Investment funds receive 90 days for late foreign-tax elections

Plain-English summary

Several regulated investment companies in a fund-of-funds structure intended to elect under section 853 so their shareholders could claim proportionate shares of foreign taxes. Their return preparer calculated the foreign-tax amounts and informed shareholders for three years but failed to check the election box or attach Form 1118. An accounting adviser discovered the filing requirements while reviewing the next year's return, and the funds requested relief before the IRS found the omissions. The IRS concluded that the funds acted reasonably and in good faith and granted each fund 90 days to make the late elections. The ruling addressed only timeliness and did not decide whether the funds otherwise qualified as regulated investment companies or whether aggregate tax liability would be no lower than with timely elections.

Ruling snapshot

• Question: Could the investment funds receive extra time to make section 853 foreign-tax pass-through elections for three prior years?
• Outcome: approved
• Key authorities: IRC §§ 852(g), 853; Treas. Reg. §§ 1.853-4, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201734001                                            Third Party Communication: None
Release Date: 8/25/2017                                      Date of Communication: Not Applicable
Index Number: 9100.00-00, 853.01-00
                                                             Person To Contact:
--------------------------                                   ------------------------, ID No. ------------------
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----------------------------------------------------         Telephone Number:
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--------------------------------------                       Refer Reply To:
                                                             CC:FIP:B02
                                                             PLR-103006-17
                                                             Date:
                                                             May 24, 2017



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PLR-103006-17                                         2



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State     = --------------
Corporati = -------------------------------------------------------
on
Life      = ----------------------------------------------------
Insuranc
e
Compan
y
Preparer = -------------------------------------
Advisor   = ---------------------------
Tax       = ------------------
Manager
Year 1    = -------------------------------------------------------
Year 2    = -------------------------------------------------------
Year 3    = -------------------------------------------------------
Year 4    = -------------------------------------------------------
Date 1    = -----------------------
Date 2    = -----------------------
Date 3      -----------------------
Month 1   = ----------
Month 2   = -------------
PLR-103006-17                                3



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

       This responds to a letter dated January 24, 2017, submitted on behalf of Funds
(collectively, “Taxpayers”). Taxpayers request an extension of time under § 301.9100-1
and § 301.9100-3 of the Procedure and Administration Regulations to make an election
under § 853 of the Internal Revenue Code for Years 1, 2, and 3.

Facts

       Corporation is a State corporation registered as an open-end investment
company under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq., as
amended. Each Taxpayer is a series fund of Corporation and a regulated investment
company (“RIC”) as defined in § 851(a). Each Taxpayer is either wholly or substantially
owned by Life Insurance Company. Each Taxpayer uses the calendar year as its
taxable year and an accrual method as its overall method of accounting.

        Taxpayers own shares in other RICs within a fund of funds structure. During the
taxable years for which relief is sought, certain of the RICs in which Taxpayers invest
qualified under § 853 to elect the benefits of that section to pass through the benefit of
foreign tax credits to Taxpayers, their shareholders. Taxpayers intended to also make
the election under § 853 to have their shareholders treated as if they had paid their
proportionate share of these foreign taxes.

      Preparer is a bank and financial services provider that prepared Taxpayers’
income tax returns in Years 1, 2, 3 and 4. Advisor, an accounting firm that provided tax
consulting and compliance services to Taxpayers, reviewed these tax returns and
signed them as a paid preparer.

        Corporation’s tax staff informed Preparer in Month 1 of Year 1 of Taxpayers’
intention to make the foreign tax credit pass-through election under § 853. In Month 2
of Year 2, Corporation asked Preparer to perform the foreign tax credit pass-through
calculations necessary for such an election and to inform Taxpayers’ shareholders.
Preparer completed the foreign tax credit calculations and informed Taxpayers’
shareholders. Preparer was unsure, however, whether a final decision had been made
regarding the § 853 election and failed to mark the appropriate checkbox for the election
or attach the Form 1118 for the Year 1 tax return. In preparing the returns for Years 2
and 3, Preparer again made the foreign tax credit calculations and provided them to
shareholders. Preparer subsequently incorrectly prepared the tax returns for Years 2
and 3 in the same fashion as the Year 1 return.

      On Date 1, a staff person under the direction of Tax Manager, the mutual funds
tax manager for Corporation, asked Advisor whether Taxpayers needed to check the
PLR-103006-17                                 4



Schedule K, line 10a, foreign tax credit election box on the Year 4 Form 1120-RIC. On
Date 2, Advisor determined that box 10b, not 10a, of Schedule K should be checked for
a § 853 election and that Form 1118 should also be prepared and attached to Form
1120-RIC. On Date 2, Advisor informed Tax Manager of these requirements. On Date
3, Tax Manager relayed this information to Preparer and directed Preparer to revise the
Year 4 return before it was due.

