Consulting group gets late personal-service ownership election

Plain-English summary

A consolidated group of consulting companies continued using the cash method after converting from S corporations, believing its members were qualified personal service corporations. The common parent timely filed the group's return but omitted the statement electing to treat the affiliated group as one taxpayer for the employee-ownership test under § 448(d)(4)(C). The IRS found the regulatory-extension standards met and granted 60 days to file an amended consolidated return with the required election statement. The ruling did not decide whether the companies were qualified personal service corporations, qualified to make the election, or could otherwise use the cash method.

Ruling snapshot

• Question: May the affiliated group make a late election to apply the qualified personal service corporation ownership test on a group basis?
• Outcome: Approved, with 60 days to amend the consolidated return
• Key authorities: IRC § 448(d)(2) and (4)(C); Treas. Reg. §§ 301.9100-3 and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201442007 Third Party Communication: None
Release Date: 10/17/2014 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
-----------------------, ID No. ----------------
Telephone Number:
--------------------
Refer Reply To:
------------------------------------------------------ CC:ITA:7
----------------------------------- PLR-104229-14
------------------------------ Date:
----------------------------- July 21, 2014

Re: Request for an Extension of Time to Make an Election under § 448(d)(4)(C) to Treat
All Members of the Parent’s Affiliated Group as a Single Taxpayer for Purposes of the
Ownership Test in § 448(d)(2)(B)

Legend

P = -----------------------------------
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S1 = -------------------------
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S2 = -------------------------------------------
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Date1 = --------------------------
Date2 = ---------------------
Date3 = --------------------------
Date4 = --------------------------
Date5 = ---------------------
Date6 = -----------------------

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

   This letter responds to a letter dated January 31, 2014, and supplemental

correspondence, submitted by P on behalf of itself and its subsidiaries S1 and S2
requesting an extension of time under § 301.9100-3 of the of the Procedure and
Administration Regulations to make an election under § 448(d)(4)(C) of the Internal
Revenue Code to treat all members of P’s affiliated group as a single taxpayer for
purposes of the ownership test in § 448(d)(2)(B), effective for the taxable year ended
Date1.
PLR-104229-14 2

                                      FACTS

   Parent represents that the facts are as follows:

    P is the common parent of an affiliated group of corporations that is comprised of

P and its wholly-owned subsidiaries S1 and S2. The affiliated group of corporations
files a consolidated federal income tax return on a calendar-year basis.

   P, S1, and S2 are engaged in the business of providing advice and counsel

(“sales and marketing consulting services”) to businesses to improve their sales and
marketing capabilities. P, S1, and S2 are compensated on a fixed fee or time and
material basis. The compensation is not contingent upon the purchase of
advertisements or other media placement by clients.

  Prior to Date2, a date before Date1, P, S1 and S2 were S corporations, and had

used the overall cash receipts and disbursements method of accounting (the “cash
method of accounting”) at all times since their formation.

   P timely filed its consolidated federal income tax return for the taxable year

ended Date1. On this return, P indicated that P, S1, and S2 were qualified personal
service corporations under § 448(d)(2). P, S1, and S2 continued to use the overall cash
method of accounting for the taxable years ended Date1, Date3, and Date4. However,
in Date5, P learned that it had inadvertently failed to attach the election statement
required by § 301.9100-7T(a) to P’s consolidated federal income tax return for the
taxable year ended Date1.

  The period of limitation on assessment under § 6501(a) for the taxable year

ended Date1 has not expired. P executed a Form 872, Consent to Extend the Time to
Assess Tax, with the Internal Revenue Service extending the period of limitation on
assessment under § 6501(a) for the taxable year ended Date1 until Date6.

                             RULING REQUESTED

  P requests an extension of time pursuant to § 301.9100-3 to make an election

under § 448(d)(4)(C) to treat all members of its affiliated group as a single taxpayer for
purposes of the ownership test in § 448(d)(2)(B).

                              LAW AND ANALYSIS

  Section 448(a)(1) generally provides that, in the case of a C corporation, taxable

income shall not be computed under the cash method of accounting.
PLR-104229-14 3

  Section 448(b) provides exceptions to the limitation on the use of the cash

method of accounting by a C corporation. For instance, § 448(b)(2) provides that
§ 448(a)(1) shall not apply to qualified personal service corporations.

   Section 448(d)(2) defines the term “qualified personal service corporation” to

mean any corporation (A) substantially all the activities of which involve the
performance of services in the fields of health, law, engineering, architecture,
accounting, actuarial science, performing arts, or consulting, and (B) substantially all the
stock of which (by value) meets certain employee-ownership requirements.

