Partnership receives more time to attach accounting-method application

Plain-English summary

A partnership sought an automatic accounting-method change for expenses related to price-protection rebates. Its accounting firm timely sent a copy of Form 3115 to the IRS National Office and prepared the tax return using the new method, but accidentally omitted the original Form 3115 from the return. Accounting-method relief normally requires unusual and compelling circumstances because a section 481 adjustment may be involved. The IRS found those circumstances because the failure was solely an administrative processing error, the return reflected the intended method, and the National Office copy was timely. It granted 60 days to file the required Form 3115 but did not decide the taxpayer's eligibility or whether the proposed method was permissible.

Ruling snapshot

• Question: May the partnership file late the original Form 3115 for its automatic price-protection rebate accounting-method change?
• Outcome: Approved, with Form 3115 due within 60 days.
• Key authorities: IRC §§ 446 and 481; Treas. Reg. §§ 1.446-1 and 301.9100-3; Rev. Proc. 2011-14.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201516026 Third Party Communication: None
Release Date: 4/17/2015 Date of Communication: Not Applicable
Index Number: 9100.10-00, 9100.10-01
Person To Contact:
-------------------- ---------------------, ID No. ----------------
-------------------------- Telephone Number:
------------------------------------ --------------------
------------------------------------------ Refer Reply To:
-------------------------------------- CC:ITA:B03
PLR-126223-14
Date:
December 24, 2014

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

Q = -----------------

R = -----------------

S = ----------------------------------------

A = -------------------------

D = ------------

Year Y = ------

X = ---------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

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

   This responds to the letter dated July 2, 2014 submitted on your behalf by your

authorized representative. That letter requests an extension of time for Taxpayer to file
a request to automatically change its method of accounting for the recognition of
expenses related to price protection rebates pursuant to Revenue Procedure 2011-14,
2011-1 C.B. 330. This request is made in accordance with sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations. Taxpayer is a limited
PLR-126223-14 2

liability company and is treated as a partnership for U.S. federal income tax purposes.
The outstanding member interests of Taxpayer are owned by Q and R, which are both
limited liability corporations and are both wholly owned by S, a C Corporation.
Taxpayer uses the accrual method of accounting and has an annual accounting period
ending on D.

FACTS

   Taxpayer is in the business of X. For its Year Y Tax Year Taxpayer engaged

Accounting Firm A to prepare and file Form 3115 Application for Change in Accounting
Method, for an automatic change in method of accounting for its recognition of
expenses relating to price protection rebates under Rev. Proc. 2011-14, Appendix §
19.07, for its Year Y Tax year (the “method change”).

   Section 6.02(3)(a) of Rev. Proc. 2011-14 provides that a taxpayer changing a

method of accounting generally must complete and file the application in duplicate. The
original application must be attached to the taxpayer’s timely filed (including any
extension) original U.S. federal income tax return implementing the change in method of
accounting for the year of change. A copy of the application must be filed with the IRS
National Office no earlier than the first day of the year of change and no later than the
date the taxpayer files the original with the federal income tax return for the year of
change.

   The Year Y tax return was prepared on a basis consistent with the Method

Change being made for the Year Y tax year. Pursuant to the requirements of Section
6.02(3)(a)(ii) of Rev. Proc. 2011-14, Accounting Firm A filed the National Office Copy.
Accounting Firm A failed to include the original election statement with the timely filed
return. This was the result of an inadvertent administrative error on the part of A staff.
Following this discovery A staff contacted an S tax manager regarding the inadvertently
omitted election and discussed filing a ruling request for an extension of time to file the
election. The S tax manager requested that Accounting Firm A prepare and file a ruling
request for such an extension of time for Taxpayer.

