Newly affiliated charity receives 30 days to revoke an old section 501(h) lobbying election

Plain-English summary

A health charity affiliated with another exempt health organization and changed its name after the affiliation. Within weeks, the organizations discovered that the charity had made a section 501(h) lobbying-expenditure election many years earlier and had never revoked it. The election had not been identified during pre-affiliation due diligence, and the affiliated group faced potential aggregation of lobbying expenditures under section 4911. The charity promptly consulted tax advisers and sought relief before filing a Form 990 covering the post-affiliation period. The IRS treated revocation of a regulatory election as eligible for the same discretionary relief as making an election, found reasonable action and good faith, and granted 30 days to file Form 5768. The revocation applied to tax years beginning after the redacted date specified in the ruling.

Ruling snapshot

• Question: May a charity obtain extra time to revoke a longstanding section 501(h) lobbying election discovered shortly after an affiliation?
• Outcome: approved, with Form 5768 due within 30 days
• Key authorities: IRC §§ 501(h) and 4911(f); Treas. Reg. §§ 1.501(h)-2 and 301.9100-1 through 301.9100-3; Rev. Rul. 83-74

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201804005                                              Third Party Communication: None
Release Date: 1/26/2018                                        Date of Communication: Not Applicable
Index Number: 501.38-02, 9100.00-00
                                                               Person To Contact:
-------------------------------                                -----------------------, ID No. -------------------
--------------------------                                     ---------------------------------------------------
------------------------------------------------------------   Telephone Number:
--                                                             --------------------
-------------------------------                                Refer Reply To:
------------------------------                                 CC:TEGE:EOEG:EO1
                                                               PLR-119813-17
                                                               Date:
                                                               September 27, 2017




Legend:

V = ------------------------------------------------
W = ----------------------------------------
X = --------------------------------------------------------------
Y = ------------------------------------
Z = -------------------------
Date 1 = ---------------------------
Date 2 = -----------------------
Date 3 = ------------------------


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

This letter responds to X’s June 19, 2017, request for a ruling permitting an
extension of time to revoke an election under I.R.C. § 501(h) of the Internal
Revenue Code (Code).1

Facts

According to the information provided by X, each of X (formerly known as Y), V, and W
is a charitable organization with the purpose to promote health, and each is recognized
as exempt from federal income tax under section 501(c)(3) and as a public charity
under section 509(a). V and W are separate corporations with overlapping directors.



1
  Section 501(h) of the Internal Revenue Code of 1986, as amended, to which all subsequent section
references are made unless otherwise stated.

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V conducts direct operations in some states and has several tax-exempt operating
subsidiaries in other states. Following ongoing discussions between V and Y, on Date 3
V formally affiliated with Y. In order to effectuate the affiliation, Z, an organization of
which V is the sole member, became the sole member of Y. Y changed its name to X
shortly thereafter.

Prior to its affiliation with Y, V retained a professional services firm to perform due
diligence on the operations and financial state of Y. Despite this process, the issue of Y
revoking its election under section 501(h) by Date 1, so that it would not be in effect for
the taxable year beginning Date 2, was not raised or pursued. As such, when Y
officially affiliated with V on Date 3, V and its affiliated organizations were not aware of
any known or foreseeable tax impact of Y's existing 501(h) election despite acting in
good faith.

Within a few weeks following V's affiliation with Y on Date 3, it was discovered that a
section 501(h) lobbying expenditure test election ("Lobbying Election") had been made
many years ago by Y (and that the Forms 990 for Y have been filed referencing the
section 501(h) election). Further, it was discovered that Y's section 501(h) election was
still in effect.

Given the amount of the lobbying expenses made by V and its affiliates and the
potential risk to X in being viewed as affiliated with V, W, and the other affiliates for
purposes of applying the lobbying tests and limitations, X immediately consulted with its
tax advisors to assist in its preparation for a request for discretionary relief with the
Internal Revenue Service (IRS) under Treas. Reg. § 301.9100. X has yet to file a Form
990 return that covers a period on or after Date 3. X’s ruling request includes the
representations and affidavits required under Treas. Reg. § 301.9100-3.

