Foreign corporation receives more time to file branch profits tax waiver

Plain-English summary

A foreign corporation sold its only asset, a U.S. condominium used by its nonresident shareholders as a vacation home, and later dissolved. It believed withholding from the sale satisfied its U.S. tax obligations, so it did not file Form 1120-F or Form 8848 to extend the assessment period for branch profits tax. After learning that the sale could create additional U.S. tax obligations, it sought permission to file the waiver late. The IRS found that the regulatory-relief standard was met and gave the corporation 60 days to file a signed Form 8848 with Form 1120-F. Because the return would be filed more than 18 months late, the corporation could not deduct expenses in computing effectively connected income, although it could claim credits for tax withheld at the source. The ruling did not decide whether the corporation otherwise qualified to file Form 8848.

Ruling snapshot

• Question: Could the dissolved foreign corporation file Form 8848 late for the year it claimed to terminate its U.S. business?
• Outcome: approved, with 60 days to file Form 8848 and Form 1120-F, but without deductions against effectively connected income
• Key authorities: IRC §§ 882, 884, 897, and 1445; Treas. Reg. §§ 1.884-2T and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201714010 [Third Party Communication:
Release Date: 4/7/2017 Date of Communication: Month DD, YYYY]
Index Number: 884.08-10, 9100.02-00
Person To Contact:
----------------------------------------- ---------------, ID No. ----------------
------------------------------------------------- Telephone Number:
---------------------------------------- --------------------
--------------------------- Refer Reply To:
CC:INTL:BR1
PLR-121154-16
Date:
December 30, 2016

TY: ------

Legend

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

Country X = ---------------------------

Individual A = -----------------------------------

Individual B = -------------------------------------------

State = --------------------

Tax Year = ----------------------------

Amount = ------------

Date 1 = ------------------

Date 2 = ---------------------

Date 3 = --------------------------

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

This is in reply to a letter dated ------------------requesting an extension of time under
Treas. Reg. § 301.9100-3 for Taxpayer to file a Form 8848, Consent to Extend the Time

PLR-121154-16 2

to Assess the Branch Profits Tax Under Regulations Sections 1.884-2T(a) and (c).
Additional information was submitted in a letter dated --------------------------.

The ruling contained in this letter is based upon facts and representations submitted by
Taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. This office has not verified any of the material submitted in support of
the request for a ruling. Verification of the factual information, representations, and
other data may be required as a part of the audit process.

FACTS

Taxpayer was an entity organized under the laws of Country X on Date 1. Taxpayer is
treated as a corporation for U.S. tax purposes and operates on a calendar year basis.
Since Taxpayer’s incorporation, Individual A, a nonresident alien, has been a director
and shareholder of Taxpayer. Individual A’s spouse, Individual B, also a nonresident
alien, was Taxpayer’s other shareholder.

Taxpayer’s sole asset was a condominium in State, which Individual A and Individual B
used as a family vacation home. Taxpayer did not collect any rent for the use of the
condominium. Taxpayer paid property taxes and other expenses related to the
condominium until it was sold on Date 2 of Tax Year. U.S. income tax of Amount was
withheld from the proceeds of the sale of the condominium under the Foreign
Investment in Real Property Tax Act. At the time of the sale, Taxpayer believed all of its
U.S. income tax liabilities relating to the sale of the condominium had been satisfied
through the withholding of Amount under section 1445. Individual A, as Taxpayer’s
Director, was not aware that, under section 897(a) of the Internal Revenue Code
(Code), the gain from the sale was taxable under section 882(a)(1) as if Taxpayer was
engaged in a trade or business in the United States during the taxable year and as if the
gain was effectively connected with that trade or business. Nor did Individual A know
that Taxpayer was potentially subject to the branch profits tax under section 884(a). As
a result, Taxpayer did not file a Form 1120-F, U.S. Income Tax Return of a Foreign
Corporation, and Form 8848 for Tax Year.

Taxpayer was dissolved on Date 3. While consulting with a foreign tax professional in
that year, Individual A became aware that Taxpayer may have potential U.S. tax
obligations relating to its sale of the condominium. Individual A subsequently sought to
bring Taxpayer into compliance with U.S. tax laws by consulting with U.S. tax
professionals and filing the instant request for an extension of time to file the Form 8848
for Tax Year, the year of the sale of the condominium and the year in which Taxpayer
alleges to have terminated its U.S. trade or business.

LAW AND ANALYSIS

PLR-121154-16 3

Treas. Reg. § 1.884-2T(a)(1) provides, in relevant part, that “[a] foreign corporation shall
not be subject to the branch profits tax for the taxable year in which it completely
terminates all of its U.S. trade or business within the meaning of [Treas. Reg. § 1.884-
2T(a)(2)].” Taxpayer represents, as required by Treas. Reg. § 1.884-2T(a)(2):

   (1) At the close of Tax Year, Taxpayer did not own any U.S. assets;
   (2) Neither Taxpayer nor a related corporation (within the meaning of Treas. Reg.
       § 1.884-2T(a)(2)(iv)) has used or will use, directly or indirectly, in the conduct
       of a trade or business in the United States at any time during the three-year
       period following the close of Tax Year: (a) any of the U.S. assets of the
       terminated U.S. trade or business; (b) any property attributable to those
       assets; or (c) any property attributable to effectively connected earnings and
       profits of Taxpayer for Tax Year; and
   (3) Taxpayer did not have any income that was, or was treated as, effectively
       connected income during the three-year period following the close of Tax
       Year.

Treas. Reg. § 1.884-2(a)(2)(ii) provides that the waiver referred to in Treas. Reg. §
1.884-2T(a)(2)(i)(D) must be executed on Form 8848 on or before the date (including
extensions) prescribed for filing the foreign corporation's income tax return for the year
of complete termination and extend the period of assessment of the branch profits tax
for the year of complete termination to a date not earlier than the close of the sixth
taxable year following that taxable year.

Treas. Reg. § 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the standards set forth in Treas. Reg. § 301.9100-3
to make a regulatory election under all subtitles of the Internal Revenue Code except
subtitles E, G, H, and I.

Treas. Reg. § 301.9100-1(b) defines a regulatory election as an election whose due
date is prescribed by a regulation, a revenue ruling, revenue procedure, notice, or
announcement.

Treas. Reg. § 301.9100-3 provides standards for extensions of time for making
regulatory elections when the deadline for making the election is other than a due date
prescribed by statute.

Treas. Reg. § 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
Treas. Reg. § 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-121154-16 4

Based on the facts and circumstances of this case, we conclude that Taxpayer satisfies
Treas. Reg. § 301.9100-3(a) and is granted an extension of time to file a signed Form
8848 and attach it to a Form 1120-F within 60 days from the date of this ruling letter.
Because Taxpayer’s filing of the Form 1120-F for Tax Year will be more than 18 months
after the filing deadline in Treas. Reg. §1.882-4(a)(3), no deductions are allowed in
computing Taxpayer’s effectively connected income in that year, although credits are
allowed for taxes withheld at source under section 33.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Specifically, as provided in Treas. Reg. § 301.9100-1(a), the granting of an
extension of time is not a determination that Taxpayer is otherwise eligible to file Form
8848.

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.

                                               Sincerely,



                                               Elizabeth U. Karzon
                                               Branch Chief, Branch 1
                                               Associate Chief Counsel (International)