Partner receives 45 days to make a late debt-discharge election

Plain-English summary

A partnership realized cancellation-of-debt income after negotiating a reduction of debt secured by its real property. Its accountant mistakenly made the IRC § 108(c)(3)(C) election on the partnership return, although § 108(d)(6) requires the exclusion and related basis reduction to be applied at the partner level. A partner relied on that accountant and did not attach a separate Form 982 to his individual return. The IRS found reasonable reliance, good faith, and no prejudice to the government's interests. It gave the partner 45 days to amend his return and make the election, while declining to decide whether the income actually qualified for exclusion.

Ruling snapshot

• Question: Could a partner make a late election to exclude qualified real property business debt discharge income and reduce depreciable real-property basis?
• Outcome: Approved, with an amended return and Form 982 due within 45 days.
• Key authorities: IRC § 108(a), (c), (d)(6); Treas. Reg. §§ 1.108-5(b), 301.9100-3.

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201637008                                             Third Party Communication: None
Release Date: 9/9/2016                                        Date of Communication: Not Applicable
Index Number: 108.01-00, 108.02-01,
              9100.00-00                                      Person To Contact:
                                                              ------------------------, ID No. --------------
------------------------------                                Telephone Number:
-----------------------------------------                     ----------------------
------------------------------                                Refer Reply To:
                                                              CC:ITA:B05
                                                              PLR-140714-15
                                                              Date:
                                                              June 13, 2016


Legend
Taxpayer          =   -----------------------------------------------------
Year 1            =   -------
Partnership       =   ----------------------------------------
State             =   -------
Date 1            =   ---------------------------
Partner 1         =   ----------------------
Partner 2         =   ------------------------------
Property          =   --------------------------------------------------------------------------------------------------
x                 =   --------
y                 =   --------
z                 =   --------
Firm              =   ------------------------------------------------------------------------
A                 =   -----------------------------
Month             =   -------------------
Date 2            =   ------------------------
Date 3            =   ---------------------------

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

This letter responds to your letter requesting an extension of time under § 301.9100-3 of
the Procedure and Administration Regulations to make an election under § 108(c)(3)(C)
of the Internal Revenue Code. Specifically, you have requested an extension of time to
make an election under § 108(c)(3)(C) and § 1.108-5(b) of the Income Tax Regulations,
to exclude income resulting from the discharge of qualified real property business
indebtedness, and to reduce the basis of depreciable real property, effective for
Taxpayer’s Year 1 federal income tax return.

FACTS
PLR-140714-15                                2

Taxpayer uses the cash method of accounting and has a calendar year as his annual
accounting period. Taxpayer is a member of Partnership, which is a calendar year-end
partnership that files its tax returns using the accrual method of accounting. Partnership
was organized on Date 1 in State as a limited liability company.

Taxpayer owns an x percent interest in Partnership. Partner 1 and Partner 2 each own
y percent and z percent interests, respectively. Partnership’s sole business activity is to
own, manage, and operate Property. During Year 1, Partnership negotiated with its
lender a reduction of Partnership’s business indebtedness encumbering the Property.
As a result of the discharge, Partnership realized cancellation of indebtedness (COD)
income.

Partnership hired Firm to prepare its Year 1 tax return. Firm concluded that in Year 1
Partnership realized COD income eligible for exclusion from gross income under
§ 108(a)(1)(D). In preparing Partnership’s Form 1065, U.S. Return of Partnership
Income, A, Partnership’s accountant at Firm, prepared and filed with the Service Form
982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082
Basis Adjustment), making the election under § 108(c)(3)(C) to exclude the COD
income and to reduce the basis of Property.

In conjunction with the filing of its Year 1 return, Partnership issued to Taxpayer a Year
1 Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc, reporting
Taxpayer’s allocable share of the COD income. In preparing Taxpayer’s Year 1
Schedule K-1, A reduced Taxpayer’s allocable share of COD income by Taxpayer’s
allocable share of Partnership’s excluded COD income.

