PLR 200851016: fourteen mutual funds keep their spillover dividend election after the extension forms were prepared but never mailed

Plain-English summary

A registered investment company trust ran seventeen separate portfolios, fourteen of which are the subject of this request. Each was a regulated investment company, and each wanted the benefit of section 855(a), the spillover dividend rule. That provision lets a fund declare a dividend before its return is due, pay it out within the following twelve months, and elect on that return to treat the dividend as paid during the earlier year. It is how a fund distributes its income to shareholders and avoids being taxed on it. The catch is in the regulation: section 1.855-1(b)(1) says the election is made in the return for that taxable year. Miss the return deadline and you miss the election.

The failure that put the election at risk is described in unusual operational detail, and the detail is the point. The trust decided each fund would file a Form 7004 for a six-month extension and told its administrator well before the deadline. A tax analyst prepared all the forms under a supervisor's direction. The administrator's Vice President for Tax Services personally reviewed every one, prepared the certified mail green card and the envelope sticker, signed a transmittal letter addressed to the correct service center, scanned copies for the file, and confirmed no estimated tax was due. He handed the package to a second analyst whose express written responsibility, under the department's existing procedures, was to mail it. The next morning he checked with her that she would mail it that day, then emailed scanned copies to the trust's chief financial officer and to a manager at the auditors saying the forms had been properly filed.

They had not been. Days later a third analyst, collecting the forms to put away in the client files, realised she was holding what looked like the originals of the transmittal letter, the forms and the certified mail documents. The package had never left the building. Every control worked except the last one. The returns went in late, carrying the section 855 elections with them, and the elections were late with them.

Relief runs through section 301.9100-3, which is available for a regulatory election that misses its deadline and does not qualify for an automatic extension. Two standards govern. A taxpayer who applies before the Service discovers the failure is deemed to have acted reasonably and in good faith. The government is prejudiced if relief would leave the taxpayer with a lower aggregate tax liability across the affected years than a timely election would have produced, taking the time value of money into account. The funds made the standard representations, including that they had not been fully informed and chosen not to file. The Service held they had shown good cause, and each fund's section 855(a) election on its late-filed return is treated as timely made.

Two features of the holding deserve attention. First, the Service granted relief while expressly declining to decide the very condition relief depends on. It states no opinion on whether each fund's liability is not lower in the aggregate than it would have been with a timely election, and leaves that to the director on audit, who will determine the federal income tax effect if a fund's liability turns out to be lower. The no-prejudice test is answered by representation now and verified later. Second, the relief is narrow. It reaches only the timeliness of the election. It does not excuse any penalty owed for filing the returns late, and no opinion is expressed on whether any of these funds even qualifies as a regulated investment company taxable under subchapter M.

The legend shows the scale of what was resolved. Each of the fourteen funds carries its own control number alongside its redacted name, running from PLR-121487-07 for Fund A to PLR-121503-07 for Fund N, with gaps at three intermediate numbers. This public release is Fund A's copy of a ruling issued fourteen times over. It is a reminder that a single clerical omission at a shared administrator propagates to every portfolio that administrator serves.

Citations are reproduced exactly as released. No section number, regulation citation or date appears beyond the authorities printed in the letter.

The text came out of the PDF digitally rather than through optical character recognition, so no corrections were needed. Apostrophes appear inconsistently, curly in most of the document and straight in the paragraph following the holding, which is an artifact of the source file rather than a reading error. Redacted values appear as runs of dashes, which is how the IRS released them.

Ruling snapshot

• Question: Where an administrator prepared but never mailed the Forms 7004, so fourteen regulated investment companies filed their returns late and their section 855(a) spillover dividend elections with them, may those elections be treated as timely made under section 301.9100-3?
• Outcome: Approved. The funds demonstrated good cause, and each fund's section 855(a) election on its late-filed return is treated as timely made. The ruling reaches timeliness only. It does not relieve any penalty for late filing, no opinion is expressed on whether any fund qualifies as a regulated investment company under subchapter M, and no opinion is expressed on whether each fund's aggregate liability is not lower than it would have been with a timely election, which is left to the director on audit.
• Key authorities: IRC sections 855, 855(a) and (a)(1), 851, and 6662; Treas. Reg. sections 1.855-1(b)(1), 301.9100-1(b) and (c), 301.9100-2, and 301.9100-3(a), (b) and (c) (reproduced as released, not verified here).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200851016
Release Date: 12/19/2008 Person To Contact:
--------------------, ID No. ------------
Index Number: 9100.22-00, 855.01-00 Telephone Number:
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Refer Reply To:
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CC:FIP:B03
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PLR-121487-07
------------------ Date:
-------------------------------------------- August 27, 2008
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Legend

