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

IRS Allows Late Election for Stock Sale Treated as Asset Disposition

The IRS granted a 60-day extension under §301.9100-3 to a taxpayer who missed the deadline to file a §336(e) election, allowing a stock sale to be treated as an asset disposition. The taxpayer sought relief after acquiring all stock of an S corporation but failing to timely file the election required under §1.336-2(h)(3)(iii). The IRS’s decision hinged on the taxpayer’s reasonable reliance on professional advice and lack of prejudice to government interests. This private letter ruling (PLR-104767-26) is non-precedential but provides insight into the IRS’s leniency for late elections in complex transactions.

The Taxpayer's Dilemma: A Missed Election and Reliance on Professional Advice

On Date 1, the taxpayer acquired all stock of an S corporation in a transaction intended to qualify as a qualified stock disposition under §1.336-1(b)(6), which allows a stock sale to be treated as an asset disposition if certain conditions are met. The parties planned to make a §336(e) election—a regulatory election under Treas. Reg. §1.336-2(h)(3)—to treat the stock sale as an asset sale for tax purposes. However, the taxpayer failed to timely execute the required written agreement or file the Election Statement by the extended due date of the S corporation’s federal income tax return.

The delay stemmed from the taxpayer’s reliance on a tax professional who advised on the transaction but did not inform them of the need to enter into the agreement or file the election. The professional’s oversight was not discovered until after the transaction closed, when the taxpayer reviewed the tax filings. At that point, the taxpayer promptly sought relief under §301.9100-3, representing that no accuracy-related penalties under §6662 had been or could be imposed, and that the IRS had not yet discovered the error. The parties confirmed that the failure to timely file was unintentional and not part of any effort to alter a return position.

IRS Grants Relief: Reasonable Reliance and No Government Prejudice

The IRS exercised its discretion under §301.9100-3 to grant an extension for the late §336(e) election, concluding that the taxpayer’s failure to file timely met the regulatory requirements for relief. Section 301.9100-3 permits the IRS to extend deadlines for regulatory elections when the taxpayer acts reasonably and in good faith, and granting relief does not prejudice the government’s interests.

In this case, the IRS determined that the taxpayer’s reliance on professional advice—combined with the prompt discovery and correction of the oversight—satisfied the "reasonable action" and "good faith" prongs of §301.9100-3. The agency also found no prejudice to its interests, as the taxpayer represented that no accuracy-related penalties under §6662 had been or could be imposed, and the IRS had not yet discovered the error. The IRS’s discretionary authority under §301.9100-3 allows it to weigh these factors flexibly, balancing taxpayer diligence against administrative burdens.

The extension is conditioned on strict compliance with the IRS’s directives. Within 60 days of the PLR’s date, the S Corporation Target and Shareholder must enter into a binding agreement under §1.336-2(h)(3)(i) and file the Election Statement with their tax return for the relevant year, attaching a copy of the PLR (or a statement referencing its control number if filed electronically). Failure to adhere to these requirements voids the relief. Additionally, all affected returns must be filed or amended within 120 days to reflect the election’s tax consequences, with the caveat that no opinion is expressed on the underlying tax liabilities or the election’s validity.

This ruling underscores the IRS’s willingness to grant relief when taxpayers demonstrate reasonable cause and good faith, but it also highlights the procedural rigor required to secure such discretionary leniency. Taxpayers and advisors must treat §301.9100-3 relief as a conditional privilege, not a guaranteed remedy.

What This Ruling Means for Taxpayers and Advisors

This ruling highlights the critical importance of timely §336(e) elections, which must be executed by the extended due date of the seller’s tax return to avoid default treatment as a stock sale. Taxpayers and advisors should treat §301.9100-3 relief as a last-resort safety net, not a substitute for compliance, given the IRS’s strict standards for reasonable reliance and lack of prejudice. The ruling reaffirms that reliance on professional advice alone does not guarantee relief unless the advisor’s failure was unforeseeable and the taxpayer acted in good faith.

For tax professionals, the decision underscores the need to verify all facts and representations with the IRS before submitting a PLR request, as the ruling explicitly warns that the Director will independently confirm essential details. Advisors should also document proactive steps taken to ensure compliance, such as tracking election deadlines and confirming eligibility under §1.336-1(b)(6). The ruling’s non-precedential nature means it offers no protection against penalties or interest if the §336(e) election is ultimately invalid, leaving taxpayers exposed to accuracy-related penalties under §6662 and accruing interest under §6601. Advisors must counsel clients on the ongoing risks of late elections, even when relief is granted, as the IRS retains full audit discretion over tax liabilities.

Key Takeaways: Deadlines, Conditions, and Caveats

The IRS granted relief under §301.9100-3 to allow a late §336(e) election—which treats a stock sale as an asset disposition—only if taxpayers meet strict procedural and substantive conditions. Practitioners must adhere to the following deadlines and requirements:

• 60-day deadline for Agreement and Election Statement: Within 60 days of the PLR date, the S corporation target and shareholders must enter into a written, binding agreement under §1.336-2(h)(3)(i) to make the §336(e) election and file the Election Statement under §1.336-2(h)(3)(iii). The Election Statement must be attached to the target’s timely filed tax return for the year of the disposition.

• 120-day deadline for filing or amending returns: Within 120 days of the PLR date, all parties must file or amend returns to report the transaction consistently with the §336(e) election for the year of the transaction and any affected years.

• Attachment of PLR to return: The PLR (or its control number) must be attached to the S corporation target’s return to substantiate the late election. For electronic filings, a statement with the PLR’s date and control number suffices.

• Condition on tax liabilities not being lower: Relief is conditioned on the aggregate tax liabilities for the years affected by the election not being lower than they would have been if the election had been timely made, accounting for the time value of money.

• No opinion on other tax consequences: The IRS expressed no opinion on whether the stock disposition qualified as a “qualified stock disposition” under §1.336-1(b)(6) or on any other tax consequences arising from the election or its late filing. Taxpayers remain exposed to accuracy-related penalties under §6662 and interest under §6601 if the election is ultimately invalid.