IRS Grants Extension for Late Section 336(e) Election in S Corporation Stock Disposition

IRS Grants Relief for Late Section 336(e) Election in $X Million Stock Deal

The IRS granted a 75-day extension to an S corporation that missed the deadline to file a § 336(e) election for a $X million stock sale, treating the transaction as an asset sale for tax purposes. The agency approved the late election after the taxpayer demonstrated that a tax professional’s oversight—rather than willful neglect—caused the delay. The decision hinges on the taxpayer’s reliance on professional advice, a factor that swayed the IRS to exercise discretion under § 301.9100-3.

The $X Million Mistake: How a Tax Professional’s Oversight Led to a Late Election

The deal began when Seller, a 90% shareholder of State A S Corporation, agreed to sell all of its shares to Purchaser for $X million. Minority Shareholder retained the remaining 10%. All parties—including the S corporation itself—intended to treat the transaction as an asset sale for tax purposes by making a § 336(e) election. Under § 336(e), a stock sale can be treated as an asset sale if the parties file a binding election statement with their tax returns, allowing the buyer to receive a stepped-up basis in the acquired assets.

However, the tax professional retained to handle the election failed to timely execute the agreement or file the required election statement. The oversight went unnoticed until after the filing deadline had passed. The taxpayer’s reliance on the tax professional’s expertise became the decisive factor in the IRS’s later decision to grant relief, as the mistake stemmed from professional error rather than willful neglect.

Section 336(e) Elections: What Went Wrong and Why It Matters

A § 336(e) election allows a stock sale to be treated as an asset sale for tax purposes—but only if the transaction qualifies as a qualified stock disposition and the election is filed correctly.

Under § 1.336-1(b)(6), a qualified stock disposition requires selling at least 80% of a corporation’s voting power and value within a 12-month period. For S corporations, this election is particularly valuable because it lets the buyer claim a stepped-up basis in the acquired assets, enabling faster depreciation or amortization deductions. Without the election, the buyer inherits the seller’s historical tax basis in the stock, limiting future tax benefits.

The election itself must be executed precisely. § 1.336-2(h)(3) requires three steps: (1) all shareholders and the S corporation must enter a written agreement before the tax return due date (including extensions), (2) the corporation must retain a copy of that agreement, and (3) the election statement must be attached to the corporation’s timely filed tax return. Missing the deadline—even by a day—invalidates the election unless the IRS grants relief.

In this case, the tax professional’s failure to file the election on time transformed what should have been a tax-neutral asset sale into a costly stock transaction. The buyer lost the ability to step up the basis in the acquired assets, increasing future taxable income. For the seller, the election’s absence meant forgoing potential tax deferrals or installment sale benefits that often accompany asset dispositions. The IRS’s decision to grant relief hinged on the taxpayer’s reliance on professional oversight—a rare exception to the strict filing rules.

IRS Discretion: Why the Taxpayer’s Reliance on a Professional Won the Day

The IRS granted relief under § 301.9100-3, which permits discretionary extensions for late regulatory elections when three conditions are met: the taxpayer acted reasonably and in good faith, and granting relief would not prejudice the government’s interests. The taxpayer’s reliance on a tax professional—who failed to file the § 336(e) election on time—satisfied these standards.

Key to the IRS’s decision were the parties’ representations: they relied in good faith on the tax advisor’s oversight, filed the relief request promptly after discovering the error, and demonstrated no intent to avoid tax liabilities. The IRS emphasized that the 75-day deadline for the extended election (measured from the ruling date) preserved the government’s ability to assess any potential tax impact, while the election itself imposed no reduction in tax liabilities—only restoring the intended tax treatment.

This case underscores the IRS’s willingness to exercise discretion when taxpayers demonstrate reasonable cause, particularly where professional reliance is well-documented. For other taxpayers, it signals that late election relief is possible but hinges on timely requests, clear evidence of good faith, and no prejudice to the government—a narrow but critical path to compliance.

What’s Next: Deadlines, Conditions, and Unresolved Questions

The IRS granted relief under § 301.9100-3, which allows discretionary extensions for late regulatory elections, but imposed strict deadlines and conditions. Within 75 days of the date of this letter, the S corporation must file the Section 336(e) agreement in accordance with § 1.336-2(h)(3)(i) and the Election Statement under § 1.336-2(h)(3)(iii). The Election Statement must be attached to the S corporation’s tax return for the taxable year that includes the disposition date. If the return is filed electronically, the taxpayer may satisfy the requirement by attaching a statement to the return that includes the date and control number of this ruling.

Within 150 days of the date of this letter, all relevant parties must file or amend their returns to reflect the transaction consistently with the Section 336(e) election for the taxable year in which the transaction was consummated and any other affected taxable year. The relief is conditioned on the aggregate tax liabilities for all years to which the election applies not being lower than they would have been if the election had been timely filed, taking into account the time value of money. However, the IRS made clear that it expressed no opinion on whether the disposition qualifies as a “qualified stock disposition” under § 1.336-1(b)(6) or any other tax consequences arising from the election.

The IRS also declined to rule on the tax consequences of filing the return or making the election late under other sections of the Code, or on the tax treatment of conditions existing at the time of or resulting from the late filing. For purposes of granting relief, the IRS relied on statements and representations made by the parties, but cautioned that the Director should verify all essential facts. Critically, even if relief is granted, penalties and interest that would otherwise apply continue to accrue. The ruling is non-precedential, and taxpayers should not rely on it as authority in other contexts.

Implications: What This Ruling Means for S Corporations and Tax Professionals

The IRS’s decision to grant late relief under § 301.9100-3 for a missed § 336(e) election underscores the critical importance of timely compliance while also highlighting the IRS’s willingness to exercise discretion when taxpayers demonstrate reasonable cause. For S corporations, this ruling reinforces the need for meticulous election procedures, as a late filing can expose shareholders to unexpected tax liabilities—particularly if the corporation was previously a C corporation and subject to the § 1374 built-in gains (BIG) tax. The IRS’s reliance on the taxpayer’s representation of professional oversight as a basis for relief suggests that documented reliance on tax advisors may serve as a viable path to relief, but only if the facts support a good-faith effort to comply.

For tax professionals, the case serves as a cautionary tale about the risks of deadline failures. The ruling implies that while the IRS may grant relief for late elections under § 301.9100-3, it expects clear evidence of due diligence—such as contemporaneous communications with clients or documented advice—rather than post-hoc justifications. Professionals must treat § 336(e) elections as non-negotiable deadlines, particularly in high-stakes transactions where the buyer’s stepped-up basis hinges on proper execution. The IRS’s warning that penalties and interest continue to accrue even if relief is granted further emphasizes the financial stakes of missing deadlines.

In mergers and acquisitions, the ruling highlights the need for rigorous due diligence in structuring stock deals. Buyers and sellers must verify that all elections—including § 336(e)—are properly filed before closing, as late elections can derail tax planning strategies that rely on asset-step-up treatment. The non-precedential nature of the ruling, however, means that taxpayers cannot assume similar relief will be granted in future cases without substantive evidence of reasonable cause.

Ultimately, this PLR serves as a reminder that while the IRS may show leniency in exceptional circumstances, proactive compliance remains the safest path. Taxpayers and their advisors should consult qualified professionals to assess the risks of late elections and explore protective filings when deadlines are uncertain. The ruling does not alter the law but signals that the IRS’s discretion under § 301.9100-3 is a last resort, not a substitute for timely action.