Consolidated group gets 60 days to make late consent dividend elections

Plain-English summary

A consolidated corporate group had subsidiaries that were treated as paying and receiving consent dividends for two tax years. Its accounting firm analyzed personal holding company tax only at the consolidated level and did not advise the group to file Schedule PH and Forms 972 and 973 for the individual subsidiaries. Later counsel concluded that Section 542(b) required company-level analysis and that consent dividend elections should have been made. The taxpayer requested relief before the IRS discovered the omission and represented that consolidated losses meant the late elections would not reduce aggregate tax liability. The affected limitation periods also remained open. The IRS found reasonable reliance and no prejudice to the government, and granted 60 days to file the elections for both years.

Ruling snapshot

• Question: May the consolidated group make late consent dividend elections for two tax years?
• Outcome: Approved (60-day extension to file Schedules PH and Forms 972 and 973)
• Key authorities: IRC §§ 542(b), 561, 565; Treas. Reg. §§ 1.565-1, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201901002                                             Third Party Communication: None
Release Date: 1/4/2019                                        Date of Communication: Not Applicable
Index Number: 542.03-00, 561.03-00,
              561.07-00, 565.00-00                            Person To Contact:
                                                              ---------------------, ID No. ------------------
-----------------------------------------------               Telephone Number:
------------------------                                      ----------------------
--------------------------                                    Refer Reply To:
                                                              CC:ITA:02
                                                              PLR-112028-18
                                                              Date:
                                                              September 28, 2018




Taxpayer                =   -----------------------------------------------
Date 1                  =   ----------------------
Taxable Year 1          =   --------------------------------------------------------
Taxable Year 2          =   --------------------------------------------------------
Subsidiary 1            =   ---------------------------
Subsidiary 2            =   ----------------------------
Accounting Firm         =   ----------------------------------------------------------
CPA                     =   -------------------
Year 1                  =   -------
Year 2                  =   -------

Dear Taxpayer:

       This is in response to your letter submitted on Date 1 requesting a ruling that,
pursuant to Treas. Reg. §§ 301.9100-1 and 301.9100-3, the Internal Revenue Service
grant Taxpayer an extension of time to make a consent dividend election under section
565 by filing Schedule PH, U.S. Personal Holding Company Tax, Form 972, Consent of
Shareholder to Include Specific Amount in Gross Income, and Form 973, Corporation
Claim for Deduction for Consent Dividends with respect to Taxable Year 1 and Taxable
Year 2.
                                           FACTS

         Taxpayer represents that the facts are as follows:

      Taxpayer timely filed its consolidated Forms 1120 for Taxable Year 1 and
Taxable Year 2, which included Subsidiary 1 and Subsidiary 2 as consolidated entities.
In Year 1 and Year 2, Subsidiary 2 was deemed to have distributed consent dividends
to Subsidiary 1. As a result, Subsidiary 1 would have recognized Personal Holding
Company (PHC) income from the deemed receipt of the consent dividends.



Taxpayer engaged Accounting Firm to prepare its Forms 1120 for Taxable Year 1 and
Taxable Year 2. Accounting Firm applied the PHC tax analysis at the consolidated level
and concluded that PHC tax did not apply to Taxpayer’s consolidated returns. Taxpayer
represents that it relied on Accounting Firm to advise Taxpayer regarding all statements
and other information that should have been included on its tax returns and that
Accounting Firm did not advise Taxpayer that it was necessary to make the consent
dividend election by filing Schedule PH and Forms 972 and 973 with its Consolidated
Forms 1120 for Taxable Years 1 and 2.

       During a later review of Taxpayer’s Year 1 and Year 2 Forms 1120, Taxpayer’s
counsel concluded that Accounting Firm should have analyzed Taxpayer’s PHC
calculation at the individual company level rather than at the consolidated level,
pursuant to section 542(b). Accordingly, Taxpayer’s counsel concluded that Taxpayer
should have made the consent dividend election under section 565 by filing Schedule
PH, Form 972, and Form 973 on behalf of Subsidiaries 1 and 2 with its consolidated
returns for Taxable Years 1 and 2. So, Taxpayer is seeking relief under Treas. Reg.
§ 301.9100-3 to make a late consent dividend election.

                                  LAW AND ANALYSIS

        Section 565(a) provides that, if any person owns consent stock (as defined in
section 565(f)(1)) in a corporation on the last day of the taxable year of such
corporation, and such person agrees, in a consent filed with the return of such
corporation in accordance with regulations prescribed by the Secretary to treat as a
dividend the amount specified in such consent, the amount so specified shall, except as
provided in subsection (b), constitute a consent dividend for purposes of section 561
(relating to the deduction for dividends paid).