     Taxpayer has represented that it is not aware of any knowledge on the part of the

Internal Revenue Service of Taxpayer’s failure to timely file the election. It represents
that it is not seeking to alter a return position for which an accuracy-related penalty has
been or could be imposed under section 6662. Taxpayer has represented that it is not
using hindsight in requesting this relief and that no specific facts have changed since
the original due date for filing the election that makes it advantageous to Taxpayer.
Taxpayer represents that the requested relief will not result in a lower tax liability for
Taxpayer and its partners for all taxable years affected by the election than they would
have had if the election had been timely made. Taxpayer represents that the period of
limitations on assessment under section 6501(a) has not expired for Taxpayer for the
PLR-126223-14 3

taxable year in which the election should have been filed or for any taxable year that
would have been affected by the election had the election been timely made.

LAW AND ANALYSIS

    Section 1.446-1(d)(2)(i) of the Income Tax regulations provides that a taxpayer

that changes a method of accounting must secure the consent of the Commissioner.
Section 6.01 of Rev. Proc. 2011-14 provides that the consent of the Commissioner is
granted to any taxpayer to change its method of accounting for a method described in
the revenue procedure as long as a taxpayer complies with all the applicable provisions
of the revenue procedure and implements the change in the method of accounting for
the requested year of change.

    Section 6.02(3)(a) of Rev. Proc. 2011-14 provides that a taxpayer changing a

method of accounting pursuant to the revenue procedure must complete and file the
application in duplicate. Section 6.02(3)(a)(i) provides that the original application must
be attached to the taxpayer’s timely filed (including any extension) original U.S. federal
income tax return implementing the change in method of accounting for the year of
change. Section 6.02(3)(a)(ii)(A) provides that a copy of the application must be filed
with the IRS National Office no earlier than the first day of the year of change and no
later than the date the taxpayer files the original with the federal income tax return for
the year of change.

    Section 6.02(3)(d)(i) of Rev. Proc. 2011-14 provides an automatic extension of

six months from the due date of the return for the year of change (excluding any
extension) to file an application, provided certain conditions are met. If these conditions
are not met, an extension will only be granted if the requirements of section 301.9100-3
of the regulations are satisfied.

   Section 301.9100-1(a) gives the Service discretionary authority to grant a

reasonable extension of time to make a regulatory election, provided that the time for
making such election is not expressly prescribed by statute. Section 301.9100-1(b)
defines the term “regulatory election” as including an election whose due date is
prescribed by a regulation, revenue ruling, revenue procedure, notice, or
announcement. Sections 301.9100-1 through 301.9100-3 provide the standards the
Service will use to determine whether to grant an extension of time to make a regulatory
election. Section 301.9100-2 provides automatic extensions of time for making certain
elections. Section 301.9100-3 provides extensions of time for making regulatory
elections that do not meet the requirements of section 301.9100-2.

   Section 301.9100-3 provides that requests for extensions of time for regulatory

elections will be granted when the taxpayer provides evidence (including affidavits
described in the regulations) to establish to the satisfaction of the Commissioner that
PLR-126223-14 4

the taxpayer acted reasonably and in good faith and granting relief will not prejudice the
interests of the government.

  Section 301.9100-3(b)(1) states that a taxpayer will be deemed to have acted

reasonably and in good faith if the taxpayer

  (i) requests relief before the failure to make the regulatory election is discovered
  by the Service;
  (ii) inadvertently failed to make the election because of intervening events
  beyond the taxpayer’s control;
  (iii) failed to make the election because, after exercising due diligence, the
  taxpayer was unaware of the necessity for the election;
  (iv) reasonably relied on the written advice of the Service; or
  (v) reasonably relied on a qualified tax professional, and the tax
  professional failed to make, or advise the taxpayer to make, the election.

   The affidavits presented show that Taxpayer acted reasonably and in good faith,

having reasonably relied on a qualified tax professional who failed to make the election.
In addition, Taxpayer requested relief before the failure to make the regulatory election
was discovered by the Service.