Trust = ----------------

Fund A = -----------------------
-----------------------/PLR-121487-07

Fund B = ------------------------------------------
-----------------------/PLR-121488-07

Fund C = -------------------------------
-----------------------/PLR-121489-07

Fund D = ---------------------------------
-----------------------/PLR-121490-07

Fund E = -------------------------
-----------------------/PLR-121491-07

Fund F = ------------------------------------
-----------------------/PLR-121493-07

Fund G = -------------------------
-----------------------/PLR-121494-07

Fund H = ----------------------------
-----------------------/PLR-121495-07

Fund I = ------------------------------
-----------------------/PLR-121496-07

Fund J = -----------------------------
-----------------------/PLR-121497-07

Fund K = -----------------------------------------
-----------------------/PLR-121498-07

Fund L = ------------------------------
-----------------------/PLR-121499-07

Fund M = ----------------------------
-----------------------/PLR-121500-07

Fund N = ---------------------------------------------------------------
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-----------------------/PLR-121503-07

State X = --------------------

Company = --------------------------

Administrator = ------------------------------------------

Auditors = ----------------------------------------

Calendar Year = -------

Taxable Year 1 = -------------------------------------------------

Taxable Year 2 = -------------------------------------------------

Date 1 = ----------------

Date 2 = ------------------------

Date 3 = ------------------------

Date 4 = --------------------------

Date 5 = --------------------------

Date 6 = -------------------
Dear --------------:

This responds to a letter and subsequent correspondence submitted on behalf of Fund A, Fund B, Fund C, Fund D, Fund E, Fund F, Fund G, Fund H, Fund I, Fund J, Fund K, Fund L, Fund M, and Fund N, (collectively, the “Funds”). Each Fund requests that its election under section 855(a) of the Internal Revenue Code (Code) to treat certain dividends distributed after the close of a taxable year as having been paid during that taxable year be treated as having been timely made pursuant to § 301.9100-3 of the Procedure and Administration Regulations.

FACTS

Trust is organized as a State X trust and is registered under the Investment Company Act of 1940, as amended. Trust consists of 17 separate segregated portfolios of assets, including Funds. Each Fund had elected to be a regulated investment company (RIC) under section 851 of the Code.

Company is responsible for overall management and administration of all Funds. Ever since Date 1, and continuously through the present, Trust has engaged Administrator to provide fund accounting and sub-administration services. The services that Administrator was engaged by Trust to provide during Calendar Year and earlier years included federal tax-compliance services. Among the tax-compliance services that Administrator was engaged by Trust to provide throughout Calendar Year were the preparation and filing of Funds’ federal income tax returns (Forms 1120-RIC) for Taxable Year 1 and the preparation and filing of all extension requests related to those returns. Administrator had been engaged by the Funds to provide similar tax- compliance services in the year preceding Calendar Year and had performed those services in a correct and timely manner for them.

The due date for a Fund to file Form 7004 (Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns) for Taxable Year 1 was Date 4. Trust decided, consistent with the practice for prior taxable years, that each Fund would file a Form 7004 for Taxable Year 1 and so informed Administrator before Date 2.

All the Forms 7004 required for Taxable Year 1 for the Funds were prepared under the direction of a tax supervisor in Administrator’s tax department by a tax analyst on Date 2. On that same date, Administrator’s Vice President -- Tax Services personally reviewed all of such Forms 7004, prepared the U.S. Postal Service certified mail green card and corresponding envelope sticker, and prepared and signed a transmittal letter dated Date 3. The transmittal letter, green card, and envelope sticker were addressed to the appropriate Internal Revenue Service Center. After making electronic copies of all the documents, Administrator’s Vice President -- Tax Services left the completed Forms 7004, the signed transmittal letter, and the completed certified mail documents with a second tax analyst. She had the express responsibility for timely mailing all the Forms 7004 pursuant to the pre-existing written procedures of Administrator’s tax department. Administrator’s Vice President -- Tax Services verified that no estimated tax was required to be paid to qualify for extension under the Forms 7004.

