IRS grants extra time for a discharge-of-indebtedness tax election

Plain-English summary

The IRS considered an individual's late election to apply excluded cancellation-of-debt income first to the basis of depreciable rental property. The taxpayer's accountant reported the excluded income but failed to complete Form 982 and advise the taxpayer to make the § 108(b)(5) election. The IRS found reasonable reliance and no prejudice to the government, then granted 45 days to file an amended return and make the election. The ruling did not decide whether the income was cancellation-of-debt income or whether it qualified for exclusion under § 108.

Ruling snapshot

• Question: Could the taxpayer make a late § 108(b)(5) election to reduce depreciable-property basis before other tax attributes?
• Outcome: Approved, 45-day extension granted
• Key authorities: IRC §§ 61, 108, 1017, 6501, 6662, and 6110; Treas. Reg. §§ 1.108-4 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201408007 Third Party Communication: None
Release Date: 2/21/2014 Date of Communication: Not Applicable
Index Number: 108.00-00, 108.01-00,
108.02-00, 108.02-01, Person To Contact:
9100.00-00 -----------------------, ID No. --------------
Telephone Number:
--------------------------- ----------------------
---------------------------------- Refer Reply To:
----------------------------------- CC:ITA:B04
PLR-120674-13
Date:
November 14, 2013

LEGEND

Taxpayer = ------------------------------------------------------
Year A = -------
Year B = -------
a = ------------
CPA = --------------------------

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

This letter responds to a letter from your authorized representative requesting an
extension of time under § 301.9100-3 of the Procedure and Administration Regulations
for Taxpayer to make a regulatory election. Specifically, Taxpayer has requested an
extension of time to make an election under § 108(b)(5) of the Internal Revenue Code
and § 1.108-4(b) of the Income Tax Regulations, to exclude income resulting from the
discharge of indebtedness when Taxpayer was insolvent and to reduce the basis of
depreciable real property, effective for Taxpayer’s Year A tax return.

FACTS

Taxpayer, an individual, files a federal income tax return reporting income on a calendar
year and uses the cash receipts and disbursements method of accounting.

In Year A, Taxpayer forfeited title to one of his rental properties to the lender in a
foreclosure transaction. The lender issued Form 1099-C, Cancellation of Debt, to
Taxpayer reflecting cancellation of recourse debt in the amount of $a. Taxpayer
represents that Taxpayer was insolvent at the time of the foreclosure transaction and
that the amount of Taxpayer’s insolvency exceeded the amount of debt cancelled.
PLR-120674-13 2

CPA prepared Taxpayer’s Year A federal income tax return. CPA properly reported
Taxpayer’s Year A cancellation of indebtedness income on Form 982, Reduction of Tax
Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), as
income excluded from the insolvency exception under section 108(a)(1)(B) but did not
complete Part II of Form 982, which requires reduction of tax attributes. Further, CPA
failed to advise Taxpayer to make the election on Line 5 of Part II to reduce basis of
depreciable property prior to reducing net operating losses. Taxpayer’s Year A federal
income tax return was timely filed.

In Year B, the Service initiated an examination of Taxpayer’s Year A federal income tax
return. In preparing for the examination, CPA and Taxpayer discovered the failures to
complete Form 982 and make a timely § 108(b)(5) election.

After discovering CPA’s oversight, Taxpayer filed this request for an extension of time to
make the election. CPA has filed an affidavit consistent with the above facts. Taxpayer
has agreed to extend the period of assessment for the Year A taxable year to October
9, 2014.

Taxpayer represents that Taxpayer acted reasonably and in good faith by Taxpayer’s
reasonable reliance on a qualified tax professional and the tax professional failed to
make, or advise Taxpayer to make, the election.

LAW AND ANALYSIS

Section 108(a)(1)(B) provides that gross income does not include any amount that
would be includible in gross income by reason of the discharge of indebtedness if the
discharge occurs while the taxpayer is insolvent.

Section 108(b)(1) provides, in general, that the amount excluded under § 108(a)(1) will
be applied to reduce the tax attributes of the taxpayer, as provided in § 108(a)(2).

Section 108(b)(5)(A) provides, in general, that the taxpayer may elect to apply any
portion of the reduction referred to in § 108(a)(1) to the reduction under § 1017 of the
basis of the depreciable property of the taxpayer.

Section 108(b)(5)(B) limits the amount to which the election in § 108(b)(5)(A) applies to
an amount not exceeding the aggregate adjusted bases of the depreciable property
held by the taxpayer as of the beginning of the taxable year following the taxable year in
which the discharge occurs.
PLR-120674-13 3

Section 1.108-4(b) provides that to make an election under § 108(b)(5), the taxpayer
must enter the appropriate information on Form 982,and attach the form to 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).

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 requests for extension of time for regulatory
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.
PLR-120674-13 4

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).

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(b)(5) and § 1.108-4(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 amount of 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 taxpayers 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 representatives.

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-120674-13 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,




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

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