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

IRS Grants Relief for Late §336(e) Election in S Corporation Sale

The IRS granted a 60-day extension under §301.9100-3 to a taxpayer seeking to file a late §336(e) election, allowing the deemed asset sale treatment for a stock disposition of an S corporation. The relief hinged on the taxpayer’s demonstration of reasonable action and good faith, with no prejudice to the government. The stakes were high: without the election, the seller would have faced corporate-level tax on asset appreciation, while the buyer would have lost stepped-up basis in the target’s assets.

The Taxpayer's Dilemma: Why the §336(e) Election Was Late

On Date 1, an individual purchaser acquired all of the stock of S Corporation Target from its shareholder in a single transaction. The parties represented that this stock disposition qualified as a "qualified stock disposition" (QSD) under Section 1.336-1(b)(6), meaning the seller disposed of at least 80% of the target’s voting power and value within a 12-month period. A QSD is a critical threshold because it allows the parties to elect under Section 336(e) to treat the stock sale as an asset sale for tax purposes, unlocking stepped-up basis benefits for the buyer.

The §336(e) election had to be made by the due date of the target’s federal income tax return for the year that included the stock disposition date—including any extensions. Despite the parties’ intent to make the election, they missed this deadline for various reasons. The election requires three key steps under Section 1.336-2(h)(3): (1) all S corporation shareholders and the target must enter into a written, binding agreement to make the election by the deadline; (2) the target must retain a copy of that agreement; and (3) the target must attach the election statement to its timely filed tax return.

The parties later submitted a ruling request under Section 301.9100-3 seeking a 60-day extension to enter into the election agreement and file the election statement. In their representations, they confirmed that no accuracy-related penalties had been or could be imposed and that the IRS had not yet discovered the failure to timely file. The stakes were significant: without the election, the seller would have faced corporate-level tax on the target’s appreciated assets, while the buyer would have lost the ability to claim higher depreciation and amortization deductions based on a stepped-up basis.

IRS Rationale: Reasonable Action and Good Faith

The IRS granted the extension under Treas. Reg. §301.9100-3, which allows discretionary relief for late elections if the taxpayer demonstrates reasonable action, good faith, and no prejudice to the government. The regulation’s framework requires the taxpayer to prove they acted reasonably in attempting compliance—such as consulting advisors or maintaining records—and that the delay was not willful or intentional.

In this case, the taxpayer’s representations—including confirmations that no accuracy-related penalties had been imposed and that the IRS had not yet discovered the failure—satisfied the IRS’s evidentiary burden. The timing of the request, filed promptly after the oversight was identified, further reinforced the taxpayer’s good faith effort to rectify the error. The IRS exercised its discretionary authority under §301.9100-1(c), concluding that granting relief would not impair its ability to audit or collect tax, as no substantive tax consequences had yet materialized. This aligns with the regulation’s intent to balance taxpayer fairness with government interests.

Conditions and Deadlines: What the Taxpayer Must Do Next

The IRS’s relief comes with strict procedural conditions to ensure compliance. Within 60 days of the PLR’s date, the S Corporation Target and the Shareholder must enter into a written, binding agreement under §1.336-2(h)(3)(i) to make the §336(e) election. Simultaneously, the S Corporation Target must file the Election Statement—a formal declaration of the election—with its tax return for the taxable year including the disposition date. If the return is filed electronically, the taxpayer may satisfy the attachment requirement by including a statement in the return that provides the date and control number (PLR-115998-25) of the PLR.

Additionally, within 120 days of the PLR’s date, all relevant parties must file or amend their tax returns to reflect the §336(e) election for the year of the transaction and any affected subsequent years. This ensures consistency in reporting across all taxpayers involved. A copy of the PLR itself must be attached to the S Corporation Target’s return (or included as a statement in electronic filings), serving as proof of the IRS’s approval for the late election.

Crucially, the extension is conditioned on the aggregate tax liabilities of all parties remaining no lower than they would have been had the election been filed timely. This prevents taxpayers from using the relief to reduce their tax obligations retroactively. The IRS does not opine on the specific tax liabilities, leaving taxpayers to ensure compliance through accurate reporting. Failure to meet these deadlines or conditions could result in the revocation of the relief, leaving the election invalid.

Implications: What This Ruling Means for Other Taxpayers

This ruling underscores that §301.9100-3 relief for late §336(e) elections remains non-precedential, reinforcing the IRS’s longstanding position under §6110(k)(3) that PLRs cannot be cited as precedent. Taxpayers seeking similar relief must still demonstrate reasonable action and good faith, as the IRS’s discretion hinges on whether the late election resulted from circumstances beyond the taxpayer’s control—such as reliance on professional advice or administrative errors—rather than negligence or intentional disregard.

The ruling also highlights the potential financial risks of missing §336(e) deadlines, including penalties and interest that accrue even if relief is granted. While the IRS granted relief here, it emphasized that penalties and interest are not waived, leaving taxpayers exposed to additional costs. For practitioners, this means proactive planning is critical: filing protective elections when timing is uncertain and ensuring all buyer consents are secured before closing.

For industries reliant on §336(e) elections—particularly private equity firms and cross-border M&A transactions—this ruling serves as a reminder of the strict compliance requirements under §1.336-1(b)(6). The IRS’s scrutiny of qualified stock dispositions (QSDs) and FMV allocations suggests that future audits will focus on ownership thresholds, timing, and documentation. Taxpayers should document every step of the election process, from stock transfers to buyer consents, to withstand potential IRS challenges. In cases where deadlines are missed, promptly filing a PLR request with evidence of good faith remains the best path to relief.