Ruling Requested

X requests a ruling that, having acted reasonably and in good faith, X shall be granted
discretionary relief under section 301.9100-3 of the Procedure and Administration
Regulations and is hereby granted an extension of time of 30 days from the letter ruling
date to file a revocation of its section 501(h) lobbying election, to be effective for all tax
years beginning after Date 1.

Law

Section 501(c)(3) exempts from federal income tax an organization organized and
operated exclusively for charitable purposes, no substantial part of the activities of
which is carrying on propaganda, or otherwise attempting, to influence legislation
(except as otherwise provided in section 501(h)).

Section 501(h) sets out an alternative to the "no substantial part" limitation on
expenditures made for the purposes of influencing legislation, based on expenditures
for lobbying during the taxable year.

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Section 501(h)(3) provides that section 501(h) shall apply to certain organizations that
elect (in such manner and at such time as the Secretary may prescribe) to have the
provisions of section 501(h) apply.

Section 501(h)(6) provides that an organization's section 501(h) election is effective
for all taxable years that end after the date the election is made, and begin before the
date the election is revoked by the organization (under regulations prescribed by the
Secretary).

Section 1.501(h)-2(a) provides that a section 501(h) election is made by filing a
completed Form 5768 with the appropriate Internal Revenue Service Center, and
remains in effect for each succeeding taxable year for which the organization is an
eligible organization and which begins before a notice of revocation is filed under
section 1.501(h)-2(d).

Section 1.501(h)-2(d)(1) provides that an organization may voluntarily revoke a
section 501(h) lobbying election by filing Form 5768.

Section 4911(f)(1)(A) provides that when two or more organizations are affiliated, and
at least one has made a section 501(h) election, the determination as to whether
excess lobbying expenditures have been made and the expenditure limits of section
501(h) have been exceeded, shall be made as though the affiliated organizations are
one organization.

Section 4911(f)(1)(B) provides that if an affiliated group has excess lobbying
expenditures, each such organization as to which an election under section 501(h) is
effective for such year shall be treated as an organization which has excess lobbying
expenditures in an amount which equals such organization's proportionate share of
such group's excess lobbying expenditures.

Section 4911(f)(2) defines two organizations as members of an affiliated group if the
governing instrument of one organization requires it to be bound by the decisions of
another on legislative issues, or if the governing board of one organization includes
persons who are either specifically designated representatives or members of the
governing board, officers, or paid executive staff of another organization, and who, by
aggregating their votes, have sufficient power to cause or prevent action on legislative
issues by the first organization.

Section 301.9100-1(a) provides that the regulations under sections 301.9100-1, -2,
and -3 provide the standards the Commissioner will use to determine whether to grant
an extension of time to make a regulatory election. The regulations under sections
301.9100-1 and -2 also provide an automatic extension of time to make certain
statutory elections. Section 301.9100-2 provides automatic extensions of time for

PLR-119813-17                               4

making regulatory and statutory elections when the deadline for making the election is
the due date of the return or the due date of the return including extensions. Section
301.9100-3 provides extensions of time for making regulatory elections that do not
meet the requirements of section 301.9100-2.

Section 301.9100-1(b) defines a “regulatory election” as an election whose due date
is prescribed by a regulation published in the Federal Register, revenue ruling,
revenue procedure, notice, or announcement published in the Internal Revenue
Bulletin, and a “statutory election” as an election whose due date is prescribed by
statute.

Section 301.9100-1(c) provides that the Commissioner in exercising the
Commissioner's discretion may grant a reasonable extension of time under the rules
set forth in sections 301.9100-2 and -3 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 301.9100-3(a) allows a request for an extension of time to file a regulatory
election to be granted when the taxpayer provides the evidence 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)(1)(i) provides generally that the taxpayer will be deemed to
have acted reasonably and in good faith if the taxpayer requests relief before the
failure to make the regulatory election is discovered by the IRS.

