PLR 200843003: Corporation received more time to make its DISC election

Plain-English summary

A domestic corporation was formed to operate as an interest charge domestic international sales corporation, but neither of its outside advisers filed the required Form 4876-A within 90 days of its first tax year. The corporation discovered the omission after receiving an IRS notice and filed a protective election for a later year. The IRS concluded that the corporation met the reasonable-action, good-faith, and government-interest standards for discretionary relief. It granted 60 days to file the DISC election and shareholder consents effective from the first tax year. The IRS also said the later protective election would either never become legally effective or would be redundant, so it did not need to be withdrawn, but the ruling did not determine whether the corporation otherwise qualified for DISC status or benefits.

Ruling snapshot

• Question: Could the corporation make a late DISC election for its first tax year and withdraw its later protective election?
• Outcome: Approved. The IRS granted 60 days for the original election and said the protective election need not be withdrawn.
• Key authorities: IRC § 992(b)(1); Temp. Treas. Reg. § 1.921-1T(b)(1); Treas. Reg. §§ 1.992-2, 301.9100-1 through 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

Number: 200843003                                             Third Party Communication: None
Release Date: 10/24/2008                                       Date of Communication: Not Applicable
                                                                Person To Contact:
Index Number: 992.02-00, 9100.22-00                             ------------------------
                                                                Telephone Number:
                                                                ---------------------
 -------------------------                                      Refer Reply To:
---------------------------------------                         CC:INTL:B6
 -----------------                                              PLR-102292-08
 In Re:                                                         Date:
          ------------------                                    July 22, 2008
         ---------------------
         --------------------------------------




                                                        Legend

 Taxpayer                            =        -----------------
 Parent                              =        ------------------------
 DE                                  =        ---------------------------------------

 Date 1                              =        -----------------------
 Date 2                              =        ---------------------
 Date 3                              =        -------------------------
 Date 4                              =        ----------------------

 Year 1                              =        -------
 Year 2                              =        -------

 X                                   =        ----

 Products                            =        ------------------------------------------------------------------------
 ------------------------------------------------------------------------------------------------------------------

 Accounting Firm                     =        ------------------------------
 Law Firm                            =        --------------



 Dear -------------:

 This responds to your letter dated Date 1, requesting a ruling that Taxpayer be
 permitted an extension of time under Treas. Reg. § 301.9100-3 to file Form 4876-A
 (including the shareholders’ consent statement) in accordance with Temp. Treas. Reg.
 § 1.921-1T(b)(1) and Treas. Reg. § 1.992-2(a)(1)(i) to be effective as of Date 2.
PLR-102292-08                                 2

The rulings given in this letter are based on facts and representations submitted by
Taxpayer and accompanied by a penalties of perjury statement. This office has not
verified any of the materials submitted in support of the request for rulings. Verification
of the information, representations, and other data may be required as part of the audit
process.

                                           Facts

Taxpayer is a domestic corporation wholly owned by Parent, a domestic limited liability
company treated as a partnership for U.S. federal tax purposes. Taxpayer has no
employees and was intended to be treated as an interest charge domestic international
sales corporation (“DISC”) since its inception. Parent has approximately X partners and
also wholly owns DE, a limited liability company that is treated as a disregarded entity
for federal income tax purposes. Taxpayer uses a calendar taxable year.

Accounting Firm is a certified public accounting firm that has performed tax compliance
and audit work, as well as some tax planning for several entities related to Taxpayer. In
Year 1 or Year 2, Accounting Firm recommended that it would be advantageous for tax
reasons for Parent to form a DISC to which DE would pay commissions with respect to
its sales of Products to foreign customers.

DE’s vice president and treasurer conferred with legal counsel from Law Firm on the
issue of forming a DISC, and requested that Law Firm incorporate Taxpayer. Law Firm
understood that its engagement was limited to incorporating Taxpayer. DE and Parent
assumed that Accounting Firm would advise them concerning any tax requirements or
other tax issues related to the formation of Taxpayer or its qualification as a DISC.
However, Accounting Firm understood that its engagement with Taxpayer was limited to
tax compliance work. Consequently, neither Taxpayer nor either of its outside advisors
filed Form 4876-A (“Election to be Treated as an Interest Charge DISC”) within 90 days
after the beginning of Taxpayer’s first taxable year, as required by Temp. Treas. Reg.
§ 1.921-1T(b)(1). Even though Form 4876-A was not timely filed, Taxpayer represents
that it intended all along to qualify as a DISC and that it reasonably believed that it could
operate as a DISC.

On Date 3, Taxpayer received a notice from the Service stating that the Service had no
record that Taxpayer filed Form 4876-A. As a result of receiving this notice, Taxpayer
became aware for the first time that it needed to file Form 4876-A to make a valid
election to be a DISC, and that neither of its advisors filed Form 4876-A on its behalf nor
advised it to file the form.

