IRS grants 75 days to make a late § 336(e) election treating an S corporation stock sale as an asset sale

Plain-English summary

When a buyer purchases all the stock of a corporation, a section 336(e) election lets the parties treat the stock sale as if it were a sale of the company's underlying assets, which usually gives the buyer a stepped-up tax basis in those assets. Here the buyer (an LLC taxed as a partnership) bought all the stock of an S corporation from its shareholders in a "qualified stock disposition." The parties intended to make the section 336(e) election but, for various reasons, missed the deadline, which requires both a written binding agreement among the shareholders and the target and an election statement attached to the target's timely filed return. They asked the IRS for an extension under the "9100 relief" regulation (Treas. Reg. § 301.9100-3). The IRS granted it, finding the parties acted reasonably and in good faith, asked for relief before the IRS caught the lapse, and would not gain a tax advantage from the delay. The parties have 75 days to sign the agreement and file the election statement, and 150 days to file or amend all returns to report the deal consistently. The IRS did not decide whether the deal actually qualifies as a qualified stock disposition, and noted that any otherwise-applicable penalties and interest still apply. It matters to buyers and sellers of S corporations who want asset-sale tax treatment but blew the election deadline.

Ruling snapshot

• Question: Should the IRS grant an extension under § 301.9100-3 to make a late § 336(e) election for an S corporation stock disposition?
• Outcome: approved (75 days to sign the agreement and file the election statement; 150 days to conform returns)
• Key authorities: IRC § 336(e); Treas. Reg. §§ 1.336-1(b)(6), 1.336-2(h)(3); Treas. Reg. §§ 301.9100-1, 301.9100-3; IRC § 6662

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

Number: 202336006                                            Third Party Communication: None
Release Date: 9/8/2023                                       Date of Communication: Not Applicable
Index Number: 336.00-00, 336.05-00,
              9100.22-00                                     Person To Contact:
                                                              --------, ID No. ------
                                                              Telephone Number:
                                                              ------
                                                              Refer Reply To:
                                                              CC:CORP:B04
                                                              PLR-101878-23
                                                              Date:
                                                              June 13, 2023

Legend

S Corporation Target               =       ------
Shareholders                       =       ------
Purchaser                          =       ------
Date                               =       ------
Company Official                   =       ------
Tax Professional                   =       ------

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

This letter responds to a letter dated December 15, 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
properly execute the agreement referenced in §1.336-2(h)(3)(i) (the "Agreement") and
for S Corporation Target to file the 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 LLC treated as a partnership for federal income tax purposes,
acquired all the stock of S Corporation Target from Shareholders (the "Disposition"). It
has been represented that the 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 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.

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 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 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
enter into the Agreement and file the Election Statement. The information establishes
that the request for relief was filed before the failure to enter into the Agreement and 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 enter into the Agreement and
file the Election Statement with respect to the Disposition.

WITHIN 75 DAYS OF THE DATE ON THIS LETTER, S Corporation Target and
Shareholders must enter into a written, binding agreement in accordance with §1.336-
2(h)(3)(i) to make the section 336(e) election, and 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-101878-23) 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 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 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 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 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 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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