Section 301.9100-3(b)(3) provides that a taxpayer will not be considered to have
acted reasonably and in good faith if the taxpayer:

      (i) Seeks to alter a return position for which an accuracy related penalty could
      be imposed under section 6662 at the time the taxpayer requests relief and the
      new position requires a regulatory election for which relief is requested;
      (ii) Chooses not to make the election, being fully informed of the required
      election and related consequences; or
      (iii) Uses hindsight in requesting relief. If specific facts have changed since the
      original deadline that makes the election advantageous to a taxpayer, the IRS
      will not ordinarily grant relief.

Section 301.9100-3(c)(1) provides that the interests of the Government are prejudiced
when:

      (i) 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. Similarly, if the tax

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      consequences of more than one taxpayer are affected by the election, the
      Government's interests are prejudiced if there may be a resulting decrease in
      the aggregate tax liability for all affected taxpayers.
      (ii) 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 (the
      Government's interests are ordinarily prejudiced in such case).

Section 301.9100-3(e)(2) provides that the taxpayer, or the individual who acts on
behalf of the taxpayer with respect to tax matters, must submit a detailed affidavit
describing the events that led to the failure to make a valid regulatory election and to
the discovery of the failure. When the taxpayer relied on a qualified tax professional
for advice, the taxpayer's affidavit must describe the engagement and responsibilities
of the professional as well as the extent to which the taxpayer relied on the
professional. The affidavit must be accompanied by a dated declaration, signed by
the taxpayer, which states: “Under penalties of perjury, I declare that I have examined
this request, including accompanying documents, and, to the best of my knowledge
and belief, the request contains all the relevant facts relating to the request, and such
facts are true, correct, and complete.” The individual who signs for an entity must
have personal knowledge of the facts and circumstances at issue.

Section 301.9100-3(e)(3) provides that the taxpayer must submit detailed affidavits
from the individuals having knowledge or information about the events that led to the
failure to make a valid regulatory election and to the discovery of the failure. These
individuals must include the taxpayer's return preparer, any individual (including an
employee of the taxpayer) who made a substantial contribution to the preparation of
the return, and any accountant or attorney, knowledgeable in tax matters, who
advised the taxpayer with regard to the election. An affidavit must describe the
engagement and responsibilities of the individual as well as the advice that the
individual provided to the taxpayer. Each affidavit must include the name, current
address, and taxpayer identification number of the individual, and be accompanied by
a dated declaration, signed by the individual, which states: “Under penalties of
perjury, I declare that I have examined this request, including accompanying
documents, and, to the best of my knowledge and belief, the request contains all the
relevant facts relating to the request, and such facts are true, correct, and complete.”

Section 301.9100-3(e)(4) provides that the request for relief must also contain the
following information -

      (i) The taxpayer must state whether the taxpayer's return(s) for 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 is
      being examined by a district director, or is being considered by an appeals

PLR-119813-17                                6

       office or a federal court. The taxpayer must notify the IRS office considering
       the request for relief if the IRS starts an examination of any such return while
       the taxpayer's request for relief is pending;

       (ii) The taxpayer must state when the applicable return, form, or statement
       used to make the election was required to be filed and when it was actually
       filed;

       (iii) The taxpayer must submit a copy of any documents that refer to the
       election;

       (iv) When requested, the taxpayer must submit a copy of the taxpayer's return
       for any taxable year for which the taxpayer requests an extension of time to
       make the election and any return affected by the election; and

       (v) When applicable, the taxpayer must submit a copy of the returns of other
       taxpayers affected by the election.

Rev. Rul. 83-74, 1983-1 C.B. 112, granted relief under section 1.9100-1 to a
homeowner's association seeking to revoke its section 528 election, reasoning that
the situation of a taxpayer seeking relief to revoke an election is analogous to one
where a taxpayer is seeking relief to make an election.

