, New Target), Purchaser, and
Selling Shareholders have represented that they are not seeking to alter a return
position for which an accuracy-related penalty has been or could be imposed under
§ 6662 at the time this relief was requested. It has been further represented that the
Disposition qualified as a qualified stock disposition as defined in § 1.336-1(b)(6).

        Regulations promulgated under § 336(e) permit certain sales, exchanges, or
distributions of stock of a corporation to be treated as an asset disposition if: (1) the
stock disposition is a qualified stock disposition as defined in § 1.336-1(b)(6); and (2) a
§ 336(e) election is made.

        Section 1.336-2(h)(3) provides that a § 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 § 336(e) election; (ii) the S corporation target retaining a
copy of the written agreement; and (iii) the S corporation target attaching the § 336(e)
PLR-126678-18                                  3

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. 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.

       The time for filing the Election Statement is fixed by the regulations (§ 1.336-
2(h)(3)(iii)). Therefore, the Commissioner has discretionary authority under § 301.9100-
3 to grant an extension of time to file the Election Statement, provided the taxpayers
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 interest of the government.

       Information, affidavits, and representations submitted by New Target, Purchaser,
Selling Shareholders, Company Official, and Tax Professional explain the
circumstances that resulted in the failure to timely file the Election Statement. The
information establishes that the taxpayers reasonably relied on a qualified tax
professional who failed to file, or advise them to timely file, the Election Statement, and
that the request for relief was filed before the failure to timely file the Election Statement
was discovered by the Internal Revenue Service. Sections 301.9100-3(b)(1)(i) and (v).

       Based on the facts and information submitted, including the affidavits submitted
and the representations made, we conclude that the taxpayers have shown they acted
reasonably and in good faith, that the requirements of §§ 301.9100-1 and 301.9100-3
are satisfied, and that granting relief will not prejudice the interests of the Government.
Accordingly, we grant an extension of time under § 301.9100-3, until 45 days from the
date on this letter, for New Target to file the Election Statement with respect to the
Disposition.

       WITHIN 45 DAYS OF THE DATE ON THIS LETTER, New Target, as successor
to Old Target, must file the Election Statement in accordance with § 1.336-2(h). The
Election Statement must be attached to Old Target’s tax return for the taxable year that
includes Date 1. In addition, a copy of this letter must be attached to Old Target’s tax
return. Alternatively, if the Old Target return is filed electronically, the requirement of
attaching a copy of this letter to the return may be satisfied by attaching a statement to
PLR-126678-18                                 4

the return that provides the date on and control number (PLR-126678-18) 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 § 336(e) 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 New Target, Old Target,
Purchaser, and Selling Shareholders’ tax liabilities (if any) being not lower, in the
aggregate, for all years to which the § 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 their 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” under § 1.336-1(b)(6); or (2) any other tax consequences arising from
the § 336(e) election.

        In addition, we express no opinion as to the tax consequences of filing the return
or the Election Statement late under the provisions of any other sections of the Code
and regulations, or as to the tax treatment of any conditions existing at the time of, or
resulting from, filing the Election Statement 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 New Target, Purchaser, Selling
Shareholders, 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 Election Statement, 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.
PLR-126678-18                                  5

         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
                                       Senior Technician Reviewer, Branch 3
                                       Office of Associate Chief Counsel (Corporate)



cc: