Late-filing relief to elect U.S. tax treatment and small-insurer status

Plain-English summary

A small foreign insurance company, owned equally by two individuals, writes extended-warranty coverage tied to a related recreational-vehicle business. It hired a tax professional who was supposed to file two elections for its first year: a section 953(d) election to be taxed as a U.S. (domestic) corporation, and a section 831(b) election to be taxed as a small insurance company (on investment income only). The 953(d) election statement was prepared but never actually mailed to the IRS, and without a valid 953(d) election the company could not make the 831(b) election either. It had filed its returns for years as if both elections were in place, and only later discovered the mistake. The IRS granted an extension of time under Treasury Regulation § 301.9100-3, finding the company acted reasonably and in good faith by relying on a qualified tax professional who failed to make the elections, and that late relief would not prejudice the government. The company got 60 days to make the 953(d) election and 90 days to make the 831(b) election.

Ruling snapshot

• Question: May a foreign small-insurer whose advisor never filed its section 953(d) and section 831(b) elections get more time to make them under Treas. Reg. § 301.9100-3?
• Outcome: Approved
• Key authorities: IRC § 953(d); IRC § 831(b); Treas. Reg. § 301.9100-1 through -3; Treas. Reg. § 301.9100-8; Rev. Proc. 2003-47; Notice 89-79

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202102008 [Third Party Communication:
Release Date: 1/15/2021 Date of Communication: Month DD, YYYY]
Index Number: 953.06-00, 831.00-00,
831.02-00, 9100.00-00 Person To Contact:
-----------------, ID No. ------------------
----------------------- Telephone Number:
------------------------------------- --------------------
------------------------ Refer Reply To:
CC:INTL:B02
PLR-113913-20
Date:
------------- October 20, 2020

LEGEND

Taxpayer = ---------------------------------------------
----------------------
Year 1 = -------
Country X = -------------------------------
Individual Y = ------------------
-----------------------
Individual Z = -------------------
-----------------------
Professional Advisor = --------------
Professional Firm = --------------------------------
Year 2 = -------

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

  This is in response to a letter dated June 4, 2020, submitted on behalf of

Taxpayer by its authorized representative, requesting an extension of time under Treas.
Reg. § 301.9100-3 to make the elections provided under (1) section 953(d) for Year 1
and (2) section 831(b)(2) effective for Taxpayer’s taxable year ending December 31,
Year 1. Additional information was submitted on October 7 and 8, 2020.

  The rulings contained in this letter are predicated upon facts and representations

submitted by Taxpayer and accompanied by a penalties of perjury statement executed
by an appropriate party. This office has not verified any of the material submitted in
support of the request for a ruling. Verification of the factual information,
representations, and other data may be required as part of the audit process.
PLR-113913-20 2

FACTS

    Taxpayer was formed, and is regulated, as an insurance company under the

laws of Country X. Taxpayer is in the business of providing extended warranty
insurance coverage for extended warranties in connection with a related business that
sells recreational vehicles. Individual Y and Individual Z are each a 50% shareholder of
Taxpayer.

  Taxpayer represents that it is an insurance company, as defined in section

831(a) by reference to section 816(a), that would qualify for treatment as a non-life
insurance company subject to part II of subchapter L for its taxable year ending
December 31, Year 1, if it were a domestic corporation.

   Taxpayer and its owners are not tax experts. Taxpayer retained the assistance

of Professional Advisor with Professional Firm who is a qualified tax professional and
assisted with the formation of Taxpayer and prepared its income tax return for its
formation year. Taxpayer also relied on Professional Advisor to file all the necessary
income tax elections, including the section 953(d) election for Taxpayer to be treated as
a domestic corporation and the section 831(b) election for Taxpayer to be treated as a
small insurance company for the year of formation. While Professional Advisor
prepared a separate section 953(d) election statement to the IRS pursuant to Notice 89-
79, 1989-2 C.B. 392, and Rev. Proc. 2003-47, 2003-28 C.B. 55, that election statement
was never sent to the IRS. In Year 2, Taxpayer discovered that it did not receive an
approval of its section 953(d) election from the IRS due to Professional Advisor’s error.

    Taxpayer represented that Professional Advisor failed to advise Taxpayer of the

consequences of failing to make a section 953(d) election with respect to Year 1.
Because Taxpayer failed to timely provide the additional information to the IRS, it did
not have a valid section 953(d) election in place. Therefore, it remained a foreign
insurance company for U.S. federal income tax purposes and, as such, Taxpayer was
ineligible to make a section 831(b) election. However, since formation, Taxpayer’s
federal income tax returns have been filed consistent with the section 953(d) and
section 831(b) elections having been properly made.

    Taxpayer’s failure to make these elections was not discovered by the IRS before

Taxpayer submitted its ruling request. In addition, Taxpayer represents that it does not
seek to alter a return position for which the accuracy-related penalty has been or could
have been imposed under section 6662 at the time Taxpayer requested relief.
Taxpayer represents that it intended to make the section 953(d) election but, having
inadvertently failed to do so, it was ineligible to make the section 831(b) election.
Finally, Taxpayer represents that it has not used hindsight to seek an extension of time
to make the election. Taxpayer represents that granting relief will not result in a lower
tax liability than it would have had if it had filed the section 953(d) and section 831(b)
elections timely.
PLR-113913-20 3

   Taxpayer represents that it would have made the section 953(d) and 831(b)(2)

elections (for which an extension of time under Treas. Reg. § 301.9100-3 is requested)
as of the election due date regardless of the enactment of the Tax Cuts and Jobs Act
(TCJA) and the issuance of regulations relating to the TCJA.

