PLR 200738018: Energy company gets 60 days to file missed separate business election

Plain-English summary

An energy company operated utility and propane businesses as separate lines but failed to file Form 5310-A for the 1996 testing year. Its benefits staff had been assigned the filing, and the company discovered the omission during a 2005 IRS audit. The IRS gave the company 60 days to file the form and treated that filing as timely. It found reasonable reliance on the staff and no prejudice to the government because the company had consistently filed Forms 5500 as though it had made the election. The ruling leaves open whether the businesses actually met the requirements for qualified separate lines of business.

Ruling snapshot

• Question: Could the company file its qualified separate lines of business notice after the deadline?
• Outcome: Yes, the IRS granted 60 days to file Form 5310-A for 1996.
• Key authorities: IRC § 414(r); Treas. Reg. § 301.9100-3; Rev. Proc. 93-40.

Full text (IRS public release)

200738018
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND

GOVERNMENT ENTITIES
JUN 28 2007

DIVISION

UIL Numbers: 9100.00-00 and 414.18-00
LEGEND:
Company A =
Company B =
Company C =
Company D =
Company E =
Company F =
Company G =
Company H =
Company I =
Company J =
Consultant K =
Consulting Firm L =
Plan X =
Dear :
This is in response to a letter dated March 10, 2006, as supplemented by correspondence dated October 19, 2006, December 8, 2006, December 18, 2006, January 18, 2007, February 10, 2007 and March 2, 2007, submitted on your behalf by your authorized representative, in which you request a ruling granting an extension of time pursuant to section 301.9100-1 of the Procedure and Administration Regulations (the “regulations”) to file the notice of election

described in Section 3 of Revenue Procedure 93-40, 1993-2 C.B. 535 (“Rev. Proc. 93-40”) to be treated as operating qualified separate lines of business

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("QSLOBs") under section 414(r)(2) of the Internal Revenue Code (the "Code"). You submitted the following facts and representations in support of your ruling request.

Company A is a holding company that distributes and markets energy products and related services through its subsidiaries and affiliates. You represent that since 1996, Company A has operated two separate lines of business, SLOB 1, which operates natural gas and electric distribution utilities, and SLOB 2, which distributes and markets propane gas and related appliances and equipment to retailers. SLOB 1 currently includes Companies A, B, C, D and E. SLOB 2 includes Company F, a holding company, and Companies G, H, and I. Company C and Company E joined Company A in 2000 and 2001, respectively, and Company J, which was previously a part of SLOB 2, is no longer related to Company A.

Company A and its affiliates have maintained several plans qualified under Code section 401(a). In 1996, Company A contacted Consultant K and Consulting Firm L to determine whether SLOBs 1 and 2 constituted two QSLOBs under section 414(r). In the summer of 1996, Company A met with Consultant K who advised Company A that SLOB 1 and SLOB 2 could qualify as QSLOBs based on one or more of the regulatory safe harbors under section 1.414(r)-5 of the federal Income Tax Regulations (the “regulations”). Consultant K advised Company A to file Form 5310-A, Notice of Qualified Separate Lines of Business, by October 15, 1997, to effectively make the QSLOB election for the 1996 testing year. According to the affidavit submitted by Company A, Company A relied on its internal employee benefits staff to file the Form 5310-A; however, the members of its benefits staff charged with the responsibility of making the election failed to file the form. During this time, Company A had restructured and decentralized its benefits staff, which resulted in the turnover of employees and the loss or misplacement of records and files pertaining to its qualified plans. Assuming the election had been made, Company A and its affiliates have, since 1996, filed the Form 5500 in a manner consistent with the QSLOB election. However, in 2005, during an audit by the Internal Revenue Service (the “Service”) of Plan X, Company A discovered its failure to file the Form 5310-A. You represent that other than Company A’s failure to file a timely election, SLOB 1 and SLOB 2 satisfy the requirements under section 414(r).

Based on the above facts and representations, you request a ruling that under section 301.9100-3 of the regulations, Company A be granted an extension of time to file the Form 5310-A with respect to the 1996 testing year.

Code section 414(r) provides rules for determining whether an employer operates a QSLOB for purposes of applying sections 129(d)(8), 401(a)(26), and 410(b) (including section 401(a)(4)).

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Code section 414(r)(1) requires that an employer operate the separate line of business for bona fide business purposes.

Under Code section 414(r)(2), the line of business must have at least 50 employees, the employer must notify the Secretary that such line of business is being treated as separate, and the line of business must satisfy the guidelines prescribed by the Secretary or the employer must receive a determination from the Secretary that the line of business is separate (“administrative scrutiny

requirement”).

Section 1.414(r)-1(b)(1) of the regulations provides that an employer is treated as operating a QSLOB under Code section 414(r) only if all property and services provided by the employer to its customers are provided exclusively by the QSLOB. Thus, once an employer has determined it has a qualified separate line of business, no portion of the employer may remain that is not included in a qualified separate line of business.

Section 1.414(r)-1(b)(2)(i) of the regulations provides that a QSLOB must constitute a line of business under paragraph (b)(2)(ii), a separate line of business under paragraph (b)(2)(iii) and a qualified separate line of business under Code section 414(r)(2) and paragraph (b)(2)(iv) relating to the 50 employee, notice, and administrative scrutiny requirements.

