Taxpayer granted extra time to elect treatment of capital gains as investment income

Plain-English summary

An individual asked for more time to elect to treat net capital gains as investment income for purposes of the investment interest deduction. The election had been missed because the taxpayer's preparer did not advise that it was available. The IRS found that the taxpayer acted reasonably and in good faith, did not use hindsight, and would not prejudice the government's interests by making the election late. The IRS granted 60 days from the ruling date to make the election by filing Form 4952 and an amended return, or an electronic-return statement with the ruling's date and control number.

Ruling snapshot

• Question: Whether the taxpayer could make a late election under section 163(d)(4)(B)(iii) to treat net capital gains as investment income.
• Outcome: Approved, a 60-day extension was granted.
• Key authorities: IRC § 163(d)(4)(B)(iii); Treas. Reg. §§ 1.163(d)-1(b), 301.9100-1, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201316003 Third Party Communication: None
Release Date: 4/19/2013 Date of Communication: Not Applicable
Index Number: 163.00-00, 9100.00-00
Person To Contact:
------------------------------------------------------- -----------------, ID No. --------------
---------------- Telephone Number:
--------------------------------- --------------------
Refer Reply To:
CC:ITA:B03
PLR-129014-12
Date:
December 28, 2012

              TY: -------

LEGEND:

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

Preparer = ----------------------------------

Year 1 = -------

Year 2 = -------

Date a = -------------------

$a = --------------

$b = ------------

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

This is in response to your letter dated June 29, 2012 requesting an extension of time to
file an election on Form 4952, Investment Interest Expense Deduction, pursuant to

PLR-129014-12 2

§ 163(d)(4)(B)(iii) of the Internal Revenue Code to treat net capital gains as investment
income for the Year 1 taxable year. The request is made in accordance with
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.

                                        FACTS

Taxpayer timely filed Form 1040, Individual Income Tax Return, for Year 1, on Date a.
Taxpayer reported net capital gains of $a. In Year 1, Taxpayer did not incur any
additional investment interest expense, but had a carryover of investment interest
expense of $b from prior years. Taxpayer did not make an election under
§ 163(d)(4)(B)(iii) to treat net capital gains as investment income.

Taxpayer engaged and relied upon Preparer to prepare his Year 1 Form 1040. During
the course of the preparation, Preparer 1 did not inform Taxpayer that an election under
§ 163(d)(4)(B)(iii) was available and Taxpayer was unaware such an election existed.
In the course of preparing the Year 2 Form 1040, Taxpayer asked Preparer about his
carryover of investment interest and how he could claim this deduction.

In examining and researching this question on behalf of Taxpayer, Preparer discovered
the availability of the election to treat capital gains as investment income for purposes of
the investment interest deduction. Due to Preparer’s oversight, Preparer did not advise
Taxpayer to make the election under § 163(d)(4)(B)(iii). Upon discovering the election
had not been timely made for Year 1, Preparer advised Taxpayer to submit a letter
ruling requesting permission to file a late election.

                                LAW AND ANALYSIS

Section 163(d)(1) provides that in the case of a taxpayer other than a corporation, the
$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) provides, in part, that investment income means the sum of —

(i) gross income from property held for investment (other than any gain taken into
account under clause (ii)(I)),
(ii) the excess (if any) of —

(I) the net gain attributable to the disposition of property held for investment, over
(II) the net capital gain determined solely by taking into account gains and losses from
dispositions of property held for investment, plus
(iii) so much of the net capital gain referred to in clause (ii)(II) (or, if lesser, the net gain
referred to in clause (ii)(I)) as the taxpayer elects to take into account under this clause.

The term investment income shall include qualified dividend income (as defined in

PLR-129014-12 3

§ 1(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment
income for purposes of this subsection.

Section 1.163(d)-1(b) of the Income Tax Regulations provides that the election for net
capital gains and qualified dividend income must be made on or before the due date
(including extensions) of the income tax return for the taxable year in which the qualified
dividend income is received.

Section 301.9100-1(c) provides that the Commissioner of Internal Revenue, in
exercising his discretion, may grant a reasonable extension of time under the rules set
forth in § 301.9100-3 to make a regulatory election under all subtitles of the Internal
Revenue Code except subtitles E, G, H, and I. The term “regulatory election” is defined
in § 301.9100-1(b) as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, or
announcement published in the Internal Revenue Bulletin.

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

Under § 301.9100-3(b)(1), except as provided in § 301.9100-3(b)(3) (i) through (iii), a
taxpayer is deemed to have acted reasonably and in good faith if the taxpayer:

   (i) requested relief under this section before the failure to make the regulatory
   election was discovered by the Internal Revenue 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 reasonable diligence
   (taking into account the taxpayer's experience and the complexity of the return or
   issue), the taxpayer was unaware of the necessity for the election;

   (iv) reasonably relied on the written advice of the Internal Revenue Service; or

   (v) reasonably relied on a qualified tax professional, including a tax professional
   employed by the taxpayer, and the tax professional failed to make, or advise the
   taxpayer to make, the election.

Paragraphs (b)(3)(i) through (iii) of § 301.9100-3 provide that a taxpayer is deemed not
to have acted reasonably and in good faith if the taxpayer:

PLR-129014-12 4

   (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 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
   due date for making the election that make the election advantageous to a
   taxpayer, the Service will not ordinarily grant relief. In such a case, the Service
   will grant relief only when the taxpayer provides strong proof that the taxpayer's
   decision to seek relief did not involve hindsight.

Section 301.9100-3(c)(1) provides 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. 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) before the
taxpayer’s receipt of a ruling granting relief under this section.

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 § 1.163(d)-1(b). In
the present situation, the requirements of §§ 301.9100-1 and 301.9100-3 of the
regulations have been satisfied. The information and representations made by
Taxpayer establish that he acted reasonably and in good faith. The affidavits presented
show that Taxpayer reasonably relied on qualified tax professionals for the filing of
Taxpayer’s return, however, the tax professionals failed to make, or advise Taxpayer to
make, the election. The affidavits presented show that Taxpayer was unaware of the
necessity for the election and, upon discovery of the error by Preparer, promptly
requested relief.

The information and representations presented establish that Taxpayer is not seeking to
alter a return position for which an accuracy-related penalty had been or could be
imposed under § 6662 at the time relief was requested. Taxpayer was not informed in
all material respects of the required election, and its related tax consequences.
Furthermore, Taxpayer is not using hindsight in requesting relief, and no facts have
changed since the time of the original filing deadline.

Finally, 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 in the
appropriate amount at this time than Taxpayer would have had if the election were

PLR-129014-12 5

made in the appropriate amount by the original deadline for making the election.
Taxpayer has represented that the granting of an extension will only affect the timing of
when he will incur the tax liability. Moreover, the taxable year in which the regulatory
election should have been made, and any taxable years that would have been affected
by the election had it been timely made, are not closed by the period of limitations on
assessment.

                                 CONCLUSION

Accordingly, Taxpayer is granted an extension of time of 60 days from the date of this
letter to make the election to treat qualified dividends and net capital gains as
investment income for the Year 1 taxable year. The election should be made by filing a
Form 4952 and by including a copy of this ruling with an amended return for the Year 1
taxable year. Alternatively, a taxpayer filing returns electronically may satisfy this
requirement by attaching a statement to the return that provides the date and control
number of the letter ruling.

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.

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,



                                  Sean M. Dwyer
                                  Assistant to the Branch Chief, Branch 3
                                  (Income Tax & Accounting)

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