PLR 200049015: Savings bank receives time to complete bad debt accounting method election

Plain-English summary

A savings bank sought to change how it accounted for bad debts, from the specific charge-off method under section 166 to the reserve method under section 593. It missed one requirement of the applicable revenue procedure because of an inadvertent error by its tax return preparer. The IRS granted an extension under the regulatory election relief rules and accepted the bank's Form 3115 as timely filed. The ruling left the bank's aggregate tax liability comparison for the affected years to be determined on audit.

Ruling snapshot

• Question: May the bank complete the missed requirement for its bad debt accounting method election after the deadline?
• Outcome: Approved; its Form 3115 was accepted as timely filed.
• Key authorities: IRC §§ 166, 593, 481(a); Treas. Reg. §§ 301.9100-3, 1.446-1(e)(3)(i); Rev. Proc. 85-8.

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200049015
Release Date: 12/8/2000
Index Nos: 9100.10-01

CC:FIP:B01 - PLR-103862-00

Date:August 30, 2000

Attention:
Taxpayer =
Parent =

Date =

Dear :

This is in reply to a request dated January 20, 2000, submitted on behalf of Taxpayer for an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to complete its compliance with the requirements of Rev. Proc. 85-8, 1985-1 C.B. 495. Rev. Proc. 85-8 provides an exclusive, automatic procedure for financial institutions to follow in changing from the § 166 specific charge-off method for bad debts to the § 593 reserve method of accounting.

Taxpayer is a savings bank that is a member of an affiliated group under § 1504(a) and joins in the filing of a consolidated tax return. Parent is the parent corporation of the affiliated group. Taxpayer used the specific charge-off method under § 166 to account for its bad debts.
In electing to change from the § 166 specific charge-off method to the § 593 reserve method, Taxpayer complied with all but one requirement of Rev. Proc. 85-8. Its failure to comply with this requirement was an inadvertent error of the independent firm that prepared Taxpayer’s federal income tax return. Taxpayer has requested an extension of time under § 301.9100-3 to complete the compliance with Rev. Proc. 85-8.

Section 301.9100-1(c) of the regulations, provides, in part, that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election (defined in section 301.9100-1(b) as an election whose due date is prescribed by regulations or by a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin), or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all - 2 -
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subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Section 301.9100-3(a) through (c)(1)(i) of the regulations sets forth rules that the Internal Revenue Service generally will use to determine whether, under the facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of section 301.9100-2. Section 301.9100-3(b) provides that subject to paragraphs (b)(3)(i) through (iii) of section 301.9100-3, when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the Service, the taxpayer will be deemed to have acted reasonably and in good faith; and section 301.9100-3(c) provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made (taking into account the time value of money).

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory elections. This section provides, in relevant part, that the interests of the government are deemed to be prejudiced by granting an extension of time, except in unusual and compelling circumstances, if the accounting method regulatory election is subject to the procedure described in § 1.446-1(e)(3)(i) (requiring the advance written consent of the Commissioner) or if the accounting method regulatory election for which relief is requested requires an adjustment under § 481(a).

Based on the information provided and the representations made, it is held that Taxpayer is deemed to have acted reasonably and in good faith, and that granting an extension of time to allow Taxpayer to complete its compliance with Rev. Proc 85-8 would not prejudice the interests of the government under the provisions of § 301.9100-3. Accordingly, Taxpayer’s Form 3115 filed on Date 1 with the national office is accepted as timely filed pursuant to the requirements of Rev. Proc 85-8.

No opinion is expressed as to the tax treatment of the transaction under the provisions of any other sections of the Code and regulations, which may be applicable thereto, or the tax treatment of any conditions existing at the time of or effects resulting from the transaction, which are not specifically set forth by the above ruling.

Further, no opinion is expressed as to whether Taxpayer's tax liability is not lower in the aggregate for all years to which the regulatory election applies than Taxpayer's tax liability would have been if the election had been timely made - 3 -
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(taking into account the time value of money). Upon an audit of the federal income tax returns involved, the district director’s office will determine Taxpayer’s tax liability for the years involved. If the district director’s office determines Taxpayer’s liability is lower, that office will determine the federal income tax effect.

A copy of this letter will be forwarded to the District Director.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to Taxpayer’s authorized representatives.

Sincerely yours,
Acting Associate Chief Counsel
(Financial Institutions & Products)

Enclosure:
Copy of this letter
Section 6110 copy