Late-election relief to identify convertible notes and call options as an integrated transaction

Plain-English summary

Tax rules let a company treat a debt instrument and a related hedge as a single "integrated" transaction, which changes how the interest and cash flows are taxed, but only if the company writes down and keeps a specific identification statement in its books on or before the day it enters the hedge. A corporation issued convertible notes and, in the same deal, bought call options on its own stock, intending the two to be integrated under the Section 1.1275-6 rules. It did not know about the on-time identification requirement and so missed it; its outside accountants later caught the error, and the company then prepared the documentation. It asked the IRS for more time under the Section 301.9100 late-election relief rules. The IRS granted the extension, finding the company acted reasonably and in good faith, came forward before the IRS discovered the lapse, and was not using hindsight or seeking a lower tax. The ruling is narrow: it only fixes the timing of the identification statement. The IRS expressly did not decide whether the documentation is actually adequate, whether the call options really are qualifying hedges, or whether the rest of the integration requirements are met.

Ruling snapshot

• Question: May the corporation get more time under Section 301.9100 to make the identification statement needed to integrate its convertible notes and call options?
• Outcome: approved (extension granted, limited to timeliness)
• Key authorities: Treas. Reg. § 1.1275-6(c)(1)(i), (e); Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202034003 Third Party Communication: None
Release Date: 8/21/2020 Date of Communication: Not Applicable
Index Number: 9100.00-00, 1275.08-00
Person To Contact:
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----------------------- Telephone Number:
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-------------------------- Refer Reply To:
CC:FIP:B01
PLR-124850-19
Date:
April 03, 2020

LEGEND

Taxpayer = ------------------------------------------------
State = -----------------------------
Date 1 = -------------------------
Date 2 = ---------------------

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

This letter is in response to a letter from your authorized representatives requesting an
extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations for Taxpayer to satisfy the requirements of § 1.1275-
6(c)(1)(i) of the Income Tax Regulations relating to the identification requirements of
§ 1.1275-6(e) for integration of a qualifying debt instrument and a § 1.1275-6 hedge.

FACTS

Taxpayer is a business entity incorporated in State and taxable as a corporation under
§ 301.7701-2(b)(1). Taxpayer uses the accrual method as its overall method of
accounting, and its annual accounting period ends December 31. On Date 1 Taxpayer
issued convertible senior notes (“Convertible Notes”). The Convertible Notes are
convertible, at the option of the holders of the Convertible Notes, into stock of Taxpayer.
As part of the same transaction, on Date 1, Taxpayer purchased call options with
respect to its stock (“Call Options”). Issuance of the Convertible Notes and purchase of
the Call Options are hereinafter referred to as the “Transaction.”

Taxpayer represents that it intended for and expected the Transaction to be an
integrated transaction as defined in § 1.1275-6. Taxpayer further represents that such
intention and expectation were indicated by the actions of its Board, the pricing
committee, and management. Taxpayer retained and relied upon professional advisors
prior to and during the relevant time period for the Transaction. During that time period,
Taxpayer did not become aware of the requirement, set forth in § 1.1275-6(c)(1)(i), to
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satisfy the identification requirements of § 1.1275-6(e) on or before the date the
taxpayer enters into the § 1.1275-6 hedge (the “Identification Requirement”).
Consequently, Taxpayer failed to satisfy the Identification Requirement.

After the Transaction was completed, Taxpayer’s independent public accounting firm
(the “Accounting Firm”) reviewed the Transaction and discovered Taxpayer’s failure to
comply with the Identification Requirement. The Accounting Firm informed Taxpayer of
such failure.

On Date 2, Taxpayer prepared and retained, as part of its books and records,
documentation that it believes meets the requirements of § 1.1275-6(c)(1)(i) and (e) (the
“Recent ID Statement”). Taxpayer has requested an extension of time under
§ 301.9100-1 to satisfy the requirements of § 1.1275-6(c)(1)(i) and (e), using the Recent
ID Statement, treating the Identification Requirement as a regulatory election.

Taxpayer makes the following representations:

1. The failure to timely comply with the Identification Requirement was the result of
   Taxpayer erroneously not being aware or advised of the Identification
   Requirement.
2. Taxpayer is not aware of any knowledge on the part of the Internal Revenue
   Service (the “Service”) of Taxpayer’s failure to timely comply with the
   Identification Requirement.
3. Taxpayer is not seeking to alter a return position for which an accuracy-related
   penalty has been or could be imposed under Section 6662.
4. Taxpayer is not using hindsight in requesting this relief. No specific facts have
   changed since the original due date for complying with the Identification
   Requirement that makes integration under § 1.1275-6 advantageous.
5. The requested relief will not result in a lower tax liability for Taxpayer, or any
   other affected taxpayer, in the aggregate, for all taxable years affected by the
   Identification Requirement than they would have had if the Identification
   Requirement had been timely made.
6. The period of limitations on assessment under Section 6501(a) has not expired
   for Taxpayer for the taxable year in which the Identification Requirement should
   have been filed, or for any taxable year(s) that would have been affected by the
   Identification Requirement had it been timely made.