  Under section 301.9100-3(b)(3), a taxpayer will not be considered 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 section 6662 at the time the taxpayer
  requests relief (taking into account section 1.6664-2(c)(3) of the Income
  Tax Regulations) and the new position requires 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 original deadline that make the election advantageous to a
  taxpayer, the Service will not ordinarily grant relief.

Taxpayer is not seeking to alter a return position for which an accuracy-related penalty
has been or could be imposed under section 6662 at the time relief is requested and
was not informed in all material respects of the required election, and its related tax
consequences and chose not to make the election. Taxpayer intended to make the
election and requested Accounting Firm A to do so. The failure to make the election
was due to an administrative processing error. Furthermore Taxpayer is not using
hindsight in requesting relief. Taxpayer has represented that specific facts have not
changed since the original deadline that make the election advantageous to Taxpayer.
PLR-126223-14 5

   Section 301.9100-3(c)(1)(i) provides, in part, 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 (taking into account the time value of
money). Section 301.9100-3(c)(1)(ii) provides, in part, 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 years that would have been affected by the
election had it been timely made, are closed by the period of limitations on assessment.

    Under these criteria, the interests of the government are not prejudiced in this

case. Taxpayer has represented that granting relief would not result in Taxpayer
having a lower tax liability in the aggregate for all taxable years affected by the election
than if the election had been timely made (taking into account the time value of money).
Furthermore, 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 on assessment.

     Section 301.9100-3(c)(2) imposes special rules for accounting method regulatory

elections. The section provides, in relevant part, that the interests of the Government
are deemed to be prejudiced except in unusual and compelling circumstances if the
accounting method regulatory election for which relief is requested requires an
adjustment under section 481(a) (or would require an adjustment under section 481(a) if
the taxpayer changed to the method of accounting for which relief is requested in a
taxable year subsequent to the taxable year the election should have been made).
Similarly section 6.02(3)(d)(ii) of Rev. Proc. 2011-14 provides that a taxpayer that fails
to file the application for the year of change as provided in sections 6.02(a), (b), or (d)(1)
of the revenue procedure will not be granted an extension of time under section
301.9100-3 except in unusual and compelling circumstances.

   Based on the facts and representations submitted, unusual and compelling

circumstances have been demonstrated. The failure to timely file the original Form
3115 was solely a result of an administrative processing error by Accounting Firm A,
and was not an error on Taxpayer’s part, the Year Y Tax Return was prepared on a
basis consistent with the method change having been made, and the National Office
copy was timely filed.

    Accordingly, the consent of the Commissioner is hereby granted to Taxpayer for

an extension of time to file the Form 3115 required to automatically change its method
of accounting for the recognition of expenses related to price protection rebates
pursuant to Revenue Procedure 2011-14, 2011-1 C.B. 330 for the Year Y tax year. This
extension shall be for a period of 60 days from the date of this ruling. A copy of this
letter must be attached to any income tax return to which it is relevant.
PLR-126223-14 6

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

consequences of the facts described above under any other provision of the Code.
Specifically, no opinion is expressed or implied concerning whether: (1) Taxpayer is
eligible to file the Form 3115 at issue under Rev. Proc 2011-14; (2) Taxpayer otherwise
meets the requirements of Rev. Proc. 2011-14; or (3) Taxpayer’s proposed method of
accounting described in Form 3115 is a permissible method of accounting.

    This ruling is based upon information and representations submitted by Taxpayer

and accompanied by a penalty of perjury statement executed by appropriate parties.
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.

  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, we are sending copies of this letter to

Taxpayer’s authorized representative. We are also sending a copy of this letter to the
appropriate operating division director. Enclosed is a copy of the letter ruling showing
the deletions proposed to be made in the letter when it is disclosed under § 6110 of the
Internal Revenue Code.

                                    Sincerely,



                                    _____________________________
                                    Christopher F. Kane
                                    Branch Chief, Branch 3
                                    Office of the Associate Chief Counsel
                                    (Income Tax & Accounting)

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