Parties received time to complete section 336(e) election

Plain-English summary

Purchasers acquired all stock of an S corporation, and the parties intended the sale to be treated as an asset disposition under section 336(e). A tax professional failed to advise them to timely execute the required written agreement and file the election statement. The IRS found reasonable reliance, good faith, and no prejudice to the government, then granted 45 days to execute the agreement and file the statement. All relevant parties also had 120 days to file consistent original or amended returns. Relief was conditioned on aggregate tax liabilities not being lower than with a timely election, and the IRS did not decide whether the transaction was a qualified stock disposition.

Ruling snapshot

• Question: May the parties receive additional time both to execute the section 336(e) agreement and to file the election statement?
• Outcome: approved
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202016010                                            Third Party Communication: None
Release Date: 4/17/2020                                      Date of Communication: Not Applicable
Index Number: 336.00-00, 336.05-00
                                                             Person To Contact:
---------------------------------                            -----------------------, ID No. -------------------
-------------------------------------------------------      ---------------------------------------------------
-------------------------                                    Telephone Number:
------------------------------------                         -------------------
                                                             Refer Reply To:
                                                             CC:CORP:B02
                                                             PLR-117635-19
                                                             Date:
                                                             January 10, 2020

Legend

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

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

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

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

Company                = ------------------------------------------------
Officials

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

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

This letter responds to a letter dated July 24, 2019 submitted on behalf of Purchasers, S
Corporation and Shareholders (collectively, the “Parties”), requesting an extension of
time under §§301.9100-1 through 301.9100-3 of the Procedure and Administrative
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) of the Income Tax
Regulations (the “Agreement”) and to file the election statement described in §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 “Stock Disposition”).

PLR-117635-19                                  2

Additional material was submitted subsequently. The material information submitted is
summarized below.

On Date 1, Purchasers acquired all of the stock of S Corporation from Shareholders
(the “Stock Disposition”). It has been represented that the Stock Disposition qualified as
a “qualified stock disposition” as defined in §1.336-1(b)(6).

The Parties intended for the stock sale to be treated as an asset sale, but for various
reasons, a timely section 336(e) election was not made. Subsequently, a request was
submitted, under §301.9100-3, for an extension of time to enter into the Agreement and
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 an asset disposition 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 for 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

PLR-117635-19                                 3

discretionary authority under §301.9100-3 to grant an extension of time to enter into the
Agreement and 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.

Information, affidavits, and representations submitted by the Parties, Company Officials,
and Tax Professional explain the circumstances that resulted in the failure to timely
enter into the Agreement and 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 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.

WITHIN 45 DAYS OF THE DATE ON THIS LETTER, (a) S Corporation and
Shareholders must enter into a written, binding agreement to make the section 336(e)
election and (b) S Corporation must file the Election Statement in accordance with
§1.336-2(h)(3)(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-117635-19) 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 all relevant 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 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 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 whether the Disposition qualifies as a “qualified stock

PLR-117635-19                                  4

disposition” or 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 Parties, Company Officials, 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.

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,

                                       T. Ian Russell
                                       T. Ian Russell
                                       Chief, Branch 1
                                       Office of Associate Chief Counsel (Corporate)