IRS grants extra time to file a late section 336(e) election on an S corporation stock sale

Plain-English summary

A partnership bought all the stock of an S corporation from its shareholders.
The buyers and sellers wanted the deal treated for tax purposes as if the
company had sold its assets rather than its stock, a choice available through a
"section 336(e) election." That election has strict paperwork: a binding
written agreement among all the S corporation's shareholders plus an election
statement attached to a timely filed return. The parties intended to make the
election but did not complete it on time, blaming reliance on their tax
professional. They asked for "9100 relief," a discretionary extension under
Treas. Reg. § 301.9100-3. The IRS granted it. The parties had acted reasonably
and in good faith, they caught the problem before the IRS did, and relief would
not prejudice the government (their combined tax could not end up lower than if
the election had been timely filed). They get 75 days to file the election
statement and 150 days to conform all affected returns. The IRS expressly did
not rule on whether the sale actually qualified for the election or on any
resulting tax.

Ruling snapshot

• Question: May the parties get a late extension under Treas. Reg.
  § 301.9100-3 to file the section 336(e) election statement for an S
  corporation stock sale they intended, but failed, to elect on time?
• Outcome: Approved. Extension granted (75 days to file the statement,
  150 days to conform returns), conditioned on no aggregate reduction in tax.
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1, 1.336-2(h),
  301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202322016 Third Party Communication: None
Release Date: 6/2/2023 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:1
PLR-122143-22
Date:
March 09, 2023

Legend

LLC = ----------------------------------------------------------------------------------
---------------------

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

Shareholders = --------------------------------------------------------

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

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

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

Tax Professional = ----------------------------------------------------------------------------------
---------------------------------------------

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

This letter responds to a letter dated November 1, 2022, submitted on behalf of LLC (as
successor 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 the election statement under §1.336-2(h)(3)(iii) ("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, a limited liability company classified as a partnership for federal
income tax purposes, 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). Subsequently, S
Corporation Target converted to a limited liability company ("LLC"). LLC is a
disregarded entity for federal income tax purposes, whose sole owner is Purchaser.

The Parties intended to make a section 336(e) election for the Stock Disposition but, for
various reasons, a timely election was not fully 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 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 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.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, LLC, as successor of 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 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-122143-22) 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 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) 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 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 with this office, a copy of this letter is being
sent to your authorized representative.

                                   Sincerely,


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

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