Taxpayer receives 60-day extension to complete accounting-method filing

Plain-English summary

A corporate taxpayer requested extra time to complete the procedural filing for an automatic accounting-method change. It had timely attached Form 3115 to its return to switch a subcontractor payable account from the cash method to the accrual method, but a communication failure caused it not to file the required duplicate copy with the IRS office in Ogden. The taxpayer discovered the omission itself and promptly sought relief under Treasury Regulations sections 301.9100-1 and 301.9100-3. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days from the ruling date to file the required Form 3115 with an amended federal income tax return.

Ruling snapshot

• Question: Could the taxpayer receive more time to complete the Form 3115 filing required for its automatic accounting-method change?
• Outcome: Approved, with a 60-day extension.
• Key authorities: IRC §§ 446, 461, 481, 6501, and 6662; Treas. Reg. §§ 301.9100-1 and 301.9100-3; Rev. Proc. 2015-13.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202001017 Third Party Communication: None
Release Date: 1/3/2020 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
----------------------------------------------------- --------------------------, ID No. ----------------
----------------------------- -----------------
------------------------------ Telephone Number:
------------------------------ --------------------
-------------------------------------------- Refer Reply To:
CC:ITA:B02
PLR-110852-19
Date:
October 07, 2019

TY: -------

LEGEND:

Taxpayer = -----------------------------------------------------------------
A = -----------------------------
B = ----------
C = ------------------------
D = ----------------------------------------------------------------------
E = ---------------------------------------------------------------------------
F = ---------------------------------------------------------------------
Firm = ----------------------
Date 1 = --------------------------
Date 2 = -----------------------
Date 3 = --------------------------
TY = -------

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

This responds to a letter ruling request dated May 7, 2019, submitted on behalf of
Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to change its method of
accounting under section 446(e) of the Internal Revenue Code, section 1.446-1(e) of
the Income Tax Regulations, and the automatic consent procedures of Rev. Proc. 2015-
13, 2015-5 I.R.B. 419, for the tax year ending on Date 1.

                                                    FACTS

Taxpayer represents the following:

Taxpayer is owned by A, a corporation based in B. A does not have a tax department in
C. Taxpayer files a consolidated U.S. federal income tax return on Form 1120, U.S.
PLR-110852-19 2

Corporation Income Tax Return. Taxpayer is filing this request on behalf of itself as well
as its subsidiaries D, E, and F.

Taxpayer uses the accrual method of accounting. However, Taxpayer determined that
for a specific item, its subcontractor payable account, it was using the cash method.
The third-party contractors provide the services and issue an invoice to Taxpayer for
payment. The unpaid invoice amounts at year end are reflected in the subcontractor
payable account. Taxpayer reversed this balance for tax purposes, effectively delaying
the deduction until the invoice was paid (cash method), rather than recognizing the
liability in the tax year in which the services were rendered to Taxpayer. Taxpayer
represents that because the liability for the subcontractor services is fixed and
determinable as of the end of the tax year, and economic performance is met because
the services have been rendered as of the end of the tax year, the liability for the
subcontractor accounts payable meets the requirements of section 461 and sections
1.461-1(a)(2) and 1.461-4(d)(2).

While preparing the tax return for TY, Taxpayer determined that the subcontractor
payable account was not properly accounted for using the accrual method, and
determined it should change its method of accounting to comply with section 461 and
the regulations thereunder. Taxpayer determined that the accounting method change
had automatic consent under Rev. Proc. 2018-31, 2018-22 I.R.B. 637, filed Form 3115,
Application for Change in Accounting Method with its TY return, took into account the
section 481(a) adjustment, and used the accrual method for the subcontractor payable
account in computing its taxable income for TY.

Taxpayer timely filed its original TY U.S. federal income tax return, including the Form
3115 described above, on Date 2. However, Taxpayer inadvertently failed to file the
Ogden copy of the Form 3115 as required by Rev. Proc. 2015-13 on or before the date
the Form 3115 was filed with Taxpayer’s timely filed return for the tax year of change.

