Couple receives 60 days to make a late investment-income election

Plain-English summary

A married couple had investment-interest expense and capital gain from property held for investment, but their longtime accountant did not advise them to elect on Form 4952 to include part of the gain in investment income. A second accountant later identified the opportunity, and the couple filed an amended return more than six months after the original due date before learning that a private letter ruling was required. The IRS found that they reasonably relied on a qualified tax professional, acted reasonably and in good faith, and would not prejudice the government because the affected year remained open and the relief produced the same treatment as a timely election. It granted 60 days to make the section 163(d)(4)(B)(iii) election by filing an amended return with Form 4952, Schedule D, and a copy of the ruling. Gain included in investment income under the election is not eligible for capital-gain rates.

Ruling snapshot

• Question: May the couple receive extra time to elect to treat net capital gain from investment property as investment income for the investment-interest limitation?
• Outcome: approved, with 60 days to file the amended return and required attachments
• Key authorities: IRC § 163(d)(1) and (4)(B)(iii); Treas. Reg. §§ 1.163(d)-1 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202020015 Third Party Communication: None
Release Date: 5/15/2020 Date of Communication: Not Applicable
Index Number: 9100.00-00 Person To Contact:
----------------------, ID No. -----------------
Telephone Number:
--------------------------- --------------------
-------------------------- Refer Reply To:
----------------------------- CC:ITA:B03
PLR-124161-19
Date:
February 10, 2020

                              TY: ------------ -------------------------------------

Legend:

Taxpayers = --------------------------
Year 1 = -------------------------------------------------
Accountant = --------------------------------
Business Accountant = --------------------------------
Date 1 = --------------------------

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

This ruling letter is in response to your letter ruling request dated October 7, 2019. In
your letter ruling request, you requested an extension of time to make an election to treat
net capital gains from the disposition of property held for investment as investment
income under §§ 163(d)(1) and 163(d)(4) of the Internal Revenue Code for tax year ------
The request is based on §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations.

                                                 FACTS

Taxpayer is a husband and wife who made a joint return under section 6013 for Year 1.
Taxpayer hired Accountant to advise them on all of their business and individual tax
matters. Taxpayer has been a client of Accountant for over ------years. Taxpayer has
been satisfied with services Accountant provided.

For Year 1, Taxpayer filed for an extension and Accountant timely submitted the original
return by the extended due date. Taxpayer had investment interest expense and net
capital gains from the disposition of property held for investment during Year 1.
Accountant did not prepare the return for the Taxpayer so as to elect on Form 4952,
Investment Interest Expense Deduction, inclusion of any part of Taxpayer’s net capital
gain in investment income on the original return for Year 1. In this vein, Accountant did
not advise Taxpayer to make the election under §163(d)(4)(B) at that time.

A separate Accountant (“Business Accountant”) performs accounting services for a
business Taxpayer owns. During the course of their engagement, the Business
Accountant was asked to review the Taxpayer’s Year 1 individual income tax return. After
discussing the matter generally, the Business Accountant agreed that filing an amended
return to take advantage of the accumulated investment interest expenses would be
appropriate.

Taxpayer returned to Accountant to inquire about amending the Year 1 individual income
tax return to make an election to treat the proceeds of the sale of the building as
investment income. Accountant advised making such an election would be appropriate.
Accountant prepared, and the taxpayers submitted the amended return on Date 1, more
than 6 months after the due date of the original return. Accountant did not advise
Taxpayer of the timeframe and procedures of section 301.9100-3 of the Procedure and
Administration Regulations (Proc. & Admin. Regs). Taxpayer subsequently submitted this
ruling request seeking approval of the late election to treat the proceeds of the sale of the
building as investment income.

Upon review of the amended return, an Internal Revenue Service Employee notified
Accountant of the required procedures under § 301.9100-3, Proc. & Admin. Regs., and
suggested Taxpayer submit a request for a private letter ruling pursuant to those
procedures. Taxpayer then sought assistance from the Taxpayer Advocate Service
(TAS). A TAS representative considered the matter and ultimately provided a similar
suggestion, specifically to submit a private letter ruling request. Taxpayer thus submitted
this request for a private letter ruling.

