Fund’s four late tax elections are treated as timely

Plain-English summary

A series of a registered investment company prepared a timely return containing elections to be treated as a regulated investment company, carry certain late-year losses forward, treat declared dividends as paid in the prior year, and mark PFIC stock to market. After the employee who historically handled filing left, the completed return was delivered to another officer who mistakenly believed it had already been filed and opened the package after the deadline. The fund filed about two and a half weeks late and sought regulatory relief before the IRS discovered the failure. The IRS found that the fund acted reasonably and in good faith and treated all four elections as timely made.

Ruling snapshot

• Question: Could the fund obtain relief for four elections included in a return filed shortly after its extended due date because of an internal handoff mistake?
• Outcome: Approved
• Key authorities: IRC §§ 851(b)(1), 852(b)(8)(A), 855(a), 1296(a); Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201546006 Third Party Communication: None
Release Date: 11/13/2015 Date of Communication: Not Applicable
Index Number: 856.00-00, 856.01-00
Person To Contact:
--------------------------- --------------------------, ID No. ----------------
--------------------------------- -----------------
--------------------------------------------------- Telephone Number:
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-------------------------------------- Refer Reply To:
CC:FIP:B02
PLR-106690-15
Date:
August 05, 2015

Legend

Taxpayer =
Trust =
Advisor =
Company X =
Company Y =
Company Z =
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Person B =
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Dear ---------------------:

This is in response to your letter dated January 30, 2015, and subsequent
correspondence, seeking an extension of time to make the following elections
(collectively the “Elections”): (1) an election under section 851(b)(1) of the Internal
Revenue Code to be a regulated investment company (“RIC”); (2) an election under
section 855(a) to treat as paid within Year 1 ordinary income dividends and capital gain
dividends declared prior to Date 1 and paid prior to Date 2 and not later than the first
regular dividend paid following such declaration; (3) an election under section
852(b)(8)(A) and section 1.852-11(f) of the Income Tax Regulations to treat any portion
of any qualified late-year loss for such taxable year as arising on the first day of the
following taxable year for federal tax purposes; and (4) a mark to market election under
section 1296(a) with respect to marketable stock in Company X and Company Y, which
are both passive foreign investment companies (“PFICs”).

FACTS

Trust was organized as a State A statutory trust on Date 3. Trust is registered
under the Investment Company Act of 1940, as amended (“1940 Act”), as an open-
ended management investment company issuing its shares in series, with each series
representing a distinct portfolio with its own investment objectives and policies.

Taxpayer is a series of Trust that is classified as non-diversified under the 1940
Act and is traded on Exchange. Taxpayer is an investment vehicle with the objective of
providing investors with a positive return regardless of the direction and fluctuations of
the U.S. equity markets generally. As such, Taxpayer represents that it is a “fund” as
defined in section 851(g)(2) and generally is treated as a separate corporation for
federal income tax purposes pursuant to section 851(g)(1).

Taxpayer commenced operations on Date 4 under the name a, and on Date 5,
Taxpayer’s name was changed to the current name. During Year 1, in addition to its
other investments, Taxpayer owned stock in Company X and Company Y, both PFICs.

Trust is governed by a Board of Trustees (“Board of Trustees”) that is
responsible for overseeing all business activities of Trust. Subject to the overall
authority of the Board of Trustees, Advisor furnishes investment advice, supervision,
and management, as well as office space, equipment, and management personnel to
Taxpayer. Advisor is registered with the Securities and Exchange Commission as an
investment advisor.

From Taxpayer’s inception, Advisor has engaged Company Z to provide
Taxpayer with accounting services, inclusive of federal tax compliance services such as
the preparation of the federal income tax returns and all extension requests related to
those returns. Company Z performed these services for Taxpayer’s Year 1 in a correct
and timely manner.

On Date 6, Taxpayer declared a long term capital gain dividend in the amount of
b (“First Dividend”). Taxpayer paid the First Dividend on Date 7, which was a date prior
to the date taxpayer paid any other regular dividend following such declaration.
Thereafter, on Date 8, Taxpayer declared and paid a long term capital gain dividend in
the amount of c (“Second Dividend”). Date 8 was also a date prior to the date Taxpayer
paid any other regular dividend following such declaration.

