IRS Grants Extension for Section 362(e)(2)(C) Election in PLR-114534-25

IRS Grants Relief for Late Section 362(e)(2)(C) Election in Property Transfer

The IRS granted a 75-day extension to a taxpayer and transferee for entering into a binding agreement and filing an election statement under Section 362(e)(2)(C), which governs basis adjustments in tax-free corporate formations. The taxpayer requested relief under §§301.9100-1 and 301.9100-3, which allow extensions for late regulatory elections when the taxpayer acted reasonably and in good faith. After reviewing the circumstances, the IRS concluded that the taxpayer met these standards and would not prejudice the government’s interests. The relief is conditioned on the parties finalizing the election within 75 days of the IRS’s letter, though the ruling remains non-precedential.

The Question: What Did the Taxpayer Request?

The taxpayer sought relief under §§301.9100-1 and 301.9100-3 for a late §362(e)(2)(C) election in a Section 351(a) transaction. Under Section 351(a), a taxpayer can transfer property to a corporation in exchange for stock without immediate tax recognition, provided the transferors control the corporation after the exchange. However, if the aggregate adjusted basis of the transferred property exceeds its fair market value (FMV) at the time of transfer, Section 362(e)(2)(A) generally limits the corporation’s basis in the property to its FMV, preventing built-in gain from being carried over.

To avoid this default rule, Section 362(e)(2)(C) allows the transferor and transferee to make a joint election to instead reduce the transferor’s basis in the stock received to FMV, while the corporation retains its carryover basis in the property. This election must be made in a Binding Agreement before filing a Section 362(e)(2)(C) Statement with the transferor’s timely filed tax return. The taxpayer and transferee failed to enter into the required Binding Agreement and file the election statement on time, prompting the request for an extension under §301.9100-3.

The Facts: Why Did the Taxpayer Miss the Deadline?

The taxpayer, transferee, and company officials submitted detailed representations explaining that the failure to make the Section 362(e)(2)(C) election stemmed from an oversight during a corporate restructuring. The transaction involved a transfer of appreciated property to a newly formed corporation in exchange for stock, where the parties intended to elect under Section 362(e)(2)(C) to preserve the transferor’s carryover basis in the stock received. However, the required Binding Agreement was inadvertently omitted from the final transaction documents due to a miscommunication between the taxpayer’s legal counsel and the transferee’s tax advisor.

The request for relief under §301.9100-3 was filed promptly—before the IRS discovered the failure—demonstrating the taxpayer’s proactive approach. The taxpayer further represented that no accuracy-related penalties had been or could be imposed, as the oversight was neither willful nor due to negligence but rather an unintended administrative error. The IRS relied on these representations, including the taxpayer’s good-faith efforts to correct the omission, in determining that granting relief would not prejudice the government’s interests.

The Ruling: IRS Grants Extension Under §301.9100-3

The IRS granted the taxpayer’s request for discretionary relief under §301.9100-3, which permits extensions of time for regulatory elections when the taxpayer demonstrates reasonable cause, good faith, and no prejudice to the government. The standards under §301.9100-3(a) require that the taxpayer’s failure to make the election was not willful or due to negligence, that the request was filed promptly—before the IRS discovered the omission—and that granting relief would not undermine the government’s interests. The IRS concluded that the taxpayer met these standards, citing the taxpayer’s proactive disclosure, reliance on professional advice, and the absence of any accuracy-related penalties.

The extension granted allows the taxpayer and transferee 75 days from the date of the ruling to enter into the Binding Agreement and file the §362(e)(2)(C) election statement in compliance with §1.362-4(d). This relief is conditioned on the federal tax liability of any relevant party not being lower, in the aggregate, for all years to which the election applies than it would have been had the election been timely made, accounting for the time value of money. The IRS explicitly declined to opine on the substantive entitlement to the election or the tax consequences of making it late, deferring such determinations to the Director’s office upon audit.

Implications: What Does This Mean for Other Taxpayers?

The IRS’s granting of relief in this PLR underscores the critical importance of timely filing elections under Section 362(e)(2)(C) for taxpayers engaged in Section 351(a) transactions. These transactions—where property is transferred to a corporation in exchange for stock while maintaining control—often hinge on precise timing for elections that determine basis adjustments. Missing the deadline can trigger immediate gain recognition under Section 362(e)(2)(B) and limit the corporation’s future depreciation deductions, making adherence to filing deadlines paramount.

For taxpayers who miss the deadline, Section 301.9100-3 offers a potential lifeline, allowing extensions if the taxpayer acted reasonably and in good faith. This relief is not automatic; it requires demonstrating that the delay was not due to negligence or intentional disregard of the rules. The IRS’s willingness to grant such relief in this case signals that professional reliance or unforeseen circumstances may justify an extension, but taxpayers should not assume leniency without robust documentation.

However, this PLR is non-precedential under Section 6110(k)(3), meaning it cannot be cited as binding authority in other cases. Taxpayers must still attach a copy of the ruling—or a statement referencing its control number—to any relevant tax return to comply with IRS requirements. This underscores the need for meticulous record-keeping and proactive filing strategies.

Critically, the IRS’s decision does not absolve taxpayers of penalties and interest that may accrue due to late filings. Even with an approved extension, interest continues to accrue on unpaid tax liabilities, and penalties may apply if the delay results in underpayment. This serves as a stark reminder that proactive planning and timely compliance are essential to avoid costly consequences.

Taxpayers in similar situations should consult tax professionals to assess their eligibility for relief under Section 301.9100-3 and to ensure all procedural requirements are met. The IRS’s decision here provides a roadmap for navigating late elections, but it also highlights the risks of missing deadlines—risks that can only be mitigated through careful planning and expert guidance.