Parties receive extra time for a Section 336(e) election

Plain-English summary

A partnership purchaser acquired all the stock of an S corporation from its shareholders in a transaction represented to be a qualified stock disposition. The parties intended to make an IRC § 336(e) election so the stock sale would be treated as an asset disposition, but the required agreement and election statement were not completed on time. They requested relief before the IRS discovered the failure and represented that they were not changing a return position subject to an accuracy-related penalty. The IRS found that they acted reasonably and in good faith and that relief would not prejudice the government. It granted 75 days to execute the agreement and file the election statement, plus 150 days for all relevant parties to file or amend affected returns consistently with the election. Relief was conditioned on aggregate tax liabilities, including the time value of money, not being lower than if the election had been timely made.

Ruling snapshot

• Question: May the parties receive extra time to complete and file the Section 336(e) election documents?
• Outcome: Approved, with 75 days for the agreement and election statement and 150 days for affected 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: 202101004 Third Party Communication: None
Release Date: 1/8/2021 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:04
PLR-111116-20
Date:
October 14, 2020

Legend

Purchaser = -------------------------------------
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S Corporation Target = ------------------------------
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LLC = --------------------------------
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Sellers = --------------------

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

Company Officials = ------------------------------------
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Tax Professional = ---------------------
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PLR-111116-20 2

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

This letter responds to a letter dated April 30, 2020, submitted on behalf of Purchaser, S
Corporation Target, and Sellers (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 Purchaser's acquisition of all of the stock of S Corporation
Target from Sellers on Date 1. Additional information was submitted subsequently. The
material information submitted is summarized below.

On Date 1, Sellers sold all the stock of S Corporation Target to Purchaser, a limited
liability company treated as a partnership for federal income tax purposes (the
“Disposition”). It has been represented that the Disposition qualified as a “qualified
stock disposition” as defined in §1.336-1(b)(6). After the Disposition, S Corporation
Target converted under state law from a corporation to a limited liability company
(“LLC”) that is disregarded for federal income tax purposes.

The Parties intended that a section 336(e) election would be made with respect to the
Disposition. However, for various reasons, the tax return was not timely filed and a
section 336(e) election was not timely 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 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.

PLR-111116-20 3

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 Officials,
and Tax Professional explain the circumstances that resulted in the failure to enter into
the Agreement and file the Election Statement. The information establishes 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 with respect to the Disposition.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, S Corporation Target 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 tax 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-111116-20), this letter ruling.

PLR-111116-20 4

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 tax year in
which the transaction was consummated (and for any other affected tax 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 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 taxpayers 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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