On Date 9, the Board of Trustees and Advisor engaged Firm A, a firm of
accounting and tax professionals, to review Taxpayer’s Form 1120-RIC, U.S. Income
Tax Return for Regulated Investment Companies (“Form 1120-RIC”), for Year 1 (“Year
1 Return”). For taxable years prior to Year 1, the Board of Trustees and Advisor had
engaged Firm B, another firm of tax and accounting professionals, to review the federal
income tax returns of the only other fund within Trust at the time.

On or about Date 10, Taxpayer timely filed a Form 7004, Application for
Automatic Extension of Time to File Certain Business Income Tax, Information, and
Other Returns (“Form 7004”), with respect to its Form 1120-RIC for Year 1 pursuant to
which the due date for the Year 1 Return was extended to Date 1.

Between Date 11 and Date 12, Company Z provided Firm A work papers and
supporting documentation used or anticipated to be used in the preparation of
Taxpayer’s Year 1 Return. During this period, Company Z, Advisor, and Firm A worked
together to prepare the final draft of the Year 1 Return. On Date 13, following Firm A’s
review of the final draft of the Year 1 Return, a senior manager of Firm A signed the
Year 1 Return. The Year 1 Return included each of the Elections and was prepared in
accordance with each such Election having been timely made.

Historically, when Firm B had completed its review of a tax return for the other
fund within Trust, an employee of Firm B would sign the return and forward it to Person
A, a director of Advisor, for signature by an authorized representative and filing with the
Service.

However, Person A left Advisor’s employ shortly before Firm A completed its
review of the Year 1 Return. Consequently, Firm A forwarded the Year 1 Return to
Advisor in a package addressed to Person B, Taxpayer’s Secretary and Treasurer and
Advisor’s CFO, for signature by an authorized representative and filing with the Service.
The Year 1 Return was delivered to Person B on Date 14.

Person B, being unaware of the process used by Person A and Firm B for the
preparation, review, signature, and filing of tax returns, believed the Year 1 Return had
already been filed and that the package contained Advisor’s administrative file copies.
Consequently, Person B did not immediately open the package.

Person B opened the package containing the Year 1 Return and filed the Year 1
Return on or about Date 15, approximately two and a half weeks after the extended due
date for the Year 1 Return.

Upon realizing that the Year 1 Return had not been filed timely, Person B
contacted Firm A to determine if there would be any ramifications to Taxpayer or its
investors due to the late filing of the Year 1 Return. On Date 16, Firm A informed
Person B of the potential consequences to Taxpayer and its investors due to the late
filing of the Year 1 Return and specifically the Elections included therein. At that time,
Firm A also informed Person B of the possibility of seeking section 9100 relief for the
late Elections. On Date 17, the Board of Trustees and Advisor approved Firm A’s
preparation, on Taxpayer’s behalf, of this request for relief under sections 301.9100-1
and 301.9100-3 of the Procedure and Administration Regulations.

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

1. Taxpayer qualified as a RIC under section 851 at all times during Year 1.

2. On Date 6 and Date 8, Taxpayer declared the First Dividend and the Second
   Dividend, respectively, which were dates prior to the 15th day of the 9th month
   following the close of Year 1 and the extended due date of Taxpayer’s return for
   Year 1.

3. Taxpayer paid the First Dividend and the Second Dividend on Date 7 and
   Date 8, respectively, which were dates that were prior to both: (1) Date 2, and (2)
   the date Taxpayer paid any other regular dividend following the declaration of the
   First Dividend and the Second Dividend.

4. Any outstanding stock of Taxpayer and any stock of Taxpayer that is currently
   being offered for sale is redeemable at its net asset value.

5. As of the date of the submission of this ruling request, the Service has not
   discovered Taxpayer’s failure to timely make the Elections for Year 1.

6. Taxpayer is not attempting to alter a return position taken for which a penalty
   has been or could be imposed under section 6662 at the time Taxpayer is
   requesting relief and for which the new position requires or permits a Regulatory
   Election for which relief is requested.

7. This is not a situation in which Taxpayer was informed of all material aspects
   of the Elections and related tax consequences, but chose not to file the Elections.

8. Taxpayer is not using hindsight in requesting relief. No facts have changed
   since the due date of the Elections that would make the Elections more
   advantageous.

