PLR 1135018: IRS grants more time for a regulated investment company to make a consent dividend election

Plain-English summary

A regulated investment company asked for more time to make a consent dividend election for a prior tax year. The company filed Form 973 with its return but omitted Forms 972 for its consenting shareholders, even though the shareholders included the appropriate consent dividend income in their gross income. The IRS concluded that the company acted reasonably and in good faith because it requested relief before the IRS discovered the omission, and that granting relief would not prejudice the government. It granted 60 days from the ruling date to file the forms needed for the § 565 election and attach the ruling to an amended return. The ruling was limited to the timeliness of the election for the specified year.

Ruling snapshot

• Question: Could the regulated investment company receive additional time to make a § 565 consent dividend election after omitting shareholder consent forms from its return?
• Outcome: Approved
• Key authorities: IRC §§ 561, 565, 852, 6501, 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: 201135018 Third Party Communication: None
Release Date: 9/2/2011 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
---------------------------- ----------------------, ID No. -------------
------------- Telephone Number:
-------------------------------------------------- ---------------------
------------------------- Refer Reply To:
--------------------------------------------------- CC:ITA:B03
PLR-106180-11
Date:
May 16, 2011

              TY: -------

              LEGEND:

              Taxpayer = ----------------------------------------------------------------------------------
     ------------------------------------------------------------------------------------------------------------
     -
                       -------------
              Parent = --------------------------------------------------------
              Subsidiary = ---------------------------------------------------------
              Fund Group = --------------------------------
              Year 1 = -------
              Extended Due Date = ---------------------------
              Discovery Date = -------------------------

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

This is in response to your letter dated February 10, 2011. In your letter, you requested
an extension of time to file the forms necessary to make a consent dividend election
under section 565 of the Internal Revenue Code for the tax year ending December 31,
Year 1. The request is based on sections 301.9100-1 and 301.9100-3 of the Procedure
and Administrative Regulations.

FACTS

Taxpayer, a corporation, is a regulated investment company owned by Parent and
Subsidiary, and is a member of Parent’s Fund Group. Parent administers the various
funds in the Fund Group. Parent and Subsidiary hold shares of each of the funds in the
Fund Group in separate accounts established for the purpose of funding variable
annuity contracts and variable life insurance policies. Investors in Parent and
Subsidiary may select one of the funds in the Fund Group, including Taxpayer, as an
investment option for a variable annuity contract or life insurance policy. Taxpayer must

PLR-106180-11 2

make minimum distributions each tax year to continue to be subject to tax as a
regulated investment company for future tax years.

Parent prepared Taxpayer’s Form 1120-RIC, U.S. Income Tax Return for Regulated
Investment Companies, for the tax year ending December 31, Year 1, and filed it before
the Extended Due Date. Before filing Taxpayer’s Form 1120-RIC, the Board of
Directors approved Taxpayer’s issuance of consent dividends to Parent, Subsidiary to
satisfy the Taxpayer’s Year 1 distribution requirements. Parent’s employees had no
prior experience issuing consent dividends. After consulting outside accountants and
lawyers, Parent’s employees prepared an internal memorandum outlining the process
of how funds in the Fund Group should issue consent dividends and the tax consequences
of issuing them. The memorandum stated that Parent needed to file a Form 973,
Corporation Claim for Deduction for Consent Dividends, with each Form 1120-RIC of
each fund in the Fund Group. But the memorandum did not mention the additional
regulatory requirement that Parent file a Form 972, Consent of Shareholder to Include
Specific Amount in Gross Income, with each fund’s return for each consent dividend
paid to a different shareholder of Taxpayer.

Time passed between when Parent’s employees prepared the memorandum and when
they began preparing the Forms 1120-RIC for each fund in the Fund Group. When
Parent prepared Form 1120-RIC on behalf of Taxpayer, Parent’s employees followed
the memorandum’s instructions. Thus, Taxpayer’s return included an executed Form
973 with the filing, but not any executed Forms 972. The Forms 972 were not attached
even though Parent’s employees possessed two executed originals of Form 972, one
authorizing the inclusion of consent dividends in Parent’s gross income, and the other
authorizing the inclusion of consent dividends in Subsidiary’s gross income. Taxpayer’s
shareholders, Parent and Subsidiary, each included the appropriate amount of consent
dividend income in their respective gross incomes on Parent’s consolidated income tax
return for Year 1.

After the Extended Due Date but before the Discovery Date, Parent’s auditor discovered
that no Forms 972 had been attached to Taxpayer’s Form 1120-RIC. To Taxpayer’s
knowledge, the IRS was not aware of the omission of the Form 972 and has not
contacted Parent about the Year 1 consent dividend election, nor has it notified Parent
that Taxpayer’s Year 1 Form 1120-RIC is under examination.

LAW AND ANALYSIS

Section 852(b)(2)(D) provides that a regulated investment company may claim a
deduction for dividends paid (as defined in section 561) in computing its investment
company taxable income.

PLR-106180-11 3

Section 852(b)(3)(A) provides that a regulated investment company may claim a
deduction for dividends paid (as defined in section 561) in computing its net capital
gains (determined with reference to capital gain dividends only).

Section 561(a)(2) provides that the deduction for dividends paid includes consent
dividends for the taxable year as determined under section 565.

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
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 (section 1.565-6(a)(1) of the Income Tax Regulations).

Section 1.565-1(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 section 1.565-1(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. With such return, and not later than the due date, the corporation
must file Forms 972 for each consenting shareholder, and a return on Form 973
showing by classes the stock outstanding on the first and last days of the taxable year,
the dividend rights of such stock, distributions made during the taxable years to
shareholders, and give all other information required by the form. Under Rev. Rul. 78-
296, 1978-2 C.B. 183, the due date for purposes of section 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

PLR-106180-11 4

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 section 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
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) 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 section 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 section 6662 at the time the taxpayer requests relief (taking
into account section 1.6664-2(c)(3)) and the new position requires or permits 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.

PLR-106180-11 5

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
Taxpayer will be deemed to have acted reasonably and in good faith. Taxpayer has
also represented that none of the circumstances listed in section 301.9100-3(b)(3)
apply.

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
section 6501(a) before the taxpayer’s receipt of a ruling granting relief.

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 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 section 301.9100-1(b),
because the due date of the election is prescribed in the regulations under section
1.565-1(b). In the present situation, the requirements of sections 301.9100-1 and
301.9100-3(b)(1)(i) of the regulations have been satisfied. The information and
representations made by Taxpayer establish that Taxpayer acted reasonably and in
good faith. Furthermore, granting an extension will not prejudice the interests of the
Government. Taxpayer represented that it 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. Taxpayer also represented that the period of assessment for Year
1 will not be closed before receipt of a ruling. Accordingly, Taxpayer is granted an
extension of time for making the election to issue consent dividends until 60 days
following the date of this ruling. The election should be made by filing the forms
necessary to make the section 565 consent dividend election for Year 1, and by

PLR-106180-11 6

including a copy of this ruling with an amended return for Year 1.

This ruling is limited to the timeliness of the consent dividend election Taxpayer wishes
to make for Year 1. This ruling’s application is limited to the facts, representations,
Code sections, and regulations cited herein.

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.

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,



                                   Robert Casey
                                   Acting Branch Chief, Branch 3
                                   (Income Tax & Accounting-)