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

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

The IRS granted an extension to file a Section 336(e) election after the taxpayer requested relief under Treas. Reg. § 301.9100-3 for a late filing. The agency concluded the parties acted reasonably and in good faith, waiving the late election penalty. The extended deadline to file the election statement is 75 days from the ruling date.

The Deal: S Corporation Stock Sale Intended as Asset Disposition

On Date 1, Purchaser acquired all outstanding stock of S Corporation Target from Seller, a State A corporation that had elected S corporation status for federal income tax purposes. The transaction was structured as a stock sale, but the parties explicitly intended it to be treated as an asset disposition under Section 336(e) of the Internal Revenue Code. This provision allows certain stock sales to be treated as asset sales for tax purposes, aligning the economic outcome with the transaction’s substance.

The sale agreement included a binding written provision requiring both parties to elect under Section 336(e) to treat the stock disposition as if S Corporation Target had sold all its assets in liquidation. However, despite this contractual obligation, the parties failed to file the required Election Statement within the statutory deadline. The late filing triggered a request for relief under Treas. Reg. § 301.9100-3, seeking an extension to cure the procedural defect.

Why the Election Was Late: A Breakdown of the IRS's Reasoning

The parties’ late filing of the Section 336(e) Election Statement stemmed from a procedural oversight despite the binding contractual obligation to make the election. To justify relief under Treas. Reg. § 301.9100-3, the parties submitted detailed representations, affidavits, and a sworn statement from the S Corporation Target’s company official and tax professional explaining the failure to timely file. These submissions documented that the request for relief was filed before the IRS discovered the missed deadline, a critical factor under Treas. Reg. § 301.9100-3(b)(1)(i), which permits relief if the taxpayer acts before the government identifies the error.

The IRS evaluated the request against the three-part standard in Treas. Reg. § 301.9100-3: whether the parties acted (1) reasonably and in good faith, (2) with no prejudice to the government’s interests, and (3) without willful neglect. The submitted evidence demonstrated that the delay resulted from an administrative error—not intentional disregard—satisfying the first requirement. The IRS further concluded that granting relief would not impair its ability to audit or enforce tax compliance, addressing the second prong. Finally, the parties’ proactive filing of the relief request before discovery by the IRS reinforced their good faith, meeting the third condition.

Based on these facts, the IRS ruled that the parties met all Treas. Reg. §§ 301.9100-1 and 301.9100-3 requirements, granting an extension to cure the procedural defect.

What Happens Next: Deadlines and Compliance

The IRS granted relief under Treas. Reg. § 301.9100-3, but the extension comes with strict procedural requirements. Within 75 days of the date on the PLR, the S Corporation Target must file the Election Statement in accordance with Treas. Reg. § 1.336-2(h)(3)(iii). The statement must be attached to the S Corporation Target’s tax return for the taxable year including the transaction date. Alternatively, 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 the PLR.

Within 150 days of the date on the PLR, all relevant parties must file or amend returns to report the transaction consistently with the Section 336(e) election for the taxable year of the transaction and any affected taxable years. The relief is conditioned on the parties’ tax liabilities not being lower in the aggregate than they would have been if the Election Statement had been timely filed, accounting for the time value of money. The IRS explicitly reserved the right to audit and adjust tax liabilities upon review.

Non-compliance with these deadlines or conditions carries consequences. While the IRS granted relief under Treas. Reg. § 301.9100-3, it emphasized that penalties and interest under IRC § 6662 (accuracy-related penalties) and IRC § 6601 (interest on underpayments) continue to apply if the election is filed late or if the tax liabilities are ultimately determined to be lower than they would have been with a timely election. The IRS also declined to opine on whether the stock disposition qualified as a “qualified stock disposition” or any other tax consequences beyond the specific relief granted.

Implications for S Corporations and Tax Practitioners

The IRS’s recent relief for a late Section 336(e) election underscores the critical importance of timely filing for S corporations and their advisors. Section 336(e) allows sellers to treat a stock disposition as an asset sale, but the election must be filed with the seller’s tax return by its due date (including extensions). Failure to meet this deadline risks disqualification, forcing stock sale treatment with potentially unfavorable tax consequences.

Tax practitioners should proactively verify compliance with election deadlines, as relief under Treas. Reg. § 301.9100-3 is not guaranteed. While the IRS may grant discretionary relief if the failure is due to reasonable cause, the ruling makes clear that penalties and interest under IRC § 6662 (accuracy-related penalties) and IRC § 6601 (interest on underpayments) remain applicable. This reinforces the need for robust internal controls to track election deadlines and avoid costly missteps.

However, the ruling’s limitations must be noted. It is non-precedential and cannot be cited as precedent under Section 6110(k)(3), meaning it offers no binding authority for future cases. The IRS also declined to opine on broader tax consequences, such as whether the transaction qualified as a "qualified stock disposition" or other potential liabilities. Practitioners should therefore treat this as a narrow, fact-specific relief rather than a broad endorsement of late elections.

To mitigate risk, tax advisors should adopt best practices for election compliance, including:

• Documenting the 80% threshold for a qualified stock disposition under Treas. Reg. § 1.336-1(b)(6) well in advance of the transaction.
• Integrating election deadlines into tax return preparation timelines, with automated reminders for critical filings.
• Conducting post-transaction reviews to confirm the election was properly attached and filed.
• Consulting the IRS early if a deadline is missed, as proactive requests for relief under Treas. Reg. § 301.9100-3 may improve outcomes.

For S corporations, the stakes are particularly high, as the election’s pass-through nature means shareholders bear the tax consequences of any missteps. Advisors must balance the flexibility of Section 336(e) with the rigor of its procedural requirements, ensuring clients avoid both late filings and the broader tax pitfalls of an invalid election.