S corporation may make late real-property debt exclusion election

Plain-English summary

An S corporation with interests in several real estate partnerships received cancellation-of-debt income through three Schedules K-1. Its accountant properly excluded the eligible qualified real property business indebtedness income on the corporation's timely return but overlooked the required Form 982 election. A new accounting firm discovered the omission while reviewing the prior return, and the corporation sought relief with supporting affidavits. The IRS found that the corporation acted reasonably and in good faith and that relief would not prejudice the government. It granted 45 days from the letter's stated sending date to file an amended return and Form 982. The ruling does not decide whether the income was cancellation-of-debt income or actually qualified for exclusion under § 108.

Ruling snapshot

• Question: Could the S corporation make a late Form 982 election for qualified real property business indebtedness income already excluded on its return?
• Outcome: Approved, with a 45-day extension
• Key authorities: IRC §§ 108(a)(1)(D), 108(c), and 108(d)(6); Treas. Reg. §§ 1.108-5(b) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201451006 Third Party Communication: None
Release Date: 12/19/2014 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-109158-14
Date:
August 28, 2014

LEGEND

Individual = ------------------------------------------------------
Taxpayer = ----------------------------------------------------
LLC1 = ----------------------------------------------------------
LLC2 = --------------------------------------------------------------
LP1 = -----------------------------------------------------
LP2 = ---------------------------------------------------------------------------------

Year 1 = -------
Year 2 = -------
$a = ------------
$b = ------------
$c = --------------
$d = ------------
$e = --------------
$f = ------------
Accountant = --------------------------------
Firm = -------------------------------

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
PLR-109158-14 2

business indebtedness and to reduce the basis of depreciable real property, effective
for Taxpayer’s Year 1 tax return.

FACTS

Individual reports income on a calendar year, uses the cash receipts and disbursements
method of accounting and is the sole shareholder of Taxpayer, an S corporation.
Taxpayer uses the cash receipts and disbursements method of accounting, reports
income on a calendar year, and is a real estate brokerage company. Taxpayer has an
ownership interest, either directly or indirectly, in partnerships LLC1, LLC2, LP1 and
LP2.

In Year 1, LLC2, LP1 and LP2 entered into debt modification agreements whereby a
portion of each note held by each partnership was forgiven, which resulted in
cancellation of indebtedness income (COD). In the same year, Taxpayer received
Schedule K-1s from: (i) LLC1 that showed COD in the amount of $a, $b of which
qualifies for exclusion under § 108(c); (ii) LP1 that showed COD in the amount of $c, $d
of which qualifies for exclusion under § 108(c); and (iii) LP2 that showed COD in the
amount of $e, $f of which qualifies for exclusion under § 108(c).

The three Schedule K-1s were provided to Accountant, who was engaged to prepare
Taxpayer’s Year 1 Form 1120S. Accountant, a qualified tax preparer with many years
of experience, properly excluded the eligible portion of COD as provided in each
Schedule K-1. However, due to an oversight, Accountant failed to complete and include
Form 982. Taxpayer’s Year 1 Form 1120S was timely filed.

In Year 2, Taxpayer provided Firm with a copy of its Year 1 Form 1120S to review in
anticipation of hiring Firm as its new accountant. Upon review of the return, Firm
noticed that the COD eligible for exclusion under § 108(c) was actually excluded, but
Form 982 was not included with Form 1120S. After discovering Accountant’s oversight
in not including the Form 982 making the election under § 108(c)(3)(C) and § 1.108-5(b)
on Taxpayer’s Year 1 Form 1120S, Taxpayer filed this request for an extension of time
to make the election. Taxpayer, Accountant and Firm 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
(and all interested parties) would have had if the election had been timely made (taking
into account the time value of money); 2) Taxpayer’s adjusted basis in the depreciable
property is greater than the amount of COD income; 3) Taxpayer will not exclude an
amount under § 108(a)(1)(D) that exceeds the excess of the principal amount of
indebtedness over the fair market value of the real property; 4) Taxpayer will reduce
basis in its depreciable real property on the Year 2 tax return; and 5) Taxpayer will
PLR-109158-14 3

reduce only the basis of depreciable real property that would have been eligible for such
basis reduction if the election had been timely made on the original return.

LAW AND ANALYSIS

Section 108(a)(1)(D) provides that gross income does not include any amount that (but
for § 108(a)) 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)(2) provides, in general, that the amount excluded under § 108(a)(1)(D)
with respect to any qualified real property business indebtedness shall not exceed the
excess of the outstanding principal amount of such indebtedness (immediately before
the discharge) over the fair market value of the real property described in § 108(c)(3)(A)
(as of such time).

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 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—
PLR-109158-14 4

(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).

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 September 23, 2014, the date
we sent the letter, to file an amended Year 1 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 amount of income at issue is properly treated as cancellation of indebtedness
PLR-109158-14 5

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
                                   Branch Chief, Branch 4
                                   (Income Tax & Accounting)