Parties received relief to complete a late section 336(e) election

Plain-English summary

Two individuals sold at least 80 percent of an S corporation's stock to a partnership in a transaction represented to be a qualified stock disposition. The parties intended to make a section 336(e) election so the stock disposition would be treated as an asset disposition, but a tax professional failed to advise them to execute the required binding agreement and file the election statement on time. They sought relief before the IRS discovered the failures. The IRS granted 45 days to execute the agreement and attach the election statement to the target's return, plus 120 days for all relevant parties to file consistently. Relief was conditioned on aggregate tax liabilities not being lower than with a timely election.

Ruling snapshot

• Question: Could the parties receive more time to execute the agreement and file the statement required for a section 336(e) election?
• Outcome: Approved, with 45-day and 120-day deadlines and a tax-liability condition.
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h), and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201929002                                             Third Party Communication: None
Release Date: 7/19/2019                                       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:B02
                                                              PLR-104670-19
                                                              Date:
                                                              April 23, 2019

Legend

Purchaser                     =       ------------------------------------------------------------------------------
                                      ------------------------------------------------------------------------------
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Target                        =       ------------------------------------------------------------------------------
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                                      ------------------------------------------------------

Individual 1                  =       ------------------------------------------------------------------------------
                                      -----------------------------------------------

Individual 2                  =       ------------------------------------------------------------------------------
                                      -----------------------------------------------

LLC 1                         =       ------------------------------------------------------------------------------
                                      --------------------------------------------------------

LLC 2                         =       ------------------------------------------------------------------------------
                                      -----------------------------------

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

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

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

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

Date 3                        =       ------------------

PLR-104670-19                                        2

Date 4                       =   -----------------------

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

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

a%                           =   ----------

b%                           =   ------------


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

This letter responds to a letter dated February 28, 2019, submitted on behalf of
Purchaser, Individual 1, Individual 2, and Target (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
properly execute the agreement referenced in § 1.336-2(h)(3)(i) (the “Agreement”) and
for 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 b% of the
stock of Target from Individual 1 and Individual 2 on Date 2. The material information
submitted in the February 28, 2019 letter, and subsequent correspondence dated March
26, 2019, is summarized below.

Until Date 1, Individual 1 and Individual 2 owned all the stock of Target, an S
corporation incorporated in State B. On Date 1, Individual 1 contributed a% of his
interest in Target to LLC 1, a wholly-owned State B limited liability company that is
treated as a disregarded entity for U.S. federal income tax purposes. Also on Date 1,
Individual 2 contributed a% of his interests in Target to LLC 2, a wholly-owned State B
limited liability company that is treated as a disregarded entity for U.S. federal income
tax purposes. The sum of Individual 1’s a% interest and Individual 2’s a% interest in
Target represents no more than 20% of the stock of Target.

On Date 2, Purchaser, a State A limited liability company that is treated as a partnership
for federal income tax purposes, acquired b% (at least 80%) of the stock of Target from
Individual 1 and Individual 2 (the stock they owned directly) in exchange for cash (the
“Disposition”). The Parties have represented that the Disposition qualified as a “qualified
stock disposition” as defined in § 1.336-1(b)(6). As a result of the Disposition, Target
ceased to be an S corporation on the date of the Disposition. On Date 3, LLC 1 and LLC
2 each contributed it’s a% interest in Target to Purchaser in exchange for an interest in
Purchaser.

PLR-104670-19                                 3

The section 336(e) election was due on Date 4. The Parties intended to make a section
336(e) election, 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. The Parties have represented that none of Purchaser, Individual
1, Individual 2, or 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
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 Individual 1, Individual 2,
and Target to enter into the Agreement and for Target 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 would not prejudice the
interests of the government.

PLR-104670-19                                 4

Information, affidavits, and representations submitted by the Parties and Company
Official explain the circumstances that resulted in the failure to timely enter into the
Agreement and to file the Election Statement. The information establishes that the
Parties 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 and 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, to enter into the Agreement and
file the Election Statement with respect to the Disposition.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, Individual 1, Individual 2, , and
Target must enter into a written, binding agreement to make the section 336(e) election,
and Target must file the Election Statement in accordance with § 1.336-2(h). The
Election Statement must be attached to Target's tax return for Year. In addition, a copy
of this letter must be attached to Target's return. Alternatively, if 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-104670-19) 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’ 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,

PLR-104670-19                                  5

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 Parties and Company Official.
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.

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)




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