During Month, Partnership received additional information about Partnership’s COD
income in Year 1. A prepared Partnership’s amended Year 1 tax return, including
amended Schedules K-1 for the three partners. A sent amended Schedules K-1 to all
partners, however, Firm did not file the amended return because it did not receive Form
8879-PE, IRS 3-file Signature Authorization for Form 1065, from Partnership.

Taxpayer timely filed a Form 4868, Application for Automatic Extension of Time to File a
U.S. Individual Income Tax Return, requesting a six-month extension of time to file
Taxpayer’s Year 1 income tax return. On or about Date 2, Firm and A prepared and
filed Taxpayer’s income tax return for Year 1. A did not make a separate election on
behalf of Taxpayer or advise Taxpayer to make an election, because A already made
the election on Partnership’s return.

Partner 2 did not intend and, consequently, did not make a § 108(c)(3)(C) election with
his Year 1 individual tax return. In reviewing Partnership’s return for Year 1, the
accountant for Partner 2 discovered that the return contained an erroneous election at
the partnership level instead of at the partner level as required under § 108(d)(6).
Partner 2 contacted Taxpayer, who in turn notified Firm and A of the error. Firm
PLR-140714-15                                3

sought legal advice as to the most effective way to remedy the mistake and learned that
a private letter ruling is required to make the late § 108(c)(3)(C) election.
Firm has prepared a corrected amended Year 1 Form 1065 for Partnership and
prepared amended Schedules K-1. Firm has filed a corrected amended Year 1
Partnership return on Date 3, and has issued the amended Schedules K-1 to Taxpayer
and partners.

Taxpayer represents that he relied on Firm and A to report the COD income in the most
tax-efficient manner for Partnership and its members. The most efficient approach
would have been for Taxpayer to make a § 108(c)(3)(C) election.

Taxpayer represents that 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 each partner
would have had if the election had been timely made.

LAW AND ANALYSIS

Section 108(a)(1)(D) provides that gross income does not include any amount that
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)(1) provides that the amount excluded from gross income is applied to
reduce basis of depreciable real property of the taxpayer. Section 108(c)(3)(C) requires
a taxpayer to make an election to exclude COD income under § 108(a)(1)(D).

Section 108(c)(2)(A) provides that the amount excluded under § 108(a)(1)(D) for any
qualified real property business indebtedness does not exceed the excess (if any) of (i)
the outstanding principal amount of such indebtedness (immediately before the
discharge), over (ii) the fair market value of the real property described in paragraph
(3)(A) (as of such time), reduced by the outstanding principal amount of any other
qualified real property business indebtedness secured by such property (as of such
time).

Section 108(c)(2)(B) provides that the amount excluded under § 108(a)(1)(D) does not
exceed the aggregate adjusted basis of depreciable real property (determined after any
reductions under § 108(b) and § 108(g)) held by the taxpayer immediately before the
discharge (other than depreciable real property acquired in contemplation of such
discharge).

Section 108(d)(6) provides that in the case of a partnership, § 108(a) and § 108(c) are
applied at the partner level.
PLR-140714-15                                 4

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, in accordance with
that Form and its instructions.

Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner
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 extensions 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—

       (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 material respects of the required election and related
               tax consequences but chose not to make 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.

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
PLR-140714-15                                  5

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.

Based on the information 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 submitted information and the facts as represented in the ruling
request, we grant Taxpayer an extension of 45 days from the date of this letter ruling to
file an amended 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 income at issue is properly treated as COD income under § 61(a)(12). In addition,
except for the relief granted to make a late election, this letter does not rule on whether
the income in fact qualifies for exclusion from income under any provision of § 108
(including § 108(a)(1)(D)) and § 1.108-5(b)).

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.
PLR-140714-15                               6



The ruling contained in this letter is 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 ruling, it is subject to verification on examination.




                                     Sincerely,




                                     Shareen Pflanz
                                     Senior Technician Reviewer, Branch 5
                                     Office of Associate Chief Counsel
                                     (Income Tax & Accounting)