Buyers and seller of an S corporation get extra time to make the section 336(e) election that treats a stock sale as an asset sale

Plain-English summary

When someone buys the stock of a corporation, the tax law normally treats it as a purchase of stock. But a section 336(e) election lets the parties treat a qualifying stock sale as if the corporation had instead sold all of its assets, which usually gives the buyer a stepped-up tax basis in those assets. For an S corporation, that election is made by the shareholders and the company signing a binding written agreement and attaching an election statement to the company's tax return, all by the return's due date. Here the seller sold all of an S corporation's stock to buyers in a deal that qualified as a "qualified stock disposition," and everyone intended to treat it as an asset sale, but the section 336(e) election was not made on time. The parties asked the IRS for a late-election extension under Treasury Regulation section 301.9100-3. Because the deadline is set by regulation and the parties reasonably relied on a tax professional who failed to make the election (and asked for relief before the IRS caught the lapse), the IRS granted an extension: 75 days to sign the agreement and file the election statement, and 150 days to file or amend all returns consistently. The relief is conditioned on the parties' total tax liability not being lower than if the election had been timely made (accounting for the time value of money), and the IRS expressed no opinion on whether the sale actually qualifies or on the resulting tax consequences.

Ruling snapshot

• Question: Should the parties to an S corporation stock sale get an extension of time to sign the agreement and file the statement needed to make a section 336(e) election (treating the stock sale as an asset sale)?
• Outcome: approved (extension under Treas. Reg. § 301.9100-3: 75 days to execute the agreement and file the election statement; 150 days to conform all returns; conditioned on no reduction in aggregate tax liability)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1(b)(6), 1.336-2(h)(3), 301.9100-1 through 301.9100-3 (including the reliance-on-a-tax-professional standard in 301.9100-3(b)(1))

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202242005                                             Third Party Communication: None
 Release Date: 10/21/2022                                      Date of Communication: Not Applicable
 Index Numbers: 9100.22-00, 336.05-00
                                                               Person To Contact:
 -----------------------------------------------               ------------------, ID No. -----------------
 -----------------------------------                           Telephone Number:
 ----------------------------                                  --------------------
 --------------------------------                              Refer Reply To:
                                                               CC:CORP:B01
                                                               PLR-104963-22
                                                               Date:
                                                               July 27, 2022




Legend

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

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

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

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

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

Tax Professionals                  =        -----------------------------------
                                            -------------------------

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


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

This letter responds to a letter dated February 25, 2022, submitted on behalf of S
Corporation Target, Purchasers, and Shareholder (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 the election statement under §1.336-
PLR-104963-22                                  2

2(h)(3)(iii) (the "Election Statement") with respect to Purchasers' acquisition of all of the
stock of S Corporation Target from Shareholder on Date 1. The material information
submitted is summarized below.

On Date 1, Shareholder sold all the stock of S Corporation Target to Purchasers (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, this 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.

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).
PLR-104963-22                                  3

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 would 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 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 make, or
advise them to make, the Election, and 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) 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 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, (a) S Corporation Target and
Shareholder must enter into a written, binding agreement to make the section 336(e)
election, and (b) 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's return is filed electronically, the requirement of attaching a copy of this letter to
the return may be satisfied by attaching a statement that provides the date on, and
control number (PLR-104963-22) 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 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 liability (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 parties' tax liability 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.
PLR-104963-22                                  4

We express no opinion as to whether the Stock Disposition qualifies as a "qualified
stock 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) 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 enter into
the Agreement and file the Election Statement, penalties and interest that would
otherwise be applicable, if any, continue to apply.

This letter 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, copies of this letter are
being sent to your authorized representatives.

                                        Sincerely,


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




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