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

IRS Allows Late Election to Treat Stock Sale as Asset Sale for S Corporation

The IRS granted a discretionary extension under § 301.9100-3 to a taxpayer who missed the 60-day deadline to file a § 336(e) election, allowing a stock sale to be treated as an asset sale for tax purposes. The relief permits the taxpayer to file the election statement within 60 days of the ruling date, provided the transaction qualified as a qualified stock disposition (QSD) under § 1.336-1(b)(6). This non-precedential ruling underscores the IRS’s willingness to grant relief for reasonable reliance on professional advice when no prejudice to the government exists.

The Taxpayer's Dilemma: A Missed Election Deadline

On Date 1, the purchasers acquired more than 80% of the stock of S Corporation Target from its shareholders in a single transaction, qualifying as a qualified stock disposition (QSD) under § 1.336-1(b)(6). The parties intended to treat the sale as an asset sale for tax purposes, leveraging the benefits of a § 336(e) election, which allows a stock sale to be treated as a deemed asset sale. However, despite this intent, the election statement was not filed within the 60-day deadline following the transaction.

The failure to file stemmed from the taxpayers' reliance on a tax professional who either neglected to file the election or failed to advise them of the deadline. The stakes were significant: without the election, the transaction would be treated as a standard stock sale, resulting in capital gain treatment for the shareholders and no step-up in basis for the buyer. In contrast, a successful § 336(e) election would have allowed the target corporation to recognize gain or loss as if it sold its assets, while the buyer would receive a stepped-up basis in those assets—critical for maximizing depreciation and amortization deductions. The missed deadline left the taxpayers facing an unfavorable tax outcome, prompting their request for relief under § 301.9100-3.

IRS Grants Relief: Why the Extension Was Approved

The IRS granted the taxpayers’ request for relief under § 301.9100-3, which permits discretionary extensions for late regulatory elections when three core conditions are met: reasonable cause, good faith, and no prejudice to the government’s interests. The IRS applied these standards strictly, evaluating whether the taxpayers’ failure to file the § 336(e) election was excusable and whether granting relief would undermine tax administration.

The IRS determined that the taxpayers satisfied the reasonable cause requirement because they relied in good faith on a qualified tax professional who failed to file the election or advise them of the deadline. The request for relief was also submitted promptly after discovery of the missed deadline, aligning with the regulation’s emphasis on timeliness in seeking relief. Additionally, the IRS found that granting the extension would not prejudice the government, as the taxpayers represented that their tax liabilities would not be lower in the aggregate than if the election had been timely filed—a condition tied to the relief’s approval.

The extension came with specific conditions to ensure compliance and transparency. The IRS granted a 60-day window from the date of the ruling to file the election statement, which must be attached to the S Corporation Target’s tax return for the year of the transaction. Alternatively, if filed electronically, the taxpayers could satisfy the requirement by including a statement with the ruling’s date and control number. The IRS also imposed a 120-day deadline for all parties to file or amend returns to reflect the election consistently, ensuring no gaps in reporting. These safeguards reflect the IRS’s broader approach to § 301.9100-3 relief: granting extensions only when taxpayers demonstrate both procedural diligence and substantive compliance with tax obligations.

What Taxpayers Must Do Now: Filing Requirements and Deadlines

The IRS’s extension in PLR-115318-25 imposes strict procedural requirements to validate the late § 336(e) election. Within 60 days of the PLR’s date, the S Corporation Target must file an Election Statement under § 1.336-2(h)(3)(iii). This statement must be attached to the target’s tax return for the year of the stock disposition. Additionally, a copy of the PLR must accompany the return; if filed electronically, the taxpayer may satisfy this requirement by including a statement with the ruling’s date and control number (PLR-115318-25).

Beyond the Election Statement, the IRS imposed a 120-day deadline for all relevant parties to file or amend returns to reflect the § 336(e) election consistently. This ensures the transaction is reported uniformly across all affected taxable years, including those prior to the election. Crucially, the extension is conditioned on the aggregate tax liabilities for the years in question not being lower than they would have been had the election been timely filed, accounting for the time value of money.

Failure to comply with these deadlines risks the IRS denying the election retroactively, exposing taxpayers to accuracy-related penalties (20% under § 6662) and potential interest accruals on underpaid taxes. The IRS’s safeguards underscore its broader approach to § 301.9100-3 relief: extensions are granted only when taxpayers demonstrate both procedural diligence and substantive compliance with tax obligations. Taxpayers should prioritize timely filing to avoid these consequences.

Implications for Taxpayers: Lessons from PLR-115318-25

The IRS’s decision in PLR-115318-25 underscores the critical importance of timely filing regulatory elections, particularly under § 301.9100-3, which provides relief for late elections like the § 336(e) deemed asset sale election. Taxpayers who miss deadlines risk denial of the election retroactively, exposing them to accuracy-related penalties (20% under § 6662) and accrued interest on underpaid taxes. The IRS’s willingness to grant relief hinges on whether the taxpayer demonstrates procedural diligence and substantive compliance with tax obligations, as evidenced by the ruling’s reliance on representations from the taxpayer, company officials, and tax professionals.

For tax professionals, this ruling highlights the potential liability for missed deadlines, even when relying on third-party advice. While the IRS verified the taxpayer’s representations, it did not absolve the taxpayer of penalties and interest that may still apply despite the extension. This serves as a cautionary tale: taxpayers remain responsible for ensuring timely compliance, and professionals advising on elections must exercise heightened diligence to avoid exposing clients to penalties.

The IRS’s approach in this PLR reflects its broader stance on § 301.9100-3 relief—extensions are granted only in cases of reasonable cause, where taxpayers act in good faith and without prejudice to the government. However, the non-precedential nature of PLRs means this ruling cannot be cited as authority in other cases. Taxpayers and practitioners should treat it as persuasive guidance only, recognizing that future rulings may differ based on specific facts. The IRS’s explicit disclaimer—that penalties and interest continue to apply—reinforces the need for meticulous adherence to filing deadlines to avoid costly consequences.