                                        LAW

Section 163(d)(1) provides that in the case of a taxpayer other than a corporation, the
amount allowed as a deduction for investment interest for any taxable year shall not
exceed the net investment income of the taxpayer for the taxable year.

Section 163(d)(4)(B) of the Code provides that investment income means the sum of –

   (i) gross income from property held for investment (other than any gain taken into
   account under clause (ii)(I)),

   (ii) the excess (if any) of —

   (I) the net gain attributable to the disposition of property held for investment, over
   (II) the net capital gain determined solely by taking into account gains and losses
   from dispositions of property held for investment, plus

   (III) so much of the net capital gain referred to in clause (ii) (II) (or, if lesser, the net
   gain referred to in clause (ii)(I)) as the taxpayer elects to take into account under
   this clause.

Section 1.163(d)-(1)(b) states that the election under § 163(d)(4)(B)(iii) must be made on
or before the due date (including extensions) of the income tax return for the taxable year
in which the net capital gain is recognized. The election is made on Form 4952 in
accordance with the form and its instructions. The net capital gain taken into account as
investment income under this election is not eligible to be taxed at capital gain rates.
Section 1.163(d)-(1)(a).

Sections 301.9100-1 through 301.9100-3, Proc. & Admin. Regs., 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 for an automatic extension.

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 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 provides extensions of time to make a regulatory election for requests
that do not meet the requirements of § 301.9100-2. 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) 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) 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
(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.

Section 301.9100-3(b)(2) provides that a taxpayer will not be considered to have
reasonably relied on a qualified tax professional if the taxpayer knew or should have
known that the professional was not (i) competent to render advice on the regulatory
election; or (ii) aware of all relevant facts.

When the taxpayer relied on a qualified tax professional for advice, the taxpayer must
provide a detailed affidavit describing the engagement and responsibilities of the
professional as well as the extent to which the taxpayer relied on the professional. Section
301.9100-3(e)(2). Further, the regulations require that the taxpayer submit a detailed
affidavit from, as relevant here, the taxpayer's return preparer describing the engagement
and responsibilities of the return preparer and advice that was provided to the taxpayer.
Section 301.9100-3(e)(3). Taxpayer provided the required affidavits.

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 § 6501(a) before
the taxpayer's receipt of a ruling granting relief under this section.

                                  CONCLUSION

Taxpayer’s election is a regulatory election, as defined under § 301.9100-1(b), because
the due date of the election is prescribed in the regulations under §1.163(d)-1(b). The
Commissioner has discretion to grant a reasonable extension of time to make a regulatory
election under all subtitles of the Code except subtitles E, G, H, and I, provided that the
taxpayer acted reasonably and in good faith and granting relief will not prejudice the
interests of the Government. In this instance, the information and representations made
by the Taxpayer, Accountant, and Business Accountant establish the Taxpayer acted
reasonably and in good faith. Additionally, granting an extension will not prejudice the
interests of the government. Taxpayer has represented that granting relief would result
in the same tax treatment as if the amended return had been filed timely. The taxable
year in which the regulatory election should have been made is not closed by the period
of assessment.

Taxpayer is granted an extension of time for making the election until 60 days following
the date of this ruling. The election should be made by attaching Form 4952 and
Schedule D, and by including a copy of this ruling letter with an amended return for Year.
This ruling is limited to providing an extension of time for making an election under §
163(d)(4)(B)(iii). It does not provide an opinion, express or implied, concerning the tax
consequences of any aspect of the transaction or item discussed or referenced in this
letter.

The ruling contained in this letter is based upon information and representations
submitted 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.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

                                                    Sincerely yours,



                                                    Brinton T. Warren,
                                                    Chief, Branch 3
                                                    Office of Associate Chief Counsel
                                                    (Income Tax & Accounting)