Funds receive relief for late RIC and dividend elections

Plain-English summary

Two series funds intended from inception to qualify as regulated investment companies. Their preparer timely extended the return deadlines and delivered the completed Forms 1120-RIC to the funds' treasurer, but an administrative clerical error prevented the returns from being mailed by the extended due date. The funds later filed the returns, which computed income as RICs and elected to treat certain declared and distributed dividends as paid during the prior taxable year. They requested relief before the IRS discovered the missed elections and represented that the relief would not reduce aggregate tax liability or rely on hindsight. The IRS treated both the section 851(b)(1) RIC elections and the section 855(a) dividend elections as timely made.

Ruling snapshot

• Question: Could two funds obtain relief after a clerical error delayed their RIC returns and related elections?
• Outcome: Approved, both elections were treated as timely made.
• Key authorities: IRC §§ 851(b)(1) and 855(a); Treas. Reg. §§ 1.851-2(a), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201521014 Third Party Communication: None
Release Date: 5/22/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00, 851.01-00
Person To Contact:
---------------------------------- ---------------, ID No. ------------
------------------------------ Telephone Number:
------------------------------------- --------------------
---------------------------------------- Refer Reply To:
CC:FIP:B02
PLR-139805-14
Date:
January 30, 2015

Legend

Fund 1 = --------------------------------------

Fund 2 = -----------------------------------------------

Trust = -----------------------------
State A = ------
Date 1 = --------------------------
Date 2 = ------------------------
Date 3 = ---------------------
Date 4 = ----------------------
Date 5 = --------------------------
Month 1 = --------------
Year 1 = ------

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

This is in reply to a letter dated October 15, 2014, submitted on behalf of Fund 1
and Fund 2 (each a “Fund,” collectively, the “Funds”). Each Fund requests an
extension of time under sections 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations to make an election under sections 851(b)(1) and 855(a) of
the Internal Revenue Code.

FACTS

Funds are series funds of Trust, a State A business trust registered as an open-
end investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1

2
PLR-139805-14

et seq., as amended. From inception, each Fund has operated in a manner intended to
qualify it as a regulated investment company (RIC) under subchapter M of the Code.

Funds’ federal income tax returns, Forms 1120-RIC, U.S. Income Tax Return for
Regulated Investment Companies, for the tax year ended Date 1 (Funds’ 1120-RICs)
were due Date 2. The tax return preparer filed, for each Fund, a timely request for an
extension of time to file (Form 7004, Application for Automatic Extension of Time to File
Certain Business Income Tax, Information, and Other Returns)) until Date 3, and
delivered Funds’ 1120-RICs to Funds’ treasurer (Treasurer) for signature. Due to a
clerical error in Funds’ administrative department, the returns were inadvertently not
mailed by Date 3. In late Month 1 of Year 1, Treasurer discovered that the returns had
not been filed and proceeded to consult with Funds’ legal counsel and CPA firm.
Funds’ 1120-RICs were filed Date 4.

Each Fund intended to make an election under section 851(b)(1) to be taxed as a
RIC and accordingly computed its taxable income as a RIC on its Form 1120-RIC for its
taxable year ended Date 1. On this Form 1120-RIC, each Fund also intended to make
an election under section 855(a) and accordingly treated dividends declared and
distributed in accordance with the limitations set forth in section 855(a)(1) and (2),
respectively, as having been paid during its taxable year ended Date 1.

Funds have submitted the affidavit of Treasurer in support of this requested
ruling.

The following representations are made in connection with the request for an
extension of time:

1. The request for relief was filed before the failure to make the regulatory
   elections was discovered by the Service.

2. Granting the relief requested will not result in Fund 1 or Fund 2 having a lower
   tax liability in the aggregate for all years to which the elections apply than it would
   have had if the elections had been timely made (taking into account the time
   value of money).

3. Funds do not seek to alter a return position for which an accuracy-related
   penalty has been or could have been imposed under section 6662 of the Code at
   the time they requested relief and the new position requires or permits a
   regulatory election for which relief is requested.

4. Being fully informed of the required regulatory elections and related tax
   consequences, Funds did not choose to not file the elections.

PLR-139805-14 3

5. Neither Fund is using hindsight by basing this request on knowledge of events
   occurring after the due date of the elections.

