IRS grants late relief to file § 336(e) election statements for two S corporation stock sales

Plain-English summary

A buyer acquired the stock of two S corporations, and the parties wanted to treat those
stock purchases as asset purchases for tax purposes, which a Section 336(e) election
allows for a "qualified stock disposition." Making that election requires the target and all its
shareholders to sign a binding agreement and attach an election statement to a timely filed
return, but here the elections were not fully made on time. The parties asked the IRS for
relief under the Section 301.9100-3 rules, which allow an extension when the taxpayer
acted reasonably and in good faith and relief will not prejudice the government. The IRS
granted the extension: the successor LLCs must file the election statements within 75 days
and all parties must file or amend returns consistently within 150 days. The IRS expressed
no opinion on whether the deals actually qualify or on the resulting tax liabilities, and noted
any otherwise-applicable penalties and interest still apply.

Ruling snapshot

• Question: Should the parties get a § 301.9100-3 extension to file late § 336(e) election statements for two qualified stock dispositions?
• Outcome: Approved (75-day extension to file; 150 days to conform returns)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h), 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202215013                                              Third Party Communication: None
 Release Date: 4/15/2022                                        Date of Communication: Not Applicable
 Index Number: 336.05-00, 9100.22-00
                                                                Person To Contact:
 --------------------------------                               --------------------, ID No. -----------------
 -----------------------                                        Telephone Number:
 ------------------------                                       --------------------
 -----------------------------                                  Refer Reply To:
                                                                CC:CORP:BO2
                                                                PLR-117361-21
                                                                Date:
                                                                January 20, 2022




Legend

LLC 1                               =        --------------------------------------
                                             ------------------------------------------------------------------------
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S Corporation Target 1              =        --------------------------------------
                                             -----------------------

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

S Corporation Target 2              =        ----------------------
                                             ----------------------

Purchaser                           =        --------------------------------
                                             ------------------------------------
                                             -----------------------

Entity                              =        ---------------------------

Shareholders 1                      =        ------------------------------------------------------
                                             -------------------------------------------------------
                                             ----------------------------------------------------------
                                             -----------------------
                                             --------------------
                                             ---------------------------------------------
                                             ------------------
                                             -------------------------------
PLR-117361-21                                      2

                                   --------------------
                                   --------------------------------------------
                                   --------------------
                                   --------------
                                   ------------------------------------

Shareholders 2              =      ------------------
                                   --------------------
                                   --------------------
                                   ------------------------------
                                   ------------------
                                   -------------------------------
                                   -------------------------------------------------------
                                   --------------------
                                   ---------------------------------------------
                                   -----------------------
                                   --------------------
                                   -----------------

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

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

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

%X                          =      -------------------------------------

Company Official 1          =      ----------------------------------------
                                   --------------------------------------

Company Official 2          =      ----------------------------------------
                                   ----------------------

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

This letter responds to a letter dated August 27, 2021, submitted on behalf of LLC 1 (as
successor of S Corporation Target 1), LLC 2 (as successor of S Corporation Target 2),
Purchaser, Entity, Shareholders 1, and Shareholders 2 (the "Parties") requesting an
extension of time under §301.9100-3 of the Procedure and Administration Regulations
to file respective elections. The Parties are requesting extensions of time to file the
election statement under §1.336-2(h)(3)(iii) (the "Election Statement") with respect to (i)
Purchaser's (through Entity) acquisition of all the stock of S Corporation Target 1 from
Shareholders 1 on Date 1, and with respect to (ii) Purchaser's (through Entity)
acquisition of %X of the stock of S Corporation Target 2 from the majority of
Shareholders 2 on Date 1. The material information submitted is summarized below.
PLR-117361-21                                  3


S Corporation Target 1 and S Corporation Target 2 each was a State A corporation that
elected to be treated as an S corporation for federal income tax purposes. S
Corporation Target 1 was owned by Shareholders 1 and S Corporation Target 2 was
owned by Shareholders 2. Immediately prior to Date 1, Purchaser was a partnership for
federal income tax purposes. On Date 1, Purchaser (through Entity, then a disregarded
entity for federal income tax purposes) acquired all the stock of S Corporation Target 1
from Shareholders 1 ("Disposition 1") and %X (more than 80%) of the stock of S
Corporation Target 2 from the majority of Shareholders 2 ("Disposition 2"). It has been
represented that Disposition 1 and Disposition 2 each qualified as a "qualified stock
disposition" as defined in §1.336-1(b)(6). Subsequently, S Corporation Target 1 and S
Corporation Target 2 each converted to a limited liability company under the laws of
State B (respectively, "LLC 1" and "LLC 2") and LLC 1 became a disregarded entity for
federal income tax purposes and LLC 2 became a partnership for federal income tax
purposes. In addition, Entity became a partnership for federal income tax purposes.

The Parties intended to make a section 336(e) election for each of Disposition 1 and
Disposition 2 but, for various reasons, timely elections were not fully made.
Subsequently, this request was submitted, under §301.9100-3, for an extension of time
to file the respective Election Statements. 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.

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.
PLR-117361-21                                 4

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 filing the Election Statement is fixed by the regulations (i.e., §1.336-
2(h)(3)(iii)). Therefore, the Commissioner has discretionary authority under §301.9100-3
to grant an extension of time to file the respective Election Statements, 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 1, and Company Official 2 explain the circumstances that resulted in
the failure to timely file the respective Election Statements. The information establishes
that the request for relief was filed before the failure to file the respective Election
Statements 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 file the respective Election
Statements.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, LLC 1, as successor of S
Corporation Target 1, and LLC 2, as successor of S Corporation Target 2, must each
file the Election Statement in accordance with §1.336-2(h)(3)(iii). The Election
Statement for Disposition 1 must be attached to the tax return for S Corporation Target
1 for the taxable year including Date 1 and the Election Statement for Disposition 2
must be attached to the tax return for S Corporation Target 2 for the taxable year
including Date 1. In addition, a copy of this letter must be attached to each of the returns
for S Corporation Target 1 and S Corporation Target 2. Alternatively, if S Corporation
Target 1 or S Corporation Target 2 files its return electronically, the requirement of
attaching a copy of this letter to the return may be satisfied by attaching a statement to
the return that provides the date on, and control number (PLR-117361-21) of, 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
Disposition 1 and Disposition 2 consistently with the making of a section 336(e) election
for the respective taxable year in which Disposition 1 and Disposition 2 was
consummated (and for any other affected taxable year).
PLR-117361-21                                  5

The above extension of time is conditioned on the Parties' tax liabilities (if any) being not
lower, in the aggregate, for all years to which the respective section 336(e) elections
apply than it would have been if the respective Election Statements 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 Disposition 1 or Disposition 2 qualifies as a
"qualified stock disposition"; or (2) any other tax consequences arising from the section
336(e) elections.

In addition, we express no opinion as to the tax consequences of filing the returns or
making the section 336(e) elections 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) elections 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 1,
and Company Official 2. 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) elections, 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.

Pursuant to the Power of Attorney on file with this office, a copy of this letter is being
sent to your authorized representatives.

                                        Sincerely,



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



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