Late § 853 foreign-tax-credit pass-through election allowed for a mutual fund after a missed deadline

Plain-English summary

A mutual fund taxed as a regulated investment company (RIC) invests in foreign companies and pays foreign taxes, and each year it elects under Internal Revenue Code § 853 to pass those foreign tax credits through to its shareholders instead of claiming them itself. For one fiscal year the fund missed the deadline for that election: its accountants incorrectly believed a 2015 law had changed the fund's return due date, when a special rule for June 30 fiscal-year filers left the old date in place, so the extension request (Form 7004) and the return carrying the election were both filed late. The fund asked the IRS for extra time under the "9100 relief" regulations (Treas. Reg. § 301.9100-3), which allow a missed regulatory election to be treated as timely when the taxpayer acted reasonably and in good faith and relief does not prejudice the government. Finding the fund had relied on its tax professionals and met the other conditions, the IRS granted relief and treated the return, and the § 853 election it contained, as timely filed. The ruling only fixes the timeliness of the election; the IRS took no position on whether the fund otherwise qualifies as a RIC. (This is one of several companion rulings issued the same day to related funds in the same fund family.)

Ruling snapshot

• Question: Should the fund get an extension of time under § 301.9100-3 to make a late § 853 election passing foreign tax credits through to its shareholders?
• Outcome: Approved (return with the § 853 election treated as timely filed)
• Key authorities: IRC § 853; Treas. Reg. §§ 1.853-4, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                          Department of the Treasury
                                                  Washington, DC 20224

Number: 201845017                     Third Party Communication: None
Release Date: 11/9/2018               Date of Communication: Not Applicable
Index Number: 853.01-00, 9100.00-00
                                      Person To Contact:
--------------------------            ----------------------, ID No. ------------------
------------------------------------------------------------      Telephone Number:
--------------                        ----------------------
------------------------------------------------------------      Refer Reply To:
------------------                    CC:FIP:B01
-----------------------------------------------                   PLR-106025-18
-----------------------------------                               Date:
------------------------------                                    August 08, 2018


Legend

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

Trust 1                    =        ---------------

Advisor                    =        -----------------

Manager                    =        -------------------------------------------

Accounting Firm            =        -----------------

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

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

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

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

Date 4                     =        ----------------------------

Date 5                     =        ------------------------

Date 6                     =        ------------------------

Date 7                     =        ------------------------

Date 8                   =   --------------------

Year 1                   =   -------

a                        =   --

b                        =   --

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

        This responds to a letter dated January 29, 2018, submitted on behalf of
Taxpayer. Taxpayer requests an extension of time under section 301.9100-1 and
section 301.9100-3 of the Procedure and Administration Regulations to make an
election under section 853 of the Internal Revenue Code ("Code") and section 1.853-1
of the Income Tax Regulations ("Regulations") for the taxable year ended on June 30,
Year 1.
                                          FACTS

      Taxpayer is registered as a diversified, open-end management investment
company under the Investment Company Act of 1940, as amended, and has elected to
be taxed as a regulated investment company ("RIC") under part I of subchapter M of the
Code. Taxpayer uses an accrual method of accounting for U.S. federal income tax
purposes, and its taxable year is a fiscal year ending on June 30.

        Taxpayer is one of a series of investment portfolios comprising Trust 1, a State
trust that was established on Date 1. Taxpayer commenced operations on Date 2.

      Advisor serves as the investment advisor to a of the b investment funds
comprising Trust 1, including Taxpayer. In its role as investment advisor, Advisor
manages the investment and reinvestment of Taxpayer's assets and is accountable for
the administration of Taxpayer's affairs.

       Taxpayer has one type of investment that requires an election as part of its Form
1120-RIC, U.S. Federal Income Tax Return for Regulated Investment Companies.
Taxpayer has direct and indirect investments in foreign countries for which foreign taxes
must be paid on income derived from such investments. As such, Taxpayer may make
an election under section 853 to pass through any foreign tax credits earned by
Taxpayer on to its shareholders.