        Advisor recommended that Taxpayers seek relief under § 301.9100-1 and
§ 301.9100-3 to make late elections under § 853 for Years 1, 2 and 3, which led to the
filing of the present request. As of the date of filing of the present request, Years 2 and
3 were not closed by the period of limitations on assessment under § 6501(a).
Taxpayers filed a Form 872 to extend the period of limitations on assessments for Year
1 prior to its expiration for that year.

      In support of their letter ruling request, Taxpayers submitted affidavits from
Preparer, Advisor, and Corporation as required by § 301.9100-3(e).

       Taxpayers make the following additional representations:

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

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

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

       4. Granting the relief will not result in Taxpayers or their shareholders having a
       lower tax liability in the aggregate for all years to which the regulatory elections
       apply than Taxpayers or their shareholders would have had if the elections had
       been timely made (taking into account the time value of money).

       5. Taxpayers are not using hindsight in requesting relief because no specific
       facts have changed since the due date for making the elections that would make
       the elections more advantageous to Taxpayers.

Law and Analysis
PLR-103006-17                                5



       Section 853(a) provides that a RIC, more than 50 percent of the value of
whose total assets at the close of the taxable year consist of stock or securities in
foreign corporations, and which meets the requirements of section 852(a) for the
taxable year, may elect the application of § 853 for the taxable year with respect to
certain taxes paid by the RIC during the taxable year to foreign countries and
possessions of the United States.

        Section 853(b)(1) provides that the effect of the election is to deny an electing
RIC any deduction under § 164(a) or any credit under section 901 for these taxes. The
electing RIC is allowed an addition to its dividends paid deduction for the taxable year
for the amount of these taxes.

      Section 853(b)(2) further describes the effect of the election by providing that
each shareholder of the RIC shall include in gross income and treat as paid by him his
proportionate share of these taxes. Each shareholder shall treat as gross income from
sources within the respective foreign countries and possessions of the United States the
sum of his proportionate share of these taxes and the portion of any dividend paid by
the RIC which represents income derived from sources within foreign countries and
possessions of the United States.

       Section 853(c) provides that the amount to be treated by the shareholder as his
proportionate share of taxes paid to any foreign country or possession of the United
States, and gross income derived from sources within any foreign country or possession
of the United States, shall not exceed the amounts so reported by the RIC in a written
statement furnished to the shareholder.

        Section 852(g) provides a special rule for a fund of funds in this context. A
qualified fund of funds, defined under § 852(g)(2) as a RIC, at least 50 percent of whose
assets at the close of each quarter of the taxable year is represented by interests in
other RICs, may elect the application of § 853 without regard to the requirement that
more than 50 percent of the value of its total assets at the close of the taxable year
consist of stock or securities in foreign corporations.

       Section 1.853-4(a) and (b) of the Income Tax Regulations provide that an
election under § 853 must be made not later than the time prescribed for filing the return
(including extensions thereof), and is irrevocable with respect to the dividend (or portion
thereof), and the foreign taxes paid with respect thereto, to which the election applies.
Section 1.853-4(c) of these regulations requires that certain information pertinent to the
election, including the date, form and contents of its notice to its shareholders, shall
accompany the RIC's timely filed federal income tax return for the taxable year on or
with a modified Form 1118, Foreign Tax Credit-Corporations.
PLR-103006-17                                 6



       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 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) 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 for automatic extensions under § 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)(1) 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)(1)(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). Similarly, if the tax consequences of more than one
PLR-103006-17                                   7



taxpayer are affected by the election, the 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 years 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. The
IRS may condition a grant of relief on the taxpayer providing a statement from an
independent auditor (other than an auditor providing an affidavit pursuant to paragraph
(e)(3) of § 301.9100-3) certifying that the interests of the Government are not prejudiced
under the standards set forth in paragraph (c)(1)(i) of § 301.9100-3.

Conclusions

      Based on the information submitted and representations made, we conclude that
Taxpayers have satisfied the requirements for granting a reasonable extension of time
to make an election under § 853 for years 1, 2 and 3. Accordingly, each Taxpayer has
90 days from the date of this letter to make its intended election.

       This ruling is limited to the timeliness of the filing of the election under § 853.
This ruling’s application is limited to the facts, representations, Code sections, and
regulations cited herein. 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. No opinion is expressed with regard to whether
Funds otherwise qualify as RICs under subchapter M of the Code.

        No opinion is expressed with regard to whether the tax liability of each Taxpayer
or its shareholders 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.

      The ruling contained in this letter is based upon information and representations
submitted by Taxpayers and accompanied by a penalty of perjury statements executed
by appropriate parties. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

      This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.
PLR-103006-17                                  8




         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,


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