9. The interests of the government are not prejudiced, within the meaning of
   section 301.9100-3(c), because granting relief will not result in Taxpayer having a
   lower tax liability in the aggregate for all years to which the Elections apply than
   Taxpayer would have had if the Elections had been timely made. In fact,
   Taxpayer included all such Elections in the Year 1 Return that it filed in Month 1.

10. The period of limitations on assessment under section 6501(a) for Taxpayer
    for Year 1 or for any other taxable year that would have been affected by the
    Elections if they had been timely filed will not expire before Month 2 and,
    therefore, is not closed.

In addition, affidavits on behalf of Taxpayer and Firm A have been provided as
required by section 301.9100-3(e).

LAW AND ANALYSIS

Section 851(b)(1) provides that a corporation shall not be considered a RIC for
any taxable year unless it files with its return for the taxable year an election to be a RIC
or has made such 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. No other method of making such
election is permitted.

Section 852(b)(8)(A) provides that a RIC may elect for any taxable year to treat
any portion of any qualified late-year loss for such taxable year as arising on the first
day of the following taxable year. Section 1.852-11(f) provides that a RIC may elect to
compute its taxable income for a taxable year without regard to part or all of any post-
October capital loss or post-October currency loss for that year. Section 1.852-11(i)
provides that a RIC may make an election under section 1.852-11(f)(1) for a taxable
year to which the section applies by completing its income tax return (including any
necessary schedules) for that taxable year in accordance with the instructions for the
form that are applicable to the election.

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 RIC 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 1.855-1(b)(1) provides that a section 855(a) election must be made
in the return filed by the RIC for the taxable year. The election shall be made by the
taxpayer by treating the dividend (or portion thereof) to which such election applies as a
dividend paid during the taxable year in computing its investment company taxable
income, or if the dividend (or portion thereof) to which such election applies is to be
designated by the company as a capital gain dividend, in computing the amount of
capital gain dividends paid during such taxable year.

Section 1296(a) provides that, in the case of marketable stock in a PFIC that is
owned (or treated as owned under section 1296(g)) by a United States person at the
close of any taxable year, the United States person may elect to include in gross
income the excess of the fair market value of the stock as of the close of the taxable
year over its adjusted basis and to deduct the lesser of (a) the excess of the adjusted
basis of the stock over its fair market value as of the close of the taxable year or (b) the
unreversed inclusions (as defined in section 1296(d)). Section 1.1296-1(h) provides
that an election under section 1296 for a taxable year must be made on or before the
due date (including extensions) of the person’s U.S. income tax return for that year.
Section 1.1296-1(h)(1)(iii) provides that a late mark to market election under section
1296 may be permitted only in accordance with section 301.9100.

Section 301.9100-1(c) 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, revenue procedure, notice, or 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 particular 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 Taxpayer
has satisfied the requirements for granting a reasonable extension of time to make the
following elections: (1) an election under section 851(b)(1) to be a RIC; (2) an election
under section 855(a) to treat as paid within Year 1 ordinary income dividends and
capital gain dividends declared prior to Date 1 and paid prior to Date 2 and not later
than the first regular dividend paid following such declaration; (3) an election under
section 852(b)(8)(A) and section 1.852-11(f) to treat any portion of any qualified late-
year loss for such taxable years as arising on the first day of the following taxable year
for federal tax purposes; and (4) a mark to market election under section 1296(a) with
respect to marketable stock in a PFIC. Since Taxpayer filed its Form 1120-RIC on or
about Date 15, Taxpayer’s Elections, 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 Elections.

This ruling is limited to Taxpayer’s timeliness of filing the Elections described
herein. This ruling’s application is limited to the facts, representations, Code sections,
and regulations cited herein. Except as specifically provided otherwise, no opinion is
expressed on the federal income tax consequences of the transaction described above.
Specifically, no opinion is expressed regarding any material item or representation on
Taxpayer’s Form 1120-RIC. Additionally, no opinion is expressed with regard to
whether Taxpayer otherwise qualifies as a RIC under subchapter M of the Code or
whether the stock of Company X or Company Y is marketable stock under section
1296(e). Furthermore, no opinion is expressed with regard to Trust.

No opinion is expressed with regard to whether the tax liability of Taxpayer 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.

This ruling is directed only to the taxpayer that requested 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 representatives.

Sincerely,

Andrea M. Hoffenson
Andrea M. Hoffenson
Branch Chief, Branch 2
Office of Associate Chief Counsel
(Financial Institutions & Products)