Section 5.03(1) of Rev. Proc. 2017-1, 2017-1 I.R.B. 1, provides that a section
301.9100 request must include an affidavit and declaration from the taxpayer and
other parties having knowledge or information about the events that led to the failure
to make a valid regulatory election and to the discovery of the failure. See sections
301.9100–3(e)(2) and (e)(3). In addition, a section 301.9100 request must include the
information required by section 301.9100–3(e)(4).

Analysis

A taxpayer may seek relief under section 301.9100-1 through -3 for an extension of time
to file a regulatory election. A taxpayer seeking relief to revoke an election is in a
position analogous to one seeking relief to make an election, as discussed in Rev. Rul.
83-74, and thus the provisions of sections 301.9100-1 through -3 apply to the same
extent.

We have determined that the section 501(h) election at issue is a regulatory election
subject to relief under section 301.9100-3 for a late election (or revocation of election).
While section 501(h)(6) appears to prescribe the due date for the election and
revocation, section 501(h)(2) expressly provides that section 501(h) applies to an
organization which has elected (in such manner and at such time as the Secretary may
prescribe) to have the provisions of section 501(h) apply, and section 501(h)(6) similarly

PLR-119813-17                                  7

provides that a section 501(h) election is effective for taxable years which begin before
the date the election is revoked (under regulations prescribed by the Secretary). Thus
we consider the regulations rather than the statute to prescribe the due date for a
section 501(h) election (or revocation).

Furthermore, based solely on the information submitted and the representations made,
we conclude that the requirements of sections 301.9100-1 and 301.9100-3 have been
satisfied, including reasonable action, good faith, and lack of prejudice to the interests of
the government. As a result, X is granted an extension of time of 30 days from the date
of this letter to file a Form 5768 with the appropriate service center to revoke its 501(h)
election, effective Date 2. A copy of this letter should be attached to the Form 5768. A
copy is enclosed for that purpose.

Ruling

Based solely on the facts and representations submitted by X, we rule that, having
acted reasonably and in good faith, X shall be granted discretionary relief under
section 301.9100-3 of the Procedure and Administration Regulations and is hereby
granted an extension of time of 30 days from the letter ruling date to file a revocation of
its section 501(h) lobbying election, to be effective for all tax years beginning after
Date 1.

The ruling contained in this letter is based upon information and representations
submitted by or on behalf of X and accompanied by a penalty of perjury statement
executed by an appropriate party, as specified in Rev. Proc. 2017-1, 2017-1 I.R.B. 1,
section 7.01(15)(b). This office has not verified any of the material submitted in
support of the request for ruling, and such material is subject to verification on
examination. This letter does not address the applicability of the Code or regulations
to the facts submitted other than with respect to the sections specifically described.
The Associate Office will revoke or modify a letter ruling and apply the revocation
retroactively if: (1) there has been a misstatement or omission of controlling facts; (2)
the facts at the time of the transaction are materially different from the controlling facts
on which the ruling is based; or (3) the transaction involves a continuing action or
series of actions and the controlling facts change during the course of the transaction.
See Rev. Proc. 2017-1, section 11.05.

No ruling is granted as to whether X qualifies as an organization described in section
501(c) and/or section 509(a)(1), (2), or (3). Except as expressly provided in this letter,
no opinion is expressed or implied concerning the federal income tax consequences of
any aspects of any transaction or item of income referenced in this letter ruling.
Additionally, this letter is directed only to X. Section 6110(k)(3) 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 each of X’s authorized representatives.

PLR-119813-17                              8


If you have any questions about this ruling, please contact the person whose name
and telephone number are shown in the heading of this letter.

                                    Sincerely,



                                    David L. Marshall
                                    Assistant Branch Chief
                                    Exempt Organizations Branch 1
                                    (Tax Exempt & Government Entities)