In addition, affidavits on behalf of Taxpayer have been provided as required by
§ 301.9100-3(e).

LAW AND ANALYSIS
PLR-124850-19 3

Section 1.1275-6 provides for integration of a qualifying debt instrument (“QDI”) with a
§ 1.1275-6 hedge or combination of § 1.1275-6 hedges if the combined cash flows of
the components are substantially equivalent to the cash flows on a noncontingent debt
instrument that pays interest at a fixed rate or qualified floating rate. See § 1.1275-6(a).

Section 1.1275-6(c)(1) provides generally that a QDI and a § 1.1275-6 hedge are an
integrated transaction if the requirements in § 1.1275-6(c)(1)(i) through (vii) are
satisfied. Section 1.1275-6(c)(1)(i) requires that the taxpayer satisfy the identification
requirements of § 1.1275-6(e) on or before the date the taxpayer enters into the
§ 1.1275-6 hedge. Section 1.1275-6(e) requires that for each integrated transaction, a
taxpayer must enter and retain as part of its books and records the following
information: (1) the date the QDI was issued or acquired (or is expected to be issued or
acquired) by the taxpayer and the date the § 1.1275-6 hedge was entered into by the
taxpayer; (2) a description of the QDI and the § 1.1275-6 hedge; and (3) a summary of
the cash flows and accruals resulting from treating the QDI and the § 1.1275-6 hedge
as an integrated transaction.

Section 301.9100-1(c) provides, in part, 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) provides in
part that the term “election” includes an application for relief in respect of tax; a request
to adopt, change, or retain an accounting method or accounting period; but does not
include an application for an extension of time for filing a return under § 6081. Section
301.9100-1(b) also provides in part that the term “regulatory election” means an election
whose due date is prescribed by a regulation published in the Federal Register, or by a
revenue ruling, revenue procedure, notice, or announcement published in the Internal
Revenue Bulletin.

Section 301.9100-3 sets forth rules that the Service will use to determine whether,
under the facts and circumstances of each situation, the Commissioner will grant an
extension of time for regulatory elections that do not meet the requirements of
§ 301.9100-2 for an automatic extension. In general, requests for relief subject to this
section will be granted when the taxpayer provides evidence (including any required
affidavits) 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 in part that, subject to paragraphs (b)(3)(i) through (iii)
of § 301.9100-3, when a taxpayer applies for relief under § 301.9100-3 before the
failure to make the regulatory election is discovered by the Service, the taxpayer will be
determined to have acted reasonably and in good faith.

Section 301.9100-3(b)(3)(iii) provides that a taxpayer is deemed to have not acted
reasonably and in good faith if the taxpayer uses hindsight in requesting relief. If specific
PLR-124850-19 4

facts have changed since the due date for making the election that make the election
advantageous to the taxpayer, the Service will not ordinarily grant relief. In such a case,
the Service will grant relief only when the taxpayer provides strong proof that the
taxpayer’s decision to seek relief did not involve hindsight.

Section 301.9100-3(c) provides that the interests of the Government are prejudiced if
either granting relief would result in the taxpayer having a lower tax liability in the
aggregate for all years to which the regulatory election applies than the taxpayer would
have had if the election had been timely made (taking into account the time value of
money) or the taxable year in which a timely regulatory election should have been made
is closed.

CONCLUSIONS

Based on the information submitted and representations made, we conclude that
Taxpayer has satisfied the requirements for granting a reasonable extension of time,
through Date 2, under §§ 301.9100-1 and 301.9100-3 to satisfy the requirements of
§ 1.1275-6(c)(1)(i) relating to the identification requirements of § 1.1275-6(e) for
integration of the Convertible Notes and Call Options.

CAVEATS

This ruling is limited to the timeliness of satisfying the requirements of § 1.1275-
6(c)(1)(i) relating to the identification requirements of § 1.1275-6(e) in order to treat the
Convertible Notes and Call Options as integrated transactions. This ruling’s application
is limited to the facts, representations, Code sections, and regulations cited herein.
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 or implied concerning the integration of
the Convertible Notes and the Call Options, including but not limited to: (1) whether the
Recent ID Statement is adequate for the purposes of § 1.1275-6(e); (2) whether the Call
Options are § 1.1275-6 hedges as described in § 1.1275-6(b)(2); or (3) whether the
Transaction meets the requirements of § 1.1275-6(c)(1)(ii) through (vii).

Moreover, 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 regulatory 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.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
PLR-124850-19 5

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

Sincerely,

Spence Hanemann
Senior Counsel, Branch 1
Office of the Associate Chief Counsel
(Financial Institutions & Products)

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