A miscommunication between A and Taxpayer resulted in a failure to file the Ogden
copy of the Form 3115. The failure to file the Ogden copy of the Form 3115 was
discovered by Taxpayer on Date 3. Shortly after discovering the failure to file the
Ogden copy of the Form 3115, Taxpayer contacted Firm, and Firm advised Taxpayer to
request an extension of time under section 301.9100-3.

In addition to failing to file the Ogden copy of the Form 3115, Taxpayer included the
incorrect designated change number on page one of the Form 3115.

                                      LAW

Rev. Proc. 2015-13 provides procedures by which a taxpayer may obtain automatic
consent to change certain accounting methods. A taxpayer complying with all the
applicable provisions of the revenue procedure can obtain the consent of the
Commissioner to change its method of accounting under § 446(e) and the regulations
thereunder.
PLR-110852-19 3

Section 6.03(1)(a)(i) of Rev. Proc. 2015-13 provides that a taxpayer changing an
accounting method pursuant to Rev. Proc. 2015-13 must complete and file a Form 3115
in duplicate. The original must be attached to the taxpayer’s timely filed (including
extensions) original federal income tax return for the year of change, and a copy (with
signature) of the Form 3115 must be filed with the appropriate office of the Internal
Revenue Service no earlier than the first day of the year of change and no later than
when the original is filed with the federal tax return for the year of change.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner uses
to determine whether to grant an extension of time to make a regulatory election.
Section 301.9100-2 provides automatic extensions of time for making certain elections.
Section 301.9100-3 provides extensions of time for making elections that do not meet
the requirements of section 301.9100-2.

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

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
six 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) provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
government.

Section 301.9100-3(b)(1) states that a taxpayer will be 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) failed to make the election because of intervening events beyond the taxpayer’s
control;

(iii) failed to make the election because, after exercising due diligence, the taxpayer was
unaware of the necessity for the election;

(iv) reasonably relied on the written advice of the Service; or
PLR-110852-19 4

(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.

Under section 301.9100-3(b)(3), 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 has been or
could be imposed under section 6662 at the time the taxpayer requests relief (taking
into account section 1.6664-2(c)(3)) 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.

If specific facts have changed since the original deadline that make the election
advantageous to a taxpayer, the Service will not ordinarily grant relief.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. Section 301.9100-3(c)(1)(i) provides, in part, 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, in part, 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.

                                    CONCLUSION

Taxpayer’s election is a regulatory election, as defined in section 301.9100-1(b),
because the due date of the election is prescribed in Rev. Proc. 2015-13, which was
published in the Internal Revenue Bulletin. Based solely on the information provided
and representations made, we conclude that Taxpayer acted reasonably and in good
faith, and granting relief will not prejudice the interests of the Government. Accordingly,
the requirements of sections 301.9100-1 and 301.9100-3 have been met.
PLR-110852-19 5

Taxpayer is granted an extension of 60 days from the date of this ruling to file the
required original Form 3115 described above for TY with an amended federal income
tax return for that year.

A copy of this ruling must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

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.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences discussed or referenced herein in this letter.
Specifically, we have no opinion, either expressed or implied, concerning whether the
accounting method change Taxpayer has attempted to make is eligible to be made
under the automatic procedures of Rev. Proc. 2015-13 and Rev. Proc. 2017-30, 2017-
18 I.R.B. 1131. Further, no opinion is expressed or implied regarding the correctness of
Taxpayer’s method of accounting.

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. We are also sending a copy of this letter
to the appropriate operating division director. Enclosed is a copy of the letter ruling
showing the deletions proposed to be made in the letter when it is disclosed under
section 6110.

                                   Sincerely,



                                   David B. Silber
                                   Acting Senior Technician Reviewer, Branch 2
                                   Office of Associate Chief Counsel
                                   (Income Tax & Accounting)

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