As a precautionary measure, Taxpayer filed a protective Form 4876-A so that it would
be treated as a DISC for its taxable year beginning Date 4 in the event that it cannot be
treated as a DISC for its first taxable year (i.e., two years earlier).
PLR-102292-08                                3

Taxpayer has requested a ruling that grants the following:

   (1) an extension of time to file a Form 4876-A within 60 days from the date such
       ruling is issued so that it will be treated as a DISC for its first taxable year
       (effective Date 2); and

   (2) permission to withdraw the protective Form 4876-A it filed for its taxable year
       beginning Date 4 if it receives a favorable ruling granting an extension of time to
       file Form 4876-A for its first taxable year.

                                           Law

Section 992(b)(1)(A) provides that an election by a corporation to be treated as DISC
shall be made by such corporation for a taxable year at any time during the 90-day
period immediately preceding the beginning of the taxable year, except that the
Secretary may give his consent to the making of an election at such other times as he
may designate.

Section 992(b)(1)(B) provides that such election shall be made in such manner as the
Secretary shall prescribe and shall be valid only if all persons who are shareholders in
such corporation on such first day of the first taxable year for which such election is
effective consent to such election.

Temp. Treas. Reg. § 1.921-1T(b)(1) provides, in part, that a corporation electing DISC
status must file Form 4876-A. A corporation electing to be treated as a DISC for its first
taxable year shall make its election within 90 days after the beginning of that year.
Temp. Treas. Reg. § 1.921-1T(b)(1). The rules contained in Treas. Reg. § 1.992-
2(a)(1), (b)(1), and (b)(3) shall apply to the manner of making the election and the
manner and form of representing shareholder consent to the election. Id.

Treas. Reg. § 1.992-2(a)(1)(i) provides that, except as otherwise provided in paragraphs
(b)(3) and (c) of that section, the election to be treated as a DISC shall be valid only if
the consent of every person who is a shareholder of the corporation as of the beginning
of the first taxable year for which such election is effective is on or attached to the
Form 4876 when filed with the service center.

Treas. Reg. § 301.9100-1(c) provides, in part, that the Commissioner, in exercising the
Commissioner’s discretion, may grant a reasonable extension of time under the rules
set forth in Treas. Reg. §§ 301.9100-2 and 301.9100-3 to make a regulatory election
under all subtitles of the Code except subtitles E, G, H, and I.

Treas. Reg. § 301.9100-1(b) provides that a regulatory election is an election whose
due date is prescribed by a regulation published in the Federal Register, or a revenue
PLR-102292-08                                       4

ruling, revenue procedure, notice, or announcement published in the Internal Revenue
Bulletin. For this purpose, an election includes an application for relief in respect of tax.

Treas. Reg. § 301.9100-3(a) provides that requests for extensions of time for regulatory
elections that do not meet the requirements of Treas. Reg. § 301.9100-2 (automatic
extensions) must be made under the rules of Treas. Reg. § 301.9100-3. Requests for
relief subject to Treas. Reg. § 301.9100-3 will be granted when the taxpayer provides
the evidence (including affidavits described in Treas. Reg. § 301.9100-3(e)) to establish
to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good
faith, and the grant of relief will not prejudice the interest of the Government.

The election described in Temp. Treas. Reg. § 1.921-1T(b)(1) is a regulatory election as
defined in Treas. Reg. § 301.9100-1(b). Therefore, the Commissioner has discretionary
authority under Treas. Reg. § 301.9100-1(c) to grant Taxpayer an extension of time,
provided that Taxpayer satisfies the standards for relief set forth in Treas. Reg.
§ 301.9100-3.

Based on the facts and information submitted, we conclude that Taxpayer satisfies
Treas. Reg. § 301.9100-3(a). Accordingly, Taxpayer is granted an extension of time of
60 days from the date of this ruling letter to file the election and shareholder consent
statements required under Temp. Treas. Reg. § 1.921-1T(b)(1) and Treas. Reg.
§ 1.992-2(a)(1)(i) for its taxable year beginning Date 2. In addition, we believe that, if
Taxpayer makes a later-executed election in accordance with this ruling that is effective
on Date 2, Taxpayer’s earlier-executed (but later-effective) protective election must
properly be viewed either as having never been legally effective in the first place or as
redundant. Under either view, Taxpayer need not withdraw its protective election.1

The granting of an extension in this ruling letter is not a determination that Taxpayer is
otherwise eligible to make the election, to submit shareholder consent statements, or to
claim DISC status or benefits. See Treas. Reg. § 301.9100-1(a). A copy of this letter
ruling should be associated with the election and shareholder consent statements.

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




1
 Taxpayer provided no precedential authority for the proposition that taxpayers may withdraw DISC
elections in a manner other than the revocation procedures set forth in Treas. Reg. § 1.992-2(e). We
provide no opinion whether taxpayers may withdraw DISC elections in the manner requested by
Taxpayer.
PLR-102292-08                                  5

expressly provided herein, this ruling neither expresses nor implies any opinion
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling letter.

Pursuant to a power of attorney on file in this office, a copy of this letter ruling is being
furnished to your authorized representatives.


                                        Sincerely,


                                        ______________________________
                                        Christopher J. Bello
                                        Chief, Branch 6
                                        Office of Associate Chief Counsel (International)



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