Late-election relief to treat an S corporation stock sale as an asset sale under section 336(e)

Plain-English summary

When someone buys all the stock of an S corporation, the buyer and the selling shareholders can jointly elect under section 336(e) to treat the deal as if the company had sold its assets instead of its stock. That election can change the tax results, but it has to be made on time, by a written agreement and a statement attached to the target's tax return. Here the parties intended to make the election but their tax professional never filed the required statement, and they only sought relief after the fact. The parties asked the IRS for an extension of time under the "9100 relief" regulations (Treas. Reg. § 301.9100-3). The IRS agreed, finding the parties acted reasonably and in good faith and that granting relief would not hurt the government, and it gave them 75 days from the letter date to file the election statement. The IRS did not rule on whether the deal actually qualified as a "qualified stock disposition" or on any other tax consequences.

Ruling snapshot

• Question: Should the IRS grant an extension of time to file the section 336(e) election statement for a stock sale the parties meant to treat as an asset sale?
• Outcome: Approved (extension of 75 days from the letter date granted).
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h)(3); Treas. Reg. §§ 301.9100-1 through 301.9100-3.

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202309011                                             Third Party Communication: None
 Release Date: 3/3/2023                                        Date of Communication: Not Applicable
 Index Number: 9100.22-00, 336.05-00
                                                               Person To Contact:
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                                                               Refer Reply To:
                                                               CC:CORP:B03
                                                               PLR-115617-22
                                                               Date:
                                                               December 07, 2022


Legend


 S Corporation Target              =     -------------------------------------------------------------------------
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 Shareholders                      =     -------------------------------------------------------------------------
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 Purchaser                         =     -----------------------

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

 Company Official                  =     -------------------------------------------------------------------------
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 Tax Professional                  =     -------------------------------------------------------------------------
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Dear -----------:

This letter responds to a letter dated August 11, 2022, submitted on behalf of S
Corporation Target, Shareholders, and Purchaser (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 file an
election statement under §1.336-2(h)(3)(iii) of the Income Tax Regulations ("Election
Statement") with respect to Purchaser's acquisition of all the stock of S Corporation
Target from Shareholders on Date 1. The material information submitted is summarized
below.

On Date 1, Purchaser, an individual, acquired all the stock of S Corporation Target from
Shareholders (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 election was not made. Subsequently, a 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 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 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 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 timely file
the Election Statement. The information establishes that the Parties reasonably relied
on a qualified tax professional who failed to timely file, or to advise them to timely file,
the Election Statement, and the request for relief was filed before the failure to 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 file the Election Statement
with respect to the Stock Disposition.

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.
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-115617-22) 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
such liabilities 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 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 Stock 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) 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
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.

Pursuant to the Power of Attorney on file in 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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