PLR 1201011: IRS grants 45 days to make consent dividend elections

Plain-English summary

The IRS granted a limited liability company 45 days to file the forms needed to make consent dividend elections for three taxable years. The taxpayer had been advised that it might be a personal holding company and later determined that it had personal holding company income, but the elections had not been made by the deadlines. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. The taxpayer was required to attach the ruling to the returns, schedules, and forms filed with the elections.

Ruling snapshot

• Question: Could the taxpayer receive more time to make consent dividend elections under IRC section 565?
• Outcome: Approved
• Key authorities: IRC §§ 561 and 565; Treas. Reg. §§ 1.565-1 and 301.9100-1 through 301.9100-3; Rev. Rul. 78-296

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201201011 Third Party Communication: None
Release Date: 1/6/2012 Date of Communication: Not Applicable
Index Number: 565.01-02, 9100.00-00
Person To Contact:
------------------- ---------------------, ID No. -----------------
------------- Telephone Number:
----------------------- --------------------
---------------------------- Refer Reply To:
------------------ CC:ITA:B03
------------------------------------------- PLR-127827-11
Date:
October 03, 2011

Taxpayer = ----------------------

Parent = -------------------------------------------

Corporation = ----------------------------

Business A = ----------------------------------------

State = -------------

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

Accounting firm 1 = -------------------

Accounting firm 2 = --------------------

$x = ---------------

$y = -----------------

$z = -----------------

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

PLR-127827-11 2

  This responds to a letter dated June 29, 2011, which requests an extension of

time under §§ 301.9100-1 and -3 of the Procedure and Administration Regulations for
Taxpayer to make consent dividend elections pursuant to § 565 of the Internal Revenue
Code.

FACTS

  Taxpayer is a State limited liability company and is solely owned by Parent.

Parent is engaged in Business A. Parent organized Taxpayer to hold, manage, protect
and defend intellectual properties relating to Business A. Taxpayer licenses to Parent
and other affiliates, as well as third party entities the right to use such intellectual
properties, for which it collects royalties.

   In Year 4, Corporation, the sole owner of Parent, hired Accounting Firm 1 to

advise it with respect to tax matters. Accounting Firm 1 advised Parent that Taxpayer
may be a personal holding company. After analysis, Parent’s auditor, Accounting Firm
2 concluded that Taxpayer would be a personal holding company and would have
personal holding company income for the tax Years 1, 2, and 3 in the amounts of $x, $y,
and $z, respectively.

LAW AND ANALYSIS

   Section 565(a) provides that if any person owns consent stock (as defined in §

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 § 565(b), constitute a consent dividend
for purposes of § 561 (relating to the deduction for dividends paid).

    Section 1.565-1(a) of the Income Tax Regulations provides that the dividends

paid deduction, as defined in § 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 § 1.565-1(b). Section 1.565-1(b)(3) provides
that a consent may be filed not 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 the time to
file.

  Section 301.9100-3 of the Procedure and Administration regulations generally

provides extensions of time for making regulatory elections. For this purpose §

PLR-127827-11 3

301.9100-1(b) defines the term “regulatory election” to include an election whose
deadline is prescribed by a revenue ruling, revenue procedure, notice or announcement
published in the Internal Revenue Bulletin.

    Section 301.9100-3 provides that requests for extensions of time for regulatory

elections will be granted when the taxpayer provides evidence (including affidavits
described in paragraph (e) of this section) 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 taxpayerB

  (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.

  The affidavits presented show that Taxpayer acted reasonably and in good faith,

having requested relief before the failure to make the election was discovered by the
Service.

  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 § 1.6664-2(c)(3) of the Income Tax
  Regulations) 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 has represented that it is not seeking to alter a return position for which an
accuracy-related penalty has been or could be imposed under ' 6662 at the time
Taxpayer requests relief, and was not informed in all material respects of the required

PLR-127827-11 4

election, and its related tax consequences, but chose not to file the election.
Furthermore Taxpayer has represented that it is not using hindsight in requesting relief
and that specific facts have not changed since the original deadline that made the
election advantageous to Taxpayer.

   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.

    Accordingly, the consent of the Commissioner is hereby granted for an extension

of time to file the forms necessary to make the § 565 consent dividend election for the
taxable Years 1, 2, and 3. This extension shall be for a period of 45 days from the date
of this ruling. Please attach a copy of this ruling to the returns, schedules and forms filed
in connection with making the election under § 565 when such forms are filed. We
enclose a copy of the letter for this purpose.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  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.

   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-127827-11 5

  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)