Parties receive late-election relief to treat an S corporation stock sale as an asset sale

Plain-English summary

A purchaser acquired all the stock of an S corporation, and the parties
intended to elect under IRC § 336(e) to treat the stock sale as an asset sale.
They did not timely execute the required written agreement or attach the
election statement to the S corporation's return. The IRS found that the
parties acted reasonably and in good faith and that relief would not prejudice
the government. It gave them 75 days to execute the agreement and file the
election statement, and 150 days for all relevant parties to file consistent
returns or amended returns. Relief is conditioned on aggregate tax liabilities
not being lower than they would have been with a timely election, taking the
time value of money into account. The IRS did not decide whether the sale was
a qualified stock disposition or address other consequences of the election.

Ruling snapshot

• Question: May the parties receive extra time to complete and file a
  § 336(e) election for an S corporation stock disposition?
• Outcome: Approved, subject to 75-day and 150-day compliance deadlines
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1(b)(6),
  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: 202042006 Third Party Communication: None
Release Date: 10/16/2020 Date of Communication: Not Applicable
Index Number: 336.00-00, 336.05-00,
9100.00-00, 9100.22-00 Person To Contact:
--------------------------, ID No. ----------------
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-------------------------------------------- Telephone Number:
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----------------------------- Refer Reply To:
CC:CORP:1
PLR-103373-20
Date:
July 23, 2020

Legend

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

Shareholder = -------------------------------

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

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

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

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

This letter responds to a letter dated December 30, 2019, submitted on behalf of S
Corporation, Purchaser, and Shareholder (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 file
the election statement under §1.336-2(h)(3)(iii) (the “Election Statement”) with respect
to Purchaser's acquisition of all the stock of S Corporation from Shareholder on Date 1.
The material information submitted is summarized below.
PLR-103373-20 2

On Date 1, Purchaser acquired all the stock of S Corporation, a corporation that elected
to be treated as an S corporation for federal income tax purposes, from Shareholder
(the “Disposition”). It has been represented that the Disposition qualified as a "qualified
stock disposition" as defined in §1.336-1(b)(6).

It was 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 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.

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
PLR-103373-20 3

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 Professional 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
§301.9100-3, until 75 days from the date on this letter, to enter into the Agreement and
file the Election Statement.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, S Corporation and Shareholder
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 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 of (PLR-103373-20), this letter ruling.

WITHIN 150 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 such liabilities 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 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, making the section 336(e) election late that are not specifically set
PLR-103373-20 4

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 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,



                                            Thomas I. Russell
                                            Chief, Branch 1
                                            Office of Associate Chief Counsel (Corporate)

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