Parties receive extra time to make a section 336(e) election for an S corporation stock sale

Plain-English summary

Shareholders sold all the stock of an S corporation to purchasers and intended the transaction to be treated as an asset sale under section 336(e). The parties did not timely sign the required binding agreement or file the election statement with the S corporation's return. They requested relief before the IRS discovered the missed steps and represented that they were not trying to change a return position exposed to an accuracy-related penalty. The IRS found that the parties acted reasonably and in good faith and that relief would not prejudice the government. It gave them 45 days to execute the agreement and file the election statement, plus 120 days for all relevant parties to file consistent returns. The relief was conditioned on aggregate tax liabilities not being lower than they would have been with a timely election.

Ruling snapshot

• Question: May the parties receive an extension to complete the agreement and filing steps for a section 336(e) election after an S corporation stock sale?
• Outcome: approved (45 days for the election documents and 120 days for consistent returns)
• 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: 202023003                                               Third Party Communication: None
 Release Date: 6/5/2020                                          Date of Communication: Not Applicable
 Index Number: 336.05-00, 9100.22-00
                                                                 Person To Contact:
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                                                                 Refer Reply To:
                                                                 CC:CORP:4
                                                                 PLR-120401-19
                                                                 Date:
                                                                 March 3, 2020




Legend

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


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

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Purchasers                 =         -----------------------
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PLR-120401-19                                             2


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

Company Official =                   -----------------------
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Tax Professionals =                  ----------------------
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Dear ---- ---------:


This letter responds to a letter dated August 13, 2019, submitted on behalf of
Purchasers, S Corporation Target, 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
properly execute the agreement referenced in §1.336-2(h)(3)(i) of the Income Tax
Regulations (the “Agreement”) and to file an election statement under §1.336-2(h)(3)(iii)
(“Election Statement”) with respect to Shareholders’ disposition of all of the stock of S
Corporation Target on Date 1. Additional information was received subsequently. The
material information submitted is summarized below.

On Date 1, Shareholders sold all of the stock of S Corporation Target to Purchasers
(the “Disposition”). It has been represented that the 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 election was not made. Subsequently, the Parties submitted a
request 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 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 at the time
of the request for relief.

PLR-120401-19                                  3

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
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 will not prejudice the interests of the government.

Information, affidavits, and representations submitted by the Parties, Company Official,
and Tax Professionals explain the circumstances that resulted in the failure to enter into
the Agreement and file the Election Statement. The information establishes that the
request for relief was filed before the failure to timely enter into the Agreement and file
the Election Statement was discovered by the Internal Revenue Service. See
§301.9100-3(b)(1)(i).

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

PLR-120401-19                                 4

§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
Shareholders must enter into a written, binding agreement in accordance with §1.336-
2(h)(3)(i) to make the section 336(e) election, and S Corporation Target must file the
Election Statement in accordance with §1.336-2(h)(3)(iii). 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 of (PLR-120401-19), 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: (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 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, making 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 Official, and
Tax Professionals. 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.

PLR-120401-19                                 5


In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.

                                       Sincerely,



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




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