PLR 1219005: Permission granted to revoke a capital-gain investment-income election

Plain-English summary

Taxpayers asked to revoke an election that treated capital gain as investment income under IRC § 163(d)(4)(B)(iii). Their tax professional had mistakenly reported personal-loan interest as investment interest and included the related election on their return. The IRS concluded that the taxpayers reasonably relied on a qualified professional and that allowing the revocation would not prejudice the government. It granted permission to revoke the election and directed the taxpayers to include a copy of the ruling with an amended return filed within 60 days.

Ruling snapshot

• Question: May the taxpayers revoke their election to treat capital gain as investment income?
• Outcome: approved
• Key authorities: IRC § 163(d)(4)(B)(iii); Treas. Reg. §§ 1.163(d)-1, 301.9100-1, 301.9100-2, and 301.9100-3; IRC §§ 6662 and 6501(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201219005 Third Party Communication: None
Release Date: 5/11/2012 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
--------------------------------- -------------------------------, ID No. -----------
---------------------------------------- -----------------
----------------------------- Telephone Number:
------------------------------------------- ---------------------
Refer Reply To:
CC:ITA:B02
PLR-134015-11
Date: January 30, 2012

LEGEND:

Taxpayers = ------------------------------------------
----------------------------------------
Advisor = ----------------------------------
Date1 = --------------------
Year1 = -------

Dear Taxpayers:

This is in response to your letter dated Date1, submitted on your behalf by your
authorized representatives. In the letter you request permission to revoke an election to
treat capital gain as investment income under § 163(d)(4)(B)(iii) of the Internal Revenue
Code for the Year1 taxable year. The request is based on §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations.

FACTS

For approximately ten years, Taxpayers used the services of Advisor to prepare and file
their Federal income tax returns. With regard to their Year1 return, Taxpayers provided
Advisor with all documents for use in preparing the return. While preparing Taxpayers’
return, Advisor noted that one of Taxpayers’ personal loans was secured by securities
held in Taxpayers’ investment portfolio. Advisor did not contact Taxpayers for the
specifics of the loan. Instead, Advisor, based on similar prior transactions entered into
by Taxpayers, assumed that the securities were purchased with the loan proceeds at
issue, and he assumed that the interest paid on the loan was deductible as investment
interest expense under § 163. Advisor reported the interest paid on the loan as
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investment interest on Taxpayers’ Year1 return, and he included on the return the
election to treat a corresponding amount of capital gain as investment income.

Taxpayers’ Year1 return was examined by the Internal Revenue Service. To prepare
for the initial meeting with the revenue agent, Advisor called Taxpayers to discuss
certain issues, one of which was the personal loan. Taxpayers told Advisor that the
securities serving as collateral for the underlying loan were not, in fact, purchased with
the loan proceeds. Advisor realized he made the mistake on the Year1 return with
regard to the investment interest expense deduction. Advisor voluntarily brought the
issue to the attention of the revenue agent during their initial meeting, in order to
undertake whatever steps were necessary to adjust this item on the return.
Accordingly, Taxpayers seek permission to revoke the election to treat capital gain as
investment income that they made on their Year1 return.

APPLICABLE LAW

Section 163(d)(1) provides that in the case of a taxpayer other than a corporation, the
amount allowed as a deduction for investment interest for any taxable year shall not
exceed the net investment income of the taxpayer for the taxable year.

Section 163(d)(4)(B)(iii) provides, in pertinent part, that investment income includes
certain capital gain that the taxpayer elects to treat as investment income.

Section 1.163(d)-1(b) provides that the election under section 163(d)(4)(B)(iii) must be
made on or before the due date (including extensions) of the income tax return for the
taxable year in which the net capital gain is recognized.

Section 1.163(d)-1(c) provides that the election under section 163(d)(4)(B)(iii) is
revocable with the consent of the Commissioner.

Taxpayers are requesting permission to revoke their election to treat capital gain as
investment income, which was made based on advice from a tax professional. This
situation is analogous to situations concerning taxpayers who fail to make a regulatory
election because of inadequate or incorrect advice from qualified tax professionals, and
who subsequently seek extensions of time to make the election under § 301.9100-1.
Rev. Rul. 83-74, 1983-1 C.B. 112.

Sections 301.9100-1 through 301.9100-3 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" to include an election
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whose due date is prescribed by a regulation published in the Federal Register.

Section 301.9100-3(a) provides that requests for extensions of time for regulatory
elections will be granted when the taxpayer provides evidence to establish to the
satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith,
and that granting relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1)(v) provides that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer reasonably relied on a qualified tax
professional who was aware of all the relevant facts, and the tax professional failed to
make, or advise the taxpayer to make, the election.

Section 301.9100-3(b)(3) provides that 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 could be
imposed under § 6662 at the time the taxpayer requests relief and the new position
requires a regulatory election for which relief is requested;

(ii) was fully informed 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 Internal Revenue
Service will not ordinarily grant relief.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. Under paragraph (c)(1)(i), the interests of the government are
prejudiced if granting relief would result in a 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. Under paragraph (c)(1)(ii), 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 § 6501(a).

CONCLUSION

The information and representations made by Taxpayers establish that Taxpayers acted
reasonably and in good faith as Taxpayers relied on their Advisor, a qualified tax
professional, to prepare their return. Furthermore, granting permission to revoke the
election will not prejudice the interests of the Government. It is represented that
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Taxpayers will not have a lower tax liability in the aggregate for all taxable years
affected by the election if given permission to revoke the election than Taxpayers would
have if the election had not been made. Accordingly, Taxpayers are granted permission
to revoke the election. Taxpayers should enclose a copy of this letter with their
amended return for Year1 within 60 days following the date of this ruling.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayers and accompanied by a penalty of perjury statement. While
this office has not verified any of the material submitted in support of the request for a
ruling, it is subject to verification on examination.

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 taxpayers requesting it. Section 6110(k)(3)
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 representatives.

                                    Sincerely,



                                    R. Matthew Kelley
                                    _____________________________
                                    R. Matthew Kelley
                                    Assistant to the Branch Chief, Branch 2
                                    (Income Tax & Accounting)