Late regulated investment company dividend election treated as timely

Plain-English summary

A regulated investment company declared and paid dividends after year-end and intended to elect under section 855(a) to treat them as paid during the prior tax year. A new return reviewer mailed the signed Form 1120-RIC to the fund's manager, but the manager's officer assumed the package was only a file copy and did not open it until after the extended filing deadline. The fund filed the return soon afterward and promptly requested relief. The IRS found that the fund acted reasonably and in good faith, did not use hindsight, and would not receive a lower aggregate tax liability from the late election. It therefore treated the election on the late-filed return as timely made, without deciding whether the fund otherwise qualified as a regulated investment company.

Ruling snapshot

• Question: Should the fund's late section 855(a) election be treated as timely when a filing-process misunderstanding caused the return to miss its deadline?
• Outcome: Approved, the election is treated as timely made
• Key authorities: IRC §§ 851 and 855(a); Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201530006 Third Party Communication: None
Release Date: 7/24/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00, 855.00-00
Person To Contact:
--------------------------------------------------------- ---------------, ID No. -----------
----------------------------------------------- Telephone Number:
------------------------------------------------ --------------------
------------------------------------ Refer Reply To:
CC:FIP:B02
PLR-106687-15
Date:
April 21, 2015

Legend:

Fund = --------------------------------------------------

Trust = -------------------------------
State A = ------------
Manager = -------------------------------
Accountant 1 = ---------------------------------
Accountant 2 = -------------------------
Accountant 3 = ----------------
Date 1 = ------------------------
Date 2 = -----------------------
Date 3 = --------------------------
Date 4 = -----------------
Date 5 = -----------------
Date 6 = --------------------

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

   This is in reply to a letter dated January 30, 2015, submitted on behalf of Fund.

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 section 855(a) of
the Internal Revenue Code.

                                                 FACTS

  Fund is a series fund of Trust, a State A statutory trust registered as an open-

ended management investment company under the Investment Company Act of 1940,
15 U.S.C. 80a-1 et seq., as amended. Fund has elected to be, and intends to qualify
each year as a regulated investment company (RIC) under section 851(a).
PLR-106687-15 2

   Trust engaged Manager to perform overall supervision and management

services for Fund. In that capacity, Manager engaged Accountant 1 to prepare Fund’s
federal income tax returns and Accountant 2 to review Fund’s federal income tax
returns. Accountant 1 has provided tax compliance services and has prepared Fund’s
federal income tax returns since Fund’s inception on Date 1. On Date 3, Manager hired
Accountant 3 to replace Accountant 2 as the reviewer of Fund’s federal income tax
returns.

   For the tax year ended Date 2 (Tax Year 1), Fund filed 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 5.

   After the close of Tax Year 1, Fund declared dividends which it paid prior to any

other regular dividend following the declaration. On its Tax Year 1 Form 1120-RIC, U.S.
Income Tax Return for Regulated Investment Companies (Fund’s 1120-RIC), Fund
intended to make an election under section 855(a) and accordingly treated those
dividends declared and distributed in accordance with the limitations set forth in section
855(a)(1) and (2), respectively, as having been paid during Tax Year 1.

  A few days prior to Date 5, the extended due date of Fund’s 1120-RIC, a senior

manager at Accountant 3 signed, as preparer, Fund’s 1120-RIC and forwarded it via
next day mail to Manager, addressed to the Secretary and Treasurer of Fund. The CFO
of Manager, who is also the Secretary and Treasurer of Fund, received the package
from Accountant 3 on Date 4. In tax years prior to Tax Year 1, an employee of
Accountant 2 had signed Fund’s return as the preparer and forwarded it to a director of
Manager for signature and filing. Because Accountant 3 and the CFO of Manager were
unaware of the process used by Accountant 2 and the director of Manager, Fund’s
1120-RIC was not timely filed. The CFO of Manager assumed Accountant 3 had filed
Fund’s 1120-RIC and that the delivery from Accountant 3 was a copy for the files.
Consequently, the CFO of Manager did not open the package until after Date 5 and
Fund’s 1120-RIC was not timely filed. Fund’s 1120-RIC was filed on or about Date 6.

    When the CFO of Manager realized that Fund’s 1120-RIC had not been timely

filed, he promptly contacted Accountant 3 and filed this letter ruling request.

    Fund has submitted the affidavit of the CFO of Manager/Secretary and Treasurer

of Fund and the affidavit of an employee of Accountant 3 in support of this requested
ruling.

  The following representations are made in connection with the request for an

extension of time:
PLR-106687-15 3

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

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

   3. Fund does not seek to alter a return position for which an accuracy-related
   penalty has been or could have been imposed under section 6662 at the time it
   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 election and related tax
   consequences, Fund did not choose to not file the election.

   5. Fund is not using hindsight by basing this request on knowledge of events
   occurring after the due date of the election.

   6. No intervening events have occurred to make the election more
   advantageous to Fund.


                              LAW AND ANALYSIS

   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.
PLR-106687-15 4

    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.

     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 Fund has

shown good cause for granting a reasonable extension of time to make an election
under section 855(a). Since Fund filed its1120-RIC on or about Date 6, Fund’s election
PLR-106687-15 5

to treat dividends declared and distributed in accordance with section 855 for Tax Year
1, as described in this letter, will be treated as having been timely made, despite having
been made after the due date prescribed for making the election.

  This ruling is limited to the timeliness of the filing of Fund’s election under section

855(a). This ruling’s application is limited to the facts, representations, Code sections,
and regulations cited herein. No opinion is expressed regarding any material item or
representation on Fund’s Form 1120-RIC. Furthermore, no opinion is expressed
regarding whether Fund qualifies as a RIC.

   No opinion is expressed with regard to whether the tax liability of Fund is not

lower in the aggregate for all years to which the election applies than such tax liability
would have been if the election 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 taxpayer that requested it. Section 6110(k)(3)

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)