On the morning of Date 3, Administrator’s Vice President -- Tax Services discussed these extensions with the second tax analyst to verify that she would mail them that day. He then forwarded scanned copies of the documents by email to Trust’s Vice President and Chief Financial Officer and to a tax manager at Auditors. In that email, Administrator’s Vice President -- Tax Services stated his understanding that the Forms 7004 had been properly filed, i.e., timely mailed to the Internal Revenue Service Center.

On Date 5, a third tax analyst in Administrator’s tax department picked up from the second tax analyst the Forms 7004 that had been set aside for filing in Administrator’s client files. The third analyst noticed that she had what appeared to be the originals of the transmittal letter, Forms 7004, and certified mail documents. She immediately brought this to Administrator’s Vice President -- Tax Services’ attention. After investigation, they determined that the Forms 7004 had not been mailed to the Internal Revenue Service Center as required and expected by Trust on Date 3.

Each Fund represents that in accordance with § 855 of the Code, it has satisfied the requirement of § 855(a)(1) that it declared the dividends with respect to which it seeks to make the § 855 election involved in this request by the time prescribed by law for the filing of its Form 1120-RIC for Taxable Year 1. Each Fund’s Form 1120-RIC for Taxable Year 1 was filed on Date 6 and included the election under § 855 to treat certain dividends paid in Taxable Year 2 as having been paid during Taxable Year 1. The elections, however, were not timely because their Forms 1120-RIC were filed after the due date therefor and no extensions of time to file such returns had been timely filed or granted.

Each Fund makes the following additional representations:

1. The request for relief was filed by Fund before the failure to make
   the regulatory election was discovered by the Internal Revenue Service.

2. Granting the requested relief will not result in Fund’s having a lower
   tax liability in the aggregate for all taxable years affected by the election than Fund would have had if the election had been timely made (taking into account the time value of money).

3. Fund did not seek to alter a return position for which an accuracy-
   related penalty has been or could have been imposed under section 6662 of the Code at the time Fund requested relief and the new position requires or permits a regulatory election for which relief is requested.

4. Being fully informed of the required regulatory election and related
   tax consequences, Fund did not choose to not file the election.

LAW AND ANALYSIS

Section 855(a) of the Code provides that, if a RIC:

(1) declares a dividend prior to the time prescribed by law for the filing of its return for a taxable year (including the period for any extension of time granted for filing such return), and

(2) distributes the amount of such dividend to shareholders in the 12-month period following the close of such taxable year and not later than the date of the first regular dividend payment made after such declaration, the amount so declared and distributed shall, to the extent the company elects in such return in accordance with regulations prescribed by the Secretary, be considered as having been paid during such taxable year, except as provided in subsections (b), (c) and (d).

Section 1.855-1(b)(1) of the Income Tax Regulations sets forth the method of making the election and provides that the election must be made in the return filed by the RIC for the taxable year.

Section 301.9100-1(c) of the Procedure and Administration Regulations provides, in part, that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election (defined in § 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 subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Sections 301.9100-3(a) through (c)(1)(i) set 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 § 301.9100-2. Section 301.9100-3(b) provides that subject to paragraphs (b)(3)(i) through (iii) of § 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 § 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).

HOLDING

Based upon the facts presented and representations made by Funds, we hold that the Funds have demonstrated good cause for the granting of relief under § 301.9100-3. Accordingly, each Fund’s election under § 855(a) on its federal income tax return filed on Date 6 for Taxable Year 1 will be treated as having been timely made.

No opinion is expressed as to whether each Fund's tax liability is not lower in the aggregate for the year to which the election applies than that Fund's tax liability would have been if the election had been timely made (taking into account the time value of money). Upon audit of the federal income tax returns involved, the director will determine the Fund's tax liabilities for the year involved. If the director determines that a Fund's liability is lower, that office will determine the federal income tax effect.

This ruling is limited to the timeliness of each Fund’s election under § 855(a) of the Code. This ruling does not relieve a Fund from any penalty that it may owe as a result of its failure to file its federal income tax return on time. Except as specifically ruled upon above, no opinion is expressed or implied as to any federal excise or income tax consequences regarding Fund. In particular, no opinion is expressed or implied whether any Fund qualifies as a RIC that is taxable under subchapter M, part 1 of the Code.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Powers of Attorney on file with this office, copies of this letter are being sent to your authorized representatives.

Sincerely,

Alice M. Bennett
Chief, Branch 3
Associate Chief Counsel
(Financial Institutions & Products)

Enclosures:
Copy of this letter
Copy for section 6110 purposes

cc: