PLR 1221001: IRS allows a late accounting-method change after unusual hardship

Plain-English summary

The IRS granted a taxpayer permission to file a late Form 3115 and request an accounting-method change for an earlier tax year. The taxpayer had missed the election connected to temporary legislation and had also failed to request the accounting-method change for the intended year. The IRS found that the taxpayer acted reasonably and in good faith and that unusual and compelling circumstances meant the government's interests would not be prejudiced by relief. The ruling allowed the Form 3115 to be filed with an amended consolidated return and sent to the IRS National Office within the time set by a related private letter ruling. The IRS did not decide whether the proposed accounting method was proper or correctly implemented.

Ruling snapshot

• Question: Could the taxpayer receive relief to file a late Form 3115 and change its accounting method effective in the earlier tax year?
• Outcome: Approved
• Key authorities: IRC §§ 446(e), 441(f), 481(a), and 6662; Treas. Reg. §§ 1.446-1(e) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201221001 Third Party Communication: None
Release Date: 5/25/2012 Date of Communication: Not Applicable
Index Number: 9100.10-01
Person To Contact:
--------------------- ----------------------, ID No. -------------
----------------------------- Telephone Number:
----------------------- -------------------
--------------------------------- Refer Reply To:
------------------------------------- CC:ITA:B03
PLR-134752-11
----------------------- Date:
TIN: ---------------- February 15, 2012

              TY: -------

Legend

Taxpayer = -----------------------
Tax Advisor = ----------------------
Costs = ---------------------------------------
Date A = ------------------
Date B = --------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------

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

This ruling is in reply to a request submitted by Taxpayer for an extension of time under
§ 301.9100-1(c) of the Procedure and Administration Regulations, and Rev. Proc. 2011-
1, 2011-1 I.R.B. 1, to submit a late Form 3115, Application for Change in Accounting
Method, requesting permission to change its method of accounting for Costs.

                                                 FACTS

Taxpayer files consolidated federal income tax returns based on a 52-53 week taxable
year.

In Year 1, Congress enacted a temporary provision, the benefits of which were available
by election only for taxable years ending after December 31, Year 1, and beginning
before January 1, Year 4.
PLR-134752-11 2

Taxpayer intended to make this election and separately request permission to change
its method of accounting for Costs for the same taxable year in order to maximize the
tax benefit available under the election. The change in method of accounting requires a
§ 481(a) adjustment.

While preparing Taxpayer’s Year 3 tax return, Taxpayer’s in-house tax advisors and
Taxpayer’s Tax Advisor concluded that Taxpayer could legally make the election on
Taxpayer’s Year 4 tax return. Taxpayer’s in-house tax advisors and Tax Advisor
reasoned that, because Taxpayer’s Year 4 taxable year began on Date A, Year 3, the
Year 4 taxable year was within the effective date prescribed by Congress. Soon
thereafter, Taxpayer filed a Form 3115 with the National Office to change its method of
accounting for Costs for its Year 4 taxable year. Taxpayer filed its Year 4 tax return
implementing the change in method of accounting for Costs and making the election.
Subsequently, Taxpayer filed Form 1139, Corporation Application for Tentative Refund.
A substantial portion of the anticipated refund was a result of the change in method of
accounting for Costs.

Taxpayer was later informed by the IRS Service Center that its refund application was
denied because Taxpayer was ineligible to make the election for its Year 4 taxable year
under § 441(f) of the Internal Revenue Code. Taxpayer’s ineligibility to make the
election for Year 4 and its failure to make the election and the change in method of
accounting for Costs for Year 3 has resulted in significant economic detriment to
Taxpayer. Taxpayer indicated that the extraordinary economic conditions during the
years at issue resulted in such significant economic harm to Taxpayer that the election,
together with the change in method of accounting for Costs, would provide it with the
relief that Congress intended to provide when it enacted the temporary legislation.

                            RULINGS REQUESTED

Taxpayer has requested a ruling granting permission under § 301.9100 to file a late
Form 3115 to change its method accounting for Costs for Year 3.

                             LAW AND ANALYSIS

Section 446(e) of the Internal Revenue Code and § 1.446-1(e) of the Income Tax
Regulations state that except as otherwise provided, a taxpayer must secure the
Commissioner's written consent before changing a method of accounting for federal
income tax purposes.

Section 1.446-1(e)(3)(i) requires that, in order to obtain the Commissioner's consent to a
method change, a taxpayer must file Form 3115 during the taxable year in which the
taxpayer desires to make the proposed change. Section 2.04 of Rev. Proc. 2008-52,
2008-36 I.R.B. 587, provides that unless specifically authorized by the Commissioner, a
taxpayer may not request, or otherwise make, a retroactive change in method of
PLR-134752-11 3

accounting, regardless of whether the change is from a permissible or an impermissible
method.

Section 301.9100-3 provides generally for extensions of time to make regulatory
elections under sections of the Code other than those for which § 301.9100-2 expressly
prescribes automatic extensions. Section 301.9100-3(a) provides in part that the
Commissioner will grant a request for an extension of time when a taxpayer provides
evidence, including affidavits described in paragraph (e) of the regulation, establishing
to the Commissioner's satisfaction that the taxpayer acted reasonably and in good faith,
and that granting relief would 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.

Section 301.9100-3(b)(3) provides in part that a taxpayer is deemed to have not 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, 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.

Section 301.9100-3(c)(1)(i) provides in part that 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 (taking into account the time value of money).
If the tax consequences of more than one taxpayer are affected by the election, the
Government's interests are prejudiced if extending the time for making the election may
result in the affected taxpayers, in the aggregate, having a lower tax liability than if the
election had been timely made.

Section 301.9100-3(c)(1)(ii) provides in part that the interests of the Government
ordinarily are 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.

Section 301.9100-3(c)(2) imposes special rules for accounting method regulatory
elections such as the one in question. The regulation provides that the interests of the
PLR-134752-11 4

Government are deemed to be prejudiced except in unusual and compelling
circumstances if the accounting method regulatory election for which relief is requested
(i) is subject to the requirement in § 1.446-1(e)(3)(i) for advance written consent of the
Commissioner; (ii) requires an adjustment under § 481(a) (or would require such an
adjustment if the taxpayer changed to the method of accounting for which relief is
requested in a taxable year subsequent to the year in which the election should have
been made); (iii) would permit a change from an impermissible method of accounting
that is an issue under consideration by examination, an appeals office, or a federal court
and the change would provide a more favorable method or more favorable terms and
conditions than if the change were made as part of an examination; or (iv) provides a
more favorable method of accounting or more favorable terms and conditions if the
election is made by a certain date or taxable year. Thus, barring unusual and
compelling circumstances, Taxpayer would not receive relief under § 301.9100-3
because the Government's interests are deemed prejudiced by its late filing.

Based solely on the facts and the representations submitted, we conclude that the
requirements of §§ 301.9100-1 and 301.9100-3 have been met. Taxpayer has shown
that it acted reasonably and in good faith and without hindsight. Further, Taxpayer has
shown that the facts and circumstances surrounding its failure to timely file its change in
method of accounting for Costs were so uncommon and of such disproportionate effect
as to constitute a combination of unusual and compelling circumstances that lead to the
conclusion that the interests of the Government are not prejudiced by granting the
requested relief for an extension of time under § 301.9100-1(c).

                                     RULING

Consent is hereby granted to Taxpayer to file Form 3115, requesting permission to
change its method of accounting for Costs, effective Year 3. In this regard, we will
consider the Form 3115 attached to Taxpayer's amended consolidated federal income
tax return for Year 3 and the copy mailed to the IRS National Office to be timely filed if
filed within the time designated in a private letter ruling to be issued by the Associate
Chief Counsel, Corporate granting an extension of time to make the election for Year 3.
A copy of this letter ruling should be associated with the Form 3115.

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 private letter ruling. Specifically, no opinion is expressed or implied regarding
whether the requested change in method of accounting is a proper method of
accounting or has been properly implemented.
PLR-134752-11 5

This ruling is directed only to the taxpayer that requested 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 representative.

                                   Sincerely,



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