IRS grants extra time to make a qualified real property debt election

Plain-English summary

The IRS granted an individual an additional 45 days to make an election to exclude cancellation-of-debt income from qualified real property business indebtedness and reduce the basis of depreciable real property. The taxpayer missed the election because the professionals preparing the partnership and individual returns did not identify the relevant income or advise about the election. The IRS found that the taxpayer acted reasonably and in good faith, and that granting relief would not prejudice the government. The taxpayer must file an amended return and make the election on Form 982. The ruling did not decide whether the income was in fact cancellation-of-debt income or qualified for exclusion.

Ruling snapshot

• Question: Whether the taxpayer could receive more time to make the section 108(c)(3)(C) election.
• Outcome: Approved, with a 45-day extension from the ruling date.
• Key authorities: IRC §§ 108(a)(1)(D), 108(c)(3)(C), and 108(d)(6); Treas. Reg. §§ 1.108-5(b) and 301.9100-1 through 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201316009 Third Party Communication: None
Release Date: 4/19/2013 Date of Communication: Not Applicable
Index Number: 108.00-00, 108.01-00,
108.02-00, 108.02-01, 9100.00-00 Person To Contact:
---------------------, ID No. -----------
--------------------------- Telephone Number:
----------------------- ----------------------
---------------------------------- Refer Reply To:
CC:ITA:B04
PLR-132168-12
Date:
January 18, 2013

LEGEND

Taxpayer = ------------------------------------------------
LLC = ----------------------------------------------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Bank = --------------------------------
Firm 1 = ---------------------------------------
Firm 2 = --------------------------------------

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

This letter responds to your letter requesting an extension of time under § 301.9100-3 of
the Procedure and Administration Regulations to make a regulatory election.
Specifically, you have requested an extension of time to make an election under
§ 108(c)(3)(C) of the Internal Revenue Code and § 1.108-5(b) of the Income Tax
Regulations, to exclude income resulting from the discharge of qualified real property
business indebtedness and to reduce the basis of depreciable real property, effective
for Taxpayer's Year 1 tax return.

FACTS

Taxpayer, an individual who files a calendar year federal income tax return, is a 50-
percent partner in LLC, a limited liability company that is treated as a partnership for
federal income tax purposes. LLC uses the cash method of accounting and files a
calendar year federal income tax return. LLC is in the commercial real estate business
and owns and manages a commercial warehouse.
PLR-132168-12 2

In Year 1, in regard to the commercial warehouse owned by LLC, LLC executed a loan
modification agreement with Bank that resulted in cancellation of indebtedness (COD)
income to Taxpayer. Firm 1 prepared LLC’s partnership income tax return and reported
the COD income on Form 1065, U.S. Return of Partnership Income. However, neither
Form 1065 nor the corresponding Schedule K-1 indicated that the discharge related to
qualified real property business indebtedness.

Taxpayer’s Form 1040 was prepared by Firm 2, which was unaware of the nature of
Taxpayer’s COD income. As a result, Firm 2 did not inform taxpayer of the
§ 108(c)(3)(C) and § 1.108-5(b) election nor did it make the election on Taxpayer’s
behalf to reduce the basis of depreciable property and to exclude income resulting from
the discharge of qualified real property business indebtedness. Taxpayer’s Year 1
Form 1040 was timely filed.

In Year 3, while preparing projections of taxable income, Taxpayer and Firm 2
discovered that the COD income could have been excluded from taxable income and,
shortly thereafter, filed this request for an extension of time to make the § 108(c)(3)(C)
election. Firm 1 and Firm 2 have submitted affidavits consistent with the above facts.

Taxpayer represents that: 1) granting relief under § 301.9100-3 will not result in a lower
tax liability in the aggregate for all years to which the election applies than Taxpayer
would have had if the election had been timely made; 2) LLC will file an amended Year
2 Form 1065 reducing its depreciation expense; and 3) Taxpayer’s adjusted basis in the
depreciable property is greater than the amount of COD income.

LAW AND ANALYSIS

Section 108(a)(1)(D) provides that gross income does not include any amount that
would be includible in gross income by reason of the discharge of indebtedness if, in the
case of a taxpayer other than a C corporation, the indebtedness discharged is qualified
real property business indebtedness.

Section 108(c)(3)(C) requires a taxpayer to make an election to exclude COD income
under § 108(a)(1)(D).

Section 108(d)(6) provides that in the case of a partnership, § 108(a) and § 108(c) are
applied at the partner level.

Section 1.108-5(b) provides that the election under § 108(c)(3)(C) is made on the timely
filed (including extensions) federal income tax return for the taxable year in which the
taxpayer has discharge of indebtedness income that is excludible from gross income
under § 108(a). The election is made on a completed Form 982, Reduction of Tax
Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Sections 301.9100-1 through § 301.9100-3 provide the standards that the Service will
use to determine whether to grant an extension of time to make a regulatory election.
Section 301.9100-3(a) provides that request for extension of time for regulatory
PLR-132168-12 3

elections (other than automatic extensions covered in § 301.9100-2) will be granted
when the taxpayer provides evidence (including affidavits) to establish 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) a taxpayer is deemed to have acted reasonably and in good
faith if the taxpayer reasonably relied on a qualified tax professional and the tax
professional failed to make, or advise the taxpayer to make, the election. However, a
taxpayer is not considered to have reasonably relied on a qualified tax professional if
the taxpayer knew or should have known that the professional was not competent to
render advice on the regulatory election or was not aware of all relevant facts. In
addition, § 301.9100-3(b)(3) provides that a taxpayer is deemed not 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 and the new
position requires or permits a regulatory election for which relief is requested;

(ii) Was informed in all respects of the required election and related consequences, but
chose not to make the election; or

(iii) Uses hindsight in requesting relief.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time to make the regulatory election only when the interests of the
Government will not be prejudiced by the granting of relief.

Section 301.9100-3(c)(1)(i) provides 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). Similarly,
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 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 year 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.

Under the facts submitted by Taxpayer, we conclude that Taxpayer has acted
reasonably and in good faith under § 301.9100-3(b). In addition, we conclude that
granting relief will not prejudice the interests of the government under § 301.9100-3(c).
PLR-132168-12 4

CONCLUSION

Based solely on the information submitted and the facts as represented in the ruling
request, we grant Taxpayer an extension of 45 days from the date of this letter to file an
amended return to make the election under §§ 108(c)(3)(C) and § 1.108-5(b). The
election is to be made on Form 982.

Except as expressly provided in the preceding paragraph, we do not express or imply
an opinion concerning the tax consequences of any aspect of any transaction or item
discussed or referenced in this letter. Specifically, this letter does not rule on whether
the income at issue is properly treated as cancellation of indebtedness income under
§ 61(a)(12). In addition, this letter also does not rule on whether the income in fact
qualifies for exclusion from income under § 108.

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,



                                               Michael J. Montemurro
                                               Chief Branch 4
                                               Office of Associate Chief Counsel
                                               (Income Tax & Accounting)

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