PLR 1035002: IRS granted extra time for a consent dividend election

Plain-English summary

The IRS considered a personal holding company that had paid personal holding company tax after failing to make a consent dividend election for an earlier tax year. The company’s president was unaware of the election and later learned about it from tax advisors reviewing prior filings. The IRS granted 60 days to file the forms needed to make the § 565 election, finding that the company acted reasonably and in good faith and that relief would not prejudice the government. The ruling required the company to include a copy of the ruling with an amended return and did not address unrelated federal tax consequences.

Ruling snapshot

• Question: May the corporation make a late consent dividend election for an earlier tax year?
• Outcome: Approved
• Key authorities: IRC §§ 561, 565, 6662, and 6110; Treas. Reg. §§ 1.565-1 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201035002 Third Party Communication: None
Release Date: 9/3/2010 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
---------------- ------------------, ID No. ------------
------------ Telephone Number:
--------------------------------- --------------------
------------------------------------- Refer Reply To:
---------------------- CC:ITA:B03
PLR-102408-10
Date:
May 18, 2010

              TY: -------

Legend

Taxpayer = ---------------------------------
-----------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Trust = ------------------
Husband = ---------------------
Wife = -------------------
President = ------------------
Tax Program = -------------

Dear -----------------

   This is in response to your letter dated -----------------------. In your letter, you

requested an extension of time to file the forms necessary to make a consent dividend
election under § 565 of the Internal Revenue Code for the tax year ending December
31, Year 1. The request is based on §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administrative Regulations.

                                                 FACTS

   Taxpayer is engaged in private financing and lending transactions. Taxpayer

was incorporated in Year 1, and has issued one class of common stock. In Year 1, all
the stock was owned by Trust, a revocable living trust established by Husband and
Wife. The President of Taxpayer is a certified public accountant and the son-in-law of
Husband and Wife.

PLR-102408-10 2

   At the time Taxpayer was formed, consideration was given as to whether it

should be a C corporation or an S corporation. Taxpayer did not make an S election to
be effective for Year 1, so it treated itself as a C corporation for Year 1.

   The President prepared Taxpayer’s income tax return for Year 1 on Form 1120,

U.S. Corporation Income Tax Return. The President used a commercial computer
based tax program (Tax Program) to prepare the return. The President thought the
return would be simple and straightforward because the only source of income was
interest, and there were insignificant expenses. However, when the President used the
Tax Program it triggered the personal holding company calculation. The President had
no knowledge of personal holding company status or the related issues. On May 10,
Year 2, the President filed the return and paid the personal holding company tax based
on the Tax Program calculation.

    Prior to filing the return for Year 1, the President determined that it would be

prudent for Taxpayer to become an S corporation. On February 27, Year 2, Taxpayer
filed Form 2553, Election by a Small Business Corporation. This election was effective
January 1, Year 2. Taxpayer would have preferred to become an S corporation
effective when it was incorporated in January of Year 1. Due to the timing of the filing of
the election, it became effective January 1 of Year 2. Taxpayer was unaware that there
were methods available to file a valid late S corporation election with its initial tax filing.

   In late October of Year 3, the President met with tax advisors in order to plan for

Year 3 and to prepare for Year 3 tax filings. During that process, the tax advisors
reviewed Taxpayer’s prior tax filings (Years 1 and 2) and raised the issues of the
personal holding company status and the consent dividends, Taxpayer was advised
that a consent dividend election is available to corporations that are personal holding
companies in order to eliminate the personal holding company tax. Until this meeting
Taxpayer was unaware of the availability of a consent dividend election.

    If Taxpayer had known about the availability of consent dividend election at the

time its tax return for Year 1 was filed, it would have used this to eliminate the personal
holding company tax for Year 1. When these potential tax problems were identified by
Taxpayer’s tax advisors, Taxpayer and its advisors submitted this ruling request.

   Taxpayer represents that it requested relief before the failure to make the

regulatory election was discovered by the Internal Revenue Service.

                               LAW AND ANALYSIS

  Section 565 of the Code provides that if any person owns consent stock (as

defined in section 565(f)(1)) in a corporation on the last day of the taxable year of such
corporation, and such person agrees, in a consent filed with the return of such

PLR-102408-10 3

corporation in accordance with the regulations, to treat as a dividend the amount
specified in such consent, the amount so specified shall, except as provided in section
565(b), constitute a consent dividend for purposes of section 561 (relating to the
deduction for dividends paid). Consent stock, which is the type of stock with respect to
which consent dividends are allowed (section 565(a)), includes what is generally known
as common stock and participating preferred stock, the participation rights of which are
unlimited (§1.565-6(a)(1) of the Income Tax Regulations).

   Section 1.565-6(a) provides that the “dividends paid deduction,” as defined in

section 561, includes the consent dividends for the taxable year. A consent dividend is a
hypothetical distribution (as distinguished from an actual distribution) made by certain
corporations to any person who owns consent stock on the last day of the taxable year
of such corporation and who agrees to treat the hypothetical distribution as an actual
dividend, subject to specified limitations, by filing a consent at the time and in the
manner specified in §1.565-6(b).

   Section 1.565-1(b)(3) provides that a consent may be filed no later than the due

date of the corporation’s income tax return for the taxable year for which the dividends
paid deduction is claimed. Under Rev. Rul. 78-296, 1978-2 C.B. 183, the due date for
purposes of §1.565-1(b)(3) includes the extended due date of a return filed pursuant to
an extension of time to file.

   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) 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, procedure, notice or announcement published in the Internal Revenue
Bulletin.

   Section 301.9100-1(c) 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 provides extensions of time to make a regulatory election

under Code sections other than those for which § 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted

PLR-102408-10 4

reasonably and in good faith and granting relief will not prejudice the interests of the
government.

  Section 301.9100-3(b)(1) states 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.

   Under § 301.9100-3(b)(3), 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
has been or could be imposed under § 6662 at the time the taxpayer requests relief
(taking into account § 1.6664-02(c)(3)) 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.

   Taxpayer in this case requested relief before the failure to make the regulatory

election was discovered by the Service, and, thus, under section 301.9100-3(b)(1)(i),
the Taxpayers will be deemed to have acted reasonably and in good faith.

   Section 301.9100-3(c)(1)(i) provides, in part, 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 taxable years affected by the election 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)(1)(ii) provides, in part, that the interests of the
government are ordinarily prejudiced if the taxable year in which the regulatory election
should have been made, or any taxable years that would have been affected by the
election had it been timely made, are closed by the period of limitations on assessment.

     Under these criteria, the interests of the government are not prejudiced in this

case. Taxpayer has represented that granting relief would not result in 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 (taking into account the time value
of money). Furthermore, the taxable year in which the regulatory election should have
been made and any taxable years that would have been affected had it been timely
made, are not closed by the period of assessment.

                                   CONCLUSION

    Taxpayer’s election is a regulatory election, as defined under § 301.9100-1(b),

because the due date of the election is prescribed in the regulations under § 1.565-1(b).
In the present situation, the requirements of §§ 301.9100-1 and 301.9100-3(b)(i) 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 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 than
Taxpayer would have if the election were made 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 the
forms necessary to make the § 565 consent dividend election for the taxable Year 1,
and by including a copy of this ruling with an amended return for Year 1.

   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.

  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 Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

   A copy of this letter must be attached to any income tax return to which it is

relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

PLR-102408-10 6

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. 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.

                                     Sincerely,



                                     Christopher F. Kane
                                     Branch Chief, Branch 3
                                     (Income Tax & Accounting)

Enclosure (2)