    Section 1.448-1T(e)(3) of the Income Tax Regulations provides that the term

“qualified personal service corporation” means any corporation that meets the function
test of § 1.448-1T(e)(4), and the ownership test of § 1.448-1T(e)(5).

   Section 1.448-1T(e)(4)(i) provides that a corporation meets the function test if

substantially all the corporation’s activities for a taxable year involve the performance of
services in health, law, engineering, architecture, accounting, actuarial science,
performing arts, or consulting. Substantially all of the activities of a corporation are
involved in the performance of services in a qualifying field only if 95 percent or more of
the time spent by employees of the corporation, serving in their capacity as such, is
devoted to the performance of services in a qualifying field.

     Section 1.448-1T(e)(5)(i) provides that a corporation meets the ownership test if

at all times during the taxable year, substantially all the corporation’s stock, by value, is
held, directly or indirectly, by (A) employees performing services for such corporation in
connection with activities involving a field described in § 1.448-1T(e)(4); (B) retired
employees who had performed such services for such corporation; (C) the estate of any
individual described in § 1.448-1T(e)(5)(i)(A) or (B); or (D) any other person who
acquired such stock by reason of the death of an individual described in § 1.448-
1T(e)(5)(i)(A) or (B), but only for the 2-year period beginning on the date of the death of
such individual. For purposes of the ownership test, “substantially all” means an
amount equal to or greater than 95 percent.

     Section 448(d)(4)(C) provides that at the election of the common parent of an

affiliated group (within the meaning of § 1504(a)), all members of such group may be
treated as 1 taxpayer for purposes of § 448(d)(2)(B) if 90 percent or more of the
activities of such group involve the performance of services in the same field described
in § 448(d)(2)(A).

   Section 301.9100-7T(a)(2)(i)(A) provides, in relevant part, that the election under

§ 448(d)(4)(C) must be made by the due date (taking extensions into account) of the tax
return for the first taxable year for which the election is to be effective.
PLR-104229-14 4

    Section 301.9100-7T(a)(3) provides that the election under § 448(d)(4)(C) shall

be made by attaching a statement to the tax return for the taxable year for which the
election is to be effective. The statement shall (A) contain the name, address and
taxpayer identification number of the electing taxpayer, (B) identify the election,
(C) indicate the section of the Code under which the election is made, (D) specify, as
applicable, the period for which the election is being made and/or the property or other
items to which the election is to apply, and (E) provide any information required by the
relevant statutory provisions and any information necessary to show that the taxpayer is
entitled to make the election.

  Under section 301.9100-1, the Commissioner has discretion to grant a

reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make a regulatory election.

   Sections 301.9100-1 through 301.9100-3 provide the standards the

Commissioner will use to determine whether to grant an extension of time to make an
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 § 301.9100-2.

    Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 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 the grant of
relief will not prejudice the interests of the government.

                                 CONCLUSION

   Based solely on the facts and representations submitted, we conclude that the

requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly,
Parent is granted 60 calendar days from the date of this letter to make the election
under § 448(d)(4)(C) to treat all members of its affiliated group as a single taxpayer for
purposes of the ownership test in § 448(d)(2)(B), effective for the taxable year ended
Date1. This election must be made by P filing an amended consolidated federal income
tax return for the taxable year ended Date1, with the written election statement required
by § 301.9100-7T(a)(3). P should attach a copy of this letter to the amended
consolidated federal income tax return.

   Except as specifically set forth above, we express no opinion concerning the

federal tax consequences of the facts described above under any other provisions of
the Code (including other subsections of § 448). Specifically, no opinion is expressed
or implied as to whether P, S1 or S2 are qualified personal service corporations under
§ 448(d)(2) and the regulations thereunder, or whether P, S1 or S2 qualify to make the
election under § 448(d)(4)(C). Moreover, no opinion is expressed or implied as to
PLR-104229-14 5

whether P, S1 or S2 are prohibited from using the cash method of accounting under
§ 448 or any other section of the Code or regulations.

  This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

  In accordance with the power of attorney, we are sending a copy of this letter to

Parent’s authorized representative. We are also sending a copy of this letter to the
appropriate operating division director.

                                             Sincerely,

                                             Karla M. Meola

                                             KARLA M. MEOLA
                                             Assistant to the Branch Chief, Branch 7
                                             Office of Associate Chief Counsel
                                             (Income Tax and Accounting)

Enclosures (2):
Copy of this letter
Copy for § 6110 purposes