PLR 200620018: Taxpayer may revise investment income election for dividends

Plain-English summary

A taxpayer used tax software to elect to treat all qualified dividend income as investment income for the investment interest deduction. The software did not calculate or explain the optimal amount to elect, and the taxpayer sought to change the election after filing. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It allowed the taxpayer to revoke the first election and make a new one within 60 days of the ruling by filing revised forms with an amended return.

Ruling snapshot

• Question: Could the taxpayer revoke the original qualified dividend election and make a revised election after the deadline?
• Outcome: Approved; the IRS granted consent to revoke and 60 days to make the new election.
• Key authorities: IRC § 163(d); Treas. Reg. §§ 1.163(d)-1, 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200620018
Third Party Communication: None
Release Date: 5/19/2006
Date of Communication: Not Applicable
163.00-00, 163.03-00, 163.03-03, 9100.00-00 Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:ITA:B03
PLR-154333-05
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Date:
February 08, 2006

Legend:

Taxpayer = ------------------------------
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Year 1 = -------

Dear ----. ---------:

This is in response to your letter dated October 12, 2005. In your letter you requested an extension of time on behalf of Taxpayer to make a late election to treat qualified dividend income as investment income under sections 163(d)(1) and 163(d)(4)(B) of the Internal Revenue Code for Year 1. Additionally, you requested a revocation under section 1.163(d)-(1)(c) of the Income Tax Regulations of the election previously made to treat qualified dividend income as investment income under section 163(d)(1) for Year

1. The request to make the late election is based on sections 301.9100-1 and
   301.9100-3 of the Procedure and Administration Regulations.

Facts

Taxpayer timely filed Form 1040, Individual Income Tax Return, for Year 1. The return was prepared using a computerized tax return preparation software program sold to the general public. Taxpayer's return included Form 4952, Investment Interest Expense Deduction. It is represented that the tax return preparation program permits a taxpayer to elect to include all of the taxpayer’s qualified dividend income in investment income. The software program does not calculate the optimal amount of qualified dividend

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income the taxpayer should include in investment income and does not advise the taxpayer that the software program does not calculate this optimal amount. Instead, a taxpayer using the program was required to compute this amount and manually enter it into the software program. It is represented that Taxpayer did not realize that the software program did not compute the proper amount to include in investment income and merely elected to include all qualified income in investment income on Form 4952 for Year 1.

Applicable Law

Section 163(d)(1) of the Code provides that in the case of a taxpayer other than a corporation, the amount allowed as a deduction for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year.

Section 163(d)(4)(B) of the Code provides, in part, that investment income means the sum of -- (i) gross income from property held for investment (other than any gain taken into account under clause (ii)(l)), (ii) the excess (if any) of -- (l) the net gain attributable to the disposition of property held for investment, over (ll) the net capital gain determined solely by taking into account gains and losses from dispositions of property held for investment, plus (iii) so much of the net capital gain referred to in clause (ii)(ll) (or, if lesser, the net gain referred to in clause (ii)(l)) as the taxpayer elects to take into account under this clause. Such term shall include qualified dividend income (as defined in section 1(h)(11)(B) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection.

Section 1.163(d)-1(b) of the regulations provides that the election for qualified dividend income must be made on or before the due date (including extensions) of the income tax return for the taxable year in which the qualified dividend income is received.

Section 1.163(d)-1(c) of the regulations provides that the election under section 163(d)(4)(B) is revocable with the consent of the Commissioner.

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations provide the standards the Commissioner uses to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making elections that do not meet the requirements of section 301.9100-2.

Section 301.9100-1(b) of the regulations defines the term "regulatory election" as an election whose due date is prescribed by a regulation published in the Federal Register,

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or a revenue ruling, revenue procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) of the regulations provides that the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Section 301.9100-3(a) of the regulations provides that requests for extensions of time for regulatory elections (other than automatic changes covered under section 301.9100-2) will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good faith if the taxpayer -- (i) requests relief before the failure to make the regulatory election is discovered by the Service; (ii) inadvertently failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising due diligence, the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make the election.

Section 301.9100-3(b)(3) of the regulations provides that a taxpayer will not be considered to have acted reasonably and in good faith if the taxpayer -- (i) seeks to alter a return position for which an accuracy-related penalty could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief.

Section 301.9100-3(c)(1) of the regulations provides that the Commissioner will grant a reasonable extension of time only when the interests of the Government will not be prejudiced by the granting of relief. Under paragraph (c)(1)(i), the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made.

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Conclusion

Taxpayer's election is a regulatory election, as defined under section 301- 9100-1(b), because the due date of the election is prescribed in the regulations under section 1.163(d)-1(b). In the present situation, the requirements of sections 301.9100-1 and 301.9100-3 of the regulations have been satisfied. The information and representations made by Taxpayer establish that Taxpayer acted reasonably and in good faith with this request. Furthermore, granting an extension will not prejudice the interests of the Government. It is represented that the Taxpayer will not have a lower tax liability in the aggregate for all taxable years affected by the election if given permission to make the election in the appropriate amount at this time than Taxpayer would have if the election were made in the appropriate amount by the original deadline for making the election. Accordingly, Taxpayer is granted an extension of time for making the election until 60 days following the date of this ruling. The election should be made by filing a revised Form 4952 and Schedule D, and by including a copy of this ruling with an amended return for Year 1. Additionally, Taxpayer is granted consent to revoke the first election made on the Year 1 return.

These rulings are based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the federal income tax consequences of any aspect of any transaction or item discussed or referenced in this ruling.

Under the powers of attorney on file in this office, a copy of this ruling is being sent to your authorized representatives.

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

Sincerely yours,

CHRISTOPHER F. KANE
Chief, Branch 3
Associate Chief Counsel
(Income Tax & Accounting)