LAW AND ANAYLSIS

    Under section 953(d), certain foreign insurance companies may elect to be

treated as domestic corporations for U.S. tax purposes. The substantive and
procedural rules for making a section 953(d) election are contained in Notice 89-79,
1989-2 C.B. 392, and Rev. Proc. 2003-47, 2003-2 C.B. 55. Rev. Proc. 2003-47
provides that the election must be filed by the due date prescribed in section 6072(b)
(including extensions) for the U.S. income tax return that is due if the election becomes
effective. Rev. Proc. 2003-47, section 4.04(2). In addition, an electing corporation must
use the calendar year as its annual accounting period for U.S. tax purposes, unless it
joins in the filing of a consolidated return and adopts the parent corporation’s tax year.
Notice 89-79, section 1. In the present situation, Rev. Proc. 2003-47 fixes the time to
make the election under section 953(d). Therefore, the Commissioner has discretionary
authority under Treas. Reg. § 301.9100-1(c) to grant Taxpayer an extension of time,
provided that Taxpayer satisfies the standards set forth under Treas. Reg. § 301.9100-
3(a).

   Section 831(a) provides that taxes, computed as provided in section 11, are

imposed for each taxable year on the taxable income of every insurance company other
than a life insurance company. However, section 831(b) allows certain small
companies to make an election to be subject to tax on their taxable investment income
only. The election applies to the taxable year for which the company made the election
and, as long as the company continues to qualify, for all subsequent taxable years
unless revoked with the consent of the Secretary.

     The time and manner to make the section 831(b)(2)(A)(ii) election is not

prescribed by statute but rather is prescribed by Treas. Reg. § 301.9100-8. Pursuant to
Treas. Reg. § 301.9100-8(a)(2), the election is to be made by the due date (taking into
account any extensions of time to file obtained by the taxpayer) of the tax return for the
first taxable year for which the election is to be effective by attaching a statement to the
tax return containing the information specified in Treas. Reg. § 301.9100-8(a)(3).
Accordingly, the section 831(b)(2)(A)(ii) election is a regulatory election. Treas. Reg.
§ 301.9100-1(b).

  Under Treas. Reg. § 301.9100-1(c), the Commissioner may grant a reasonable

extension of time under the rules set forth in Treas. Reg. §§ 301.9100-2 and
301.9100-3 to make a regulatory or statutory election.
PLR-113913-20 4

    Treas. Reg. § 301.9100-2 does not provide relief for Taxpayer to make an

election under section 831(b)(2)(A)(ii) for any of the years for which relief is sought.
Requests for extensions of time for regulatory elections that do not meet the
requirements of Treas. Reg. § 301.9100-2 must be made under Treas. Reg.
§ 301.9100-3. Treas. Reg. § 301.9100-3(a) provides that requests for relief will be
granted when the taxpayer provides the evidence to establish to the satisfaction of the
Commissioner that it “acted reasonably and in good faith" and that "the grant of relief
will not prejudice the interests of the Government."

  Under Treas. Reg. § 301.9100-3(b)(1), a taxpayer is deemed to have acted

reasonably and in good faith if it:

  (i) Requests relief before the failure to make the regulatory
  election is discovered by the Internal Revenue 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 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 Internal Revenue 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.

  Under Treas. Reg. § 301.9100-3(b)(3), a taxpayer is deemed not to have acted

reasonably and in good faith if it:

  (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.

   The Commissioner will grant a reasonable extension of time to make a regulatory

election only when the interests of the Government will not be prejudiced by the
granting of relief. Treas. Reg. § 301.9100-3(c)(1).
PLR-113913-20 5

   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).

   Treas. Reg. § 301.9100-1(a) cautions that granting an extension of time to make

an election is not a determination that the taxpayer is otherwise eligible to make the
election.

CONCLUSION

  Based solely on the facts and information submitted, and the additional

information required under Treas. Reg. § 301.9100-3(e), Taxpayer qualifies for an
extension of time to make the elections under section 831(b)(2)(A)(ii) and section
953(d). Taxpayer is deemed to have acted in good faith, as defined by Treas. Reg.
§ 301.9100-3(b), and the grant of relief will not prejudice the interests of the
Government.

    Accordingly, Taxpayer is granted an extension of time of 60 days from the date of

this ruling letter to make the section 953(d) election, in accordance with the procedural
rules set forth in Rev. Proc. 2003-47, to be treated as a domestic corporation for U.S.
federal income tax purposes effective for Year 1. Also, under Treas. Reg. § 301.9100-
3, Taxpayer is granted an extension of time until 90 days following the date of this letter
to make the election provided by section 831(b)(2)(A)(ii), effective for Taxpayer’s
taxable year ending December 31, Year 1.

   The above extension of time is conditioned on Taxpayer’s tax liability (if any)

being not lower, in the aggregate, for all years to which the section 953(d) and section
831(b) elections apply than it would have been if the elections had been timely filed
(taking into account the time value of money). No opinion is expressed as to
Taxpayer’s tax liability for the years involved. No opinion is expressed or implied
concerning the federal income tax consequences of any other aspect of this or other
transactions or item of income. Further, the granting of the above extension is not a
determination that Taxpayer qualifies as an insurance company under section 831(c) or
that Taxpayer is otherwise eligible to make the section 953(d) and section 831(b)(2)
elections. Treas. Reg. § 301.9100-1(a). Also, no ruling is granted with respect to
Taxpayer’s entity classification for federal income tax purposes.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.
PLR-113913-20 6

   Pursuant to a power of attorney on file in this office, a copy of this ruling letter is

being furnished to your authorized representative.

                                 Sincerely,



                                 Melinda E. Harvey
                                 Branch Chief, Branch 2
                                 Office of Associate Chief Counsel (International)

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