Buyers and seller of an S corporation get extra time to file the late election that treats their stock purchase as an asset purchase under section 336(e)

Plain-English summary

When someone buys all the stock of an S corporation, a section 336(e) election lets the parties treat the deal as if the company sold its assets instead of its stock, which usually gives the buyer a stepped-up basis in the assets (bigger future depreciation and amortization deductions). That election has to be made on time by written agreement among all the S corporation shareholders and the target, attached to a timely filed return. Here two individuals bought all the stock of an S corporation through disregarded entities and everyone intended asset-sale treatment, but the required section 336(e) election was never filed on time. The parties asked the IRS for relief under Treasury Regulation section 301.9100-3, which allows a late regulatory election when the taxpayers acted reasonably and in good faith and the government is not prejudiced. The IRS granted the extension: the target must file the election statement within 75 days of the letter, and all parties must file or amend returns within 150 days to report the deal consistently with the election. The relief is conditioned on the parties' total tax not being lower than if they had filed on time (accounting for the time value of money), and the IRS expressly did not opine on whether the sale actually qualifies or on the parties' ultimate tax bills.

Ruling snapshot

• Question: Should the parties get an extension of time under Treas. Reg. § 301.9100-3 to file the late section 336(e) election statement treating an S corporation stock sale as an asset disposition?
• Outcome: Approved (75-day extension to file, 150 days to conform returns; conditioned on no aggregate tax reduction versus timely filing)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h)(3), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202244006 Third Party Communication: None
Release Date: 11/4/2022 Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.22-00,
336.05-00 Person To Contact:
------------------, ID No. -----------------
------------------------- Telephone Number:
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-------------------------------- Refer Reply To:
---------------------------------- CC:CORP:B05
PLR-107047-22
Date:
August 11, 2022

Legend

S Corporation Target = -------------------------------------------------------------------------
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Purchasers = -------------------------------------------------------------------------
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Shareholder = -------------------------------------------------------------------------
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Date 1 = ----------------

Company Official = -------------------------------------------------------------------------
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Dear -------------:

This letter responds to a letter dated March 21, 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 Administrative
Regulations to file an election. The Parties are requesting an extension of time to file an
election statement under §1.336-2(h)(3)(iii) of the Income Tax Regulations ("Election
PLR-107047-22 2

Statement") with respect to Purchasers' acquisition, through disregarded entities, of all
the stock of S Corporation Target from Shareholder on Date 1. The material information
submitted is summarized below.

On Date 1, Purchasers (two individuals) acquired, through entities that were
disregarded for federal tax purposes, all the stock of S Corporation Target from
Shareholder (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 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.

Regulations promulgated under section 336(e) permit certain sales, exchanges or
distributions of stock of a corporation to be treated as an asset disposition 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 for 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-107047-22 3

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 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 and Company
Official explain the circumstances that resulted in the failure to timely file the Election
Statement. The information establishes that the request for relief was filed before the
failure to timely 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 file the Election Statement.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, 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 (PLR-107047-22) 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 the 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 Election Statement had been timely filed (taking into account the
time value of money). No opinion is expressed as to the Parties' 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,
PLR-107047-22 4

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 and Company Official.
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 representatives.

                                        Sincerely,


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

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