       Since it was established, Taxpayer has been taxed as a corporation for U.S.
federal income tax purposes.

      For many years, Advisor has engaged Manager to manage a number of
investment funds, including Taxpayer. Manager's management responsibilities include
managing Taxpayer's tax matters, including all tax return preparation work. On Date 3,
Manager engaged Accounting Firm to assist with the tax preparation work formerly
performed by Manager, including the preparation of Taxpayer's Form 1120-RIC for the
taxable year ended on June 30, Year 1 ("Year 1 Form 1120-RIC"), and all relevant
forms, statements, and elections.

      In all taxable years prior to the taxable year ended on June 30, Year 1, Taxpayer
has consistently and timely made the election that is the subject of the ruling request.

       As part of Taxpayer's Year 1 Form 1120-RIC, Taxpayer intended to make an
election under section 853. The election under section 853 would allow Taxpayer to
pass through any foreign tax credits earned by Taxpayer on to its shareholders. Under
section 1.853-4, the election must be made in a statement with supporting information
included on or with Form 1118, Foreign Tax Credit-Corporations, and must be made
not later than the time prescribed for filing the return (including extensions thereof).

       Accounting Firm was required to prepare and submit Form 7004, Application for
Automatic Extension of Time to File Certain Business Income Tax, Information, and
Other Returns, on behalf of Taxpayer for the taxable year ended on June 30, Year 1
("Year 1 Form 7004").

        Section 2006(a) of the Surface Transportation and Veterans Health Care Choice
Improvement Act of 2015, P.L. 114-41 (the "Act"), made certain amendments to the
Code that modified tax return due dates for certain taxpayers. Section 2006(a)(3)(A) of
the Act provides, in general, that except as provided in Section 2006(a)(3)(B) of the Act,
the amendments made by Section 2006(a) of the Act apply to returns for taxable years
beginning after December 31, 2015. Section 2006(a)(3)(B) of the Act provides a special
rule for C corporations with fiscal years ending on June 30. Under this special rule, the
amendments made by section 2006(a) of the Act to tax return due dates apply to
returns for taxable years beginning after December 31, 2025. Accordingly, the
amendments made by section 2006(a) of the Act did not modify the due date for
Taxpayer's Year 1 Form 1120-RIC. See Section 2006(a)(3)(B) of the Act.

       During the tax return planning and preparation phases related to Taxpayer's Year
1 Form 1120-RIC, neither Manager nor Accounting Firm identified that Taxpayer's
taxable year end fell under the special rule provided by section 2006(a)(3)(B) of the Act
and that the tax return due date for Taxpayer's Year 1 Form 1120-RIC had not changed.
Two main factors contributed to this oversight. First, because this was the first year that
Accounting Firm was engaged by Manager, Accounting Firm and Manager were still
working out an effective communication system to ensure that all filing obligations were
being met. On previous projects with filing deadlines, Manager and Accounting Firm
worked together to prepare a production calendar to ensure filing deadlines were met.
No production calendar was prepared that involved Taxpayer's Year 1 Form 7004, due
on Date 4, because both Manager and Accounting Firm believed that Taxpayer's Year 1
Form 7004 was due on Date 7. Second, Accounting Firm's manager, who was
responsible for Taxpayer's Year 1 Form 1120-RIC, was in the process of transitioning
away from Accounting Firm in order to pursue other opportunities. Accounting Firm's
manager's last day at Accounting Firm was shortly after the Date 4 due date for
Taxpayer's Year 1 Form 7004. As such, Accounting Firm's manager's attention was not
focused on the impact of the amendments made to the Code by section 2006(a) of the
Act and the impact of these amendments, if any, on the tax return due date for
Taxpayer's Year 1 Form 1120-RIC.