Section 1.414(r)-1(d)(2) of the regulations provides that the provisions of sections 1.414(r)-2 through 1.414(r)-11 are to be interpreted in a manner consistent with the purpose of Code section 414(r), i.e., to recognize an employer's operation of a QSLOB for bona fide business reasons.

Section 1.414(r)-5(a) of the regulations provides that a separate line of business as determined under section 1.414(r)-3 satisfies the administrative scrutiny requirement if the SLOB satisfies any of the safe harbors in paragraph (b), which implements the statutory safe harbor, and paragraphs (c) through (g) (the regulatory safe harbors).

Section 1.414(r)-4(c) of the regulations provides that the notice requirement under Code section 414(r)(2)(B) must take the form and be filed at the time prescribed by the Commissioner in revenue procedures or other guidance of

general applicability.

Section 3 of Rev. Proc. 93-40 sets forth the exclusive rules for satisfying the notice requirement of Code section 414(r)(2)(B). Section 3.03 of Rev. Proc. 93- 40 provides that notice must be given by filing Form 5310-A. Section 3.05 provides that notice for a testing year must be given on or before the Notification Date for the testing year. The Notification Date for a testing year is the later of October 15 of the year following the testing year or the 15th day of the 10th month after the close of the plan year of the employer's plan that begins earliest

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in the testing year. Section 3.06 of Rev. Proc. 93-40 provides that after the Notification Date, the notice cannot be modified, withdrawn, or revoked, and will be treated as applying to subsequent testing years unless the employer takes timely action to provide a new notice.

Sections 301.9100-1(a) and 301.9100-1(c) of the regulations generally provide that the Commissioner of Internal Revenue may grant a reasonable extension of time to make a regulatory or statutory election pursuant to the standards set forth in sections 301.9100-2 and 301.9100-3. Such extension of time is only available for elections that a taxpayer is otherwise eligible to make.

Section 301.9100-1(b) defines the term "regulatory election” as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

Section 301.9100-3(a) of the regulations provides that applications for relief that fall within section 301.9100-3 will be granted when the taxpayer provides the evidence (including affidavits described in section 301.9100-3(e)(2)) to establish that (1) the taxpayer acted reasonably and in good faith, and (2) granting relief would not prejudice the interests of the government.

Section 301.9100-3(b)(1) of the regulations provides that, except as otherwise provided in paragraphs (b)(3)(i) through (iii), a taxpayer will be deemed to have acted reasonably and in good faith if the taxpayer:

(i) Requests relief under this section before the failure to make the regulatory election is discovered by the Service;

(ii) Failed to make the election because of intervening events beyond the taxpayer's control;

(iii) Failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), 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, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.

Section 301.9100-3(c) of the regulations provides that ordinarily the interests of the Government will be treated as prejudiced and that ordinarily the Service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statute of limitations before the taxpayer's

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receipt of a ruling granting relief under this section or if granting relief would result in a taxpayer having a lower tax liability.

Section 301.9100-3(e)(2) of the regulations provides that the taxpayer must submit a detailed affidavit describing the events that led to the failure to make a valid regulatory election and to the discovery of the failure. When the taxpayer relied on a qualified tax professional for advice, the taxpayer's affidavit must describe the engagement and responsibilities of the professional as well as the extent to which the taxpayer relied on the professional. The individual who signs for an entity must have personal knowledge of the facts and circumstances at

issue.

According to the facts, representations, and affidavits submitted, although Consultant K advised Company A to make the election, Company A’s own benefits professionals who were charged with the responsibility for making the QSLOB election failed to timely file the Form 5310-A for the 1996 testing year. During this time, Company A restructured its benefits office, resulting in the loss of employees and records pertaining to its qualified plans. When Company A discovered that the requisite Form 5310-A had not been timely filed, it promptly filed this request for relief under section 301.9100-3 of the regulations. Thus, based on the information and representations submitted, Company A satisfies clause (v) of section 301.9100-3(b)(1) of the regulations.

Moreover, until 2005, Company A and its affiliates assumed the election had been made and filed its Forms 5500 in a manner consistent with that assumption. Although some of the years involved are closed under the statute of limitations, granting relief only clarifies the position that was consistently taken by Company A and conforms the documentation to the operation of Company A and its affiliates with respect to their qualified plans. Thus, granting relief will not prejudice the interests of the Government. Because the taxpayer has acted reasonably and in good faith and the granting of relief will not prejudice the interests of the Government, we grant Company A a period of 60 days from the date of this ruling to file the Form 5310-A for the 1996 testing year, and such filing will be deemed a timely filing under Section 3 of Rev. Proc. 93-40 with respect to such year.

This ruling does not address whether Company A and the businesses identified as SLOB 1 and SLOB 2 otherwise satisfy the requirements to be treated as QSLOBs for the 1996 testing year and subsequent years. No opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the Code or regulations, which may be applicable thereto.

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

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If you wish to inquire about this ruling, please contact at

A copy of this letter has been sent to your authorized representative in accordance with a Power of Attorney on file in this office.

Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:

Deleted copy of Letter Ruling
Notice of Intention to Disclose