       Section 1.565-1(a) provides that the dividends paid deduction, as defined in
section 561, includes the consent dividends for the taxable year. A consent dividend is
a hypothetical distribution (as distinguished from an actual distribution) made by certain
corporations to any person who owns consent stock on the last day of the taxable year
of such corporation and who agrees to treat the hypothetical distribution as an actual
dividend, subject to the limitations set forth in section 565, and Treas. Reg. §§ 1.565-2
and 1.565-1(c)(2), by filing a consent at the time and in the manner specified in Treas.
Reg. § 1.565-1(b). Under Treas. Reg. § 1.565-1(b)(3) and Rev. Rul. 78-296, 1978-2
C.B. 183, a consent may be filed no later than the extended due date of the
corporation’s income tax return for the taxable year for which the dividends paid
deduction is claimed. As Taxpayer represents that Taxpayer did not file the Schedule
PH nor the Forms 972 and 972 with its timely Consolidated Forms 1120 for Taxable
Years 1 and 2, Taxpayer did not make a timely consent dividend election for Taxable
Years 1 and 2.


       Treasury Regulation §§ 301.9100-1 and 301.9100-3 set forth the standards the
Commissioner will use to determine whether to grant an extension of time to make a
regulatory election. Treasury Regulation § 301.9100-1(b) defines a regulatory election
as one with a due date prescribed by a regulation published in the Federal Register, or
a revenue ruling, revenue procedure, notice, or announcement published in the Internal
Revenue Bulletin. Pursuant to Treas. Reg. § 301.9100-1(c), the Commissioner has
discretion to grant a reasonable extension of time under the rules set forth in Treas.
Reg. § 301.9100-3 to make a regulatory election. The time to file a consent dividend
election is prescribed by regulation, so the consent dividend election is a regulatory
election for which relief may be granted under Treas. Reg. § 301.9100-1.

       Requests for relief pursuant to Treas. Reg. § 301.9100-3 will be granted when
the taxpayer provides evidence (including affidavits described in Treas. Reg.
§ 301.9100-3(e)) that establishes to the Satisfaction of the Commissioner that the
taxpayer acted reasonably and in good faith, and that the grant of relief will not
prejudice the interests of the government.

      Treasury Regulation § 301.9100-3(b)(1) provides that a taxpayer is deemed to
have acted reasonably and in good faith if the taxpayer:

      (i)     requests relief before the failure to make the regulatory election is
              discovered by the Service;
      (ii)    inadvertently 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 at 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 taxpayer failed to make,
              or to advise the taxpayer to make, the election.

       Taxpayer represents that it acted reasonably and in good faith because it
requested relief before the failure to make the election was discovered by the Service
and because Taxpayer reasonably relied on Accounting Firm, a group of qualified tax
professionals, who failed to advise Taxpayer of the need and method for making the
election.

     Treasury Regulation § 301.9100-3(b)(3) provides that a taxpayer will not be
deemed 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 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.

       Taxpayer represents that, due to its consolidated losses, the making of this
election will not result in any additional tax due on its consolidated returns for Taxable
Years 1 and 2. As such, Taxpayer does not seek to alter a return position for which an
accuracy-related penalty could be imposed under section 6662. In addition, Taxpayer
represents that it did not chose not to file the election and that it is not using hindsight in
requesting relief.

        Treasury Regulation § 301.9100-3(c)(1) provides that an extension of time to
make a regulatory election will be granted only when the interests of the government
are not prejudiced by the granting of relief. 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).
Treas. Reg. § 301.9100-3(c)(1)(i).

       Under Treas. Reg. § 301.9100-3(c)(1)(ii), the interests of the government also
ordinarily are 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 under section 6501(a) before
the taxpayer’s receipt of a ruling granting relief.

        Taxpayer represents that the interests of the government will not be prejudiced
by the grant of this relief because the request will not result in the taxpayer having a
lower tax liability in the aggregate for all taxable years affected by the election than
Taxpayer would have had if the election had been timely made. In addition, the periods
of limitation for Taxable Years 1 and 2 and the taxable years that would have been
affected by the election had it been timely made remain open.

                                       CONCLUSION

       Based upon on the information submitted and representations made, we
conclude that Taxpayer acted reasonably and in good faith, and granting relief will not
prejudice the interests of the government. Therefore, the requirements of Treas. Reg.
§§ 301.9100-1 and 301.9100-3 have been met.

      Taxpayer is granted an extension of 60 days from the date of this ruling to make
the consent dividend election by filing Schedules PH, Forms 972, and Forms 973 for
Taxable Years 1 and 2.



       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. In particular, no opinion is expressed as to whether Taxpayer
properly calculated the amount of consent dividends and PHC income.

      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.

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

                                        Sincerely,



                                        Bridget Tombul
                                        Branch Chief, Branch 2
                                        (Income Tax & Accounting)




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