6. No intervening events have occurred to make the elections more
   advantageous to Funds.

LAW AND ANALYSIS

Section 851(b)(1) provides that a corporation shall not be considered a RIC for
any taxable year unless it makes an election to be a RIC on its federal income tax return
for the taxable year or has made an election for a previous taxable year. Section 1.851-
2(a) of the Income Tax Regulations provides that the taxpayer shall make its election to
be treated as a RIC by computing taxable income as a RIC on its federal income tax
return for the first taxable year for which the election is applicable.

Section 855(a) provides that, if a RIC declares a dividend prior to the time
prescribed by law for the filing of its return for a taxable year (including the period for
any extension of time granted for filing such return), and distributes the amount of such
dividend to shareholders in the 12-month period following the close of such taxable year
and not later than the date of the first regular dividend payment made after such
declaration, the amount so declared and distributed shall, to the extent the company
elects in such return in accordance with regulations prescribed by the Secretary, be
considered as having been paid during such taxable year, except as provided in
subsections (b), (c), and (d).

Section 301.9100-1(c) of the Procedure and Administration Regulations provides
that the Commissioner has discretion to grant a reasonable extension of time to make a
regulatory election or a statutory election (but no more than 6 months except in the case
of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except
subtitles E, G, H, and I. Section 301.9100-1(b) defines a regulatory election as an
election whose due date is prescribed by regulations or by a revenue ruling, a revenue
procedure, a notice, or an announcement published in the Internal Revenue Bulletin.

Section 301.9100-3(a) through (c)(1)(i) sets forth rules that the Service generally
will use to determine whether, under the facts and circumstances of each situation, the
Commissioner will grant an extension of time for regulatory elections that do not meet
the requirements of section 301.9100-2. Section 301.9100-3(a) provides that requests
for relief subject to this section will be granted when the taxpayer provides the evidence
(including affidavits described in section 301.9100-3(e)) 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.

PLR-139805-14 4

Section 301.9100-3(b) provides that a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer (i) requests relief under this section before
the failure to make the regulatory election is discovered by the Service; (ii) failed to
make the election because of intervening events beyond the taxpayer’s control; (iii)
failed to make the election because, after exercising reasonable diligence (taking into
account the taxpayer’s experience and the complexity of the return or issue), 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,
including a tax professional employed by the taxpayer, and the tax professional failed to
make, or advise the taxpayer to make, the election. Moreover, a taxpayer will be
deemed not to have acted 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 and the new position requires or permits 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.

Section 301.9100-3(c) provides that a reasonable extension of time to make a
regulatory election will be granted only when the interests of the government will not be
prejudiced by the granting of relief. Section 301.9100-3(c)(i) provides 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)(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 years that would have been affected by the
election had it been timely made are closed by the period of limitations on assessment
under section 6501(a) before the taxpayer’s receipt of a ruling granting relief under this
section.

CONCLUSION

Based upon the facts and representations submitted, we conclude that each
Fund has shown good cause for granting a reasonable extension of time to make
elections under sections 851(b)(1) and 855(a). Since Funds filed their 1120-RICs on
Date 4, each Fund’s election to be treated as a RIC for U.S. federal income tax
purposes and election to treat dividends declared and distributed in accordance with
section 855, as described in this letter, for Funds’ taxable years ended Date 1, will be
treated as having been timely made, despite having been made after the due date
prescribed for making these elections.

This ruling is limited to the timeliness of the filing of Funds’ elections under
sections 851(b)(1) and 855(a). This ruling’s application is limited to the facts,

PLR-139805-14 5

representations, Code sections, and regulations cited herein. No opinion is expressed
regarding any material item or representation on each Fund’s Form 1120-RC.

No opinion is expressed with regard to whether the tax liability of Fund 1 or Fund
2 is not lower in the aggregate for all years to which the elections apply than such tax
liability would have been if the elections had been timely made (taking into account the
time value of money). Upon audit of the federal income tax returns involved, the
director’s office will determine such tax liability for the years involved. If the director’s
office determines that such tax liability is lower, that office will determine the federal
income tax effect.

Except as specifically provided otherwise, no opinion is expressed on the federal
income tax consequences of the transaction described above.

This ruling is directed only to the taxpayers that requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

Sincerely,

Susan Thompson Baker___
Susan Thompson Baker
Senior Technician Reviewer, Branch 2
Office of Associate Chief Counsel
(Financial Institutions & Products)