     On Date 5, during Manager's review of Forms 7004 for its managed entities,
Manager discovered that the correct due date for filing Taxpayer's Year 1 Form 7004
was Date 4. Also on Date 5, Manager advised Accounting Firm and Taxpayer that
Taxpayer's Year 1 Form 7004 was due on Date 4. Accounting Firm subsequently filed
Taxpayer's Year 1 Form 7004 on Date 6.

        The difficulties described above surrounding the communication between both
Manager and Accounting Firm resulted in the late filing of Taxpayer's Year 1 Form
7004. Because Taxpayer's Year 1 Form 7004 was not timely filed, Taxpayer cannot
make a timely election under section 853 absent the requested relief. Taxpayer
represents that it submitted its request for relief promptly and as soon as practicable
after learning of the untimely filing of the Year 1 Form 7004.

         To be timely, Taxpayer should have filed the election under section 853 by Date
4, or, if Taxpayer had timely filed the Year 1 Form 7004, Taxpayer should have filed the
election by Date 8, the extended due date for Taxpayer's Year 1 Form 1120-RIC.
Taxpayer represents that Taxpayer's Year 1 Form 1120-RIC was filed on or about Date
8 and contained an election under section 853, and that Taxpayer's Year 1 Form 1120-
RIC was not timely because of the failure to file Taxpayer's Year 1 Form 7004 timely.

      Taxpayer makes the following additional representations in connection with its
request for an extension of time:

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

      2. Granting the relief requested will not result in Taxpayer having a lower
      U.S. federal tax liability in the aggregate for all years to which the election
      applies than Taxpayer would have had if the election had been timely
      made (taking into account the time value of money).

      3. Taxpayer does not seek to alter a return position for which an accuracy-
      related penalty has been or could have been imposed under section 6662
      of the Code at the time Taxpayer requested relief and the new position
      requires or permits the regulatory election for which relief is requested.

      4. Being fully informed of the required regulatory election and related tax
      consequences, Taxpayer did not choose to not file the election.

       5. Taxpayer is not using hindsight in making the decision to seek the relief
       requested. No specific facts have changed since the due date for making
       the election that make the election advantageous to Taxpayer.

       6. The period of limitations on assessment under section 6501(a) has not
       expired for Taxpayer for the taxable year in which the election should have
       been filed, nor for any taxable year(s) that would have been affected by
       the election had the election been timely filed.

      In addition, affidavits on behalf of Taxpayer, Manager, and Accounting Firm have
been provided as required by sections 301.9100-3(e)(2) and (3).

                                  LAW AND ANALYSIS

        Section 853(a) provides that a RIC, more than 50 percent of the value (as
defined in section 851(c)(4)) 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 section 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 section 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.

       Sections 1.853-4(a) and (b) provide that an election under section 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)
requires that certain information pertinent to the election, including, among other things,
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.

        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 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 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. A taxpayer will be deemed to have
not 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 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). 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 section 6501(a) before the taxpayer's receipt of a ruling granting
relief under this section.

                                      CONCLUSION

       Based upon the information submitted and representations made, we conclude
that Taxpayer has shown good cause for granting a reasonable extension of time to
make the election under section 853 for the taxable year ended on June 30, Year 1.
Accordingly, Taxpayer's Year 1 Form 1120-RIC, which was filed on or about Date 8 and
contained an election under section 853, is treated as timely filed for purposes of
making that election.

      This ruling is limited to the timeliness of the filing of the election in section 853 of
the Code. This ruling's application is limited to the facts, representations, Code sections,
and regulations cited herein. No opinion is expressed with regard to whether Taxpayer
otherwise qualifies as a RIC under subchapter M of the Code.

       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.

      Except as specifically provided otherwise, no opinion is expressed on the federal
income tax consequences of the transactions described above.

      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 terms of a power of attorney on file in this office, a copy of
this letter is being sent to your authorized representatives.

                                       Sincerely,

                                       ___________________________
                                       Robert A. Martin
                                       Senior Technician Reviewer
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)


Enclosure:
      A copy of this letter


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