Late section 853 foreign-tax pass-through election by a liquidated fund allowed under 9100 relief

Plain-English summary

A mutual fund (a regulated investment company, or RIC) that holds mostly foreign stocks can elect under § 853 to pass the foreign taxes it pays through to its shareholders, who then claim the related foreign tax credit or deduction. The election has to be made on a timely filed return. Here the fund merged into another fund and liquidated, creating a short tax year, and the administrator (partly due to COVID-19 office disruptions) failed to file the extension request, so the return carrying the § 853 election was late. The fund asked the IRS for an extension under the § 301.9100-3 relief rules. The IRS granted relief, treating the late-filed Form 1120-RIC as timely for purposes of the § 853 election, because the fund reasonably relied on its administrator and relief would not prejudice the government. The ruling is limited to the timeliness of the election; it does not decide whether the fund actually qualifies as a RIC or meets the § 853 requirements.

Ruling snapshot

• Question: May the liquidated fund get an extension of time to make a late § 853 foreign-tax pass-through election?
• Outcome: Approved (late return treated as timely for the § 853 election)
• Key authorities: IRC § 853; Treas. Reg. §§ 1.853-4, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202203006
Third Party Communication: None
Release Date: 1/21/2022
Date of Communication: Not Applicable
Index Number: 853.00-00, 853.01-00,
9100.00-00
Person To Contact:
-------------------, ID No. -----------------
---------------------
Telephone Number:
-------------
--------------------
--------------------------------
Refer Reply To:
-------------------------
CC:FIP:B01
--------------------------------
PLR-110929-21
Date:
November 01, 2021

Legend:

Taxpayer = ---------------------------------------------------------------------------------------
-----------------------
Corporation = --------------------------------
Surviving = ---------------------------------------------------------------------------------------
Fund
---------------------
Manager = ------------------------------------------
Administrator = ---------------------------------------------------
Firm = ---------------
Date 1 = ------------------
Date 2 = ---------------------
Date 3 = ---------------------------
Date 4 = ----------------------
Date 5 = -------------------
State A = -------------
Month A = -------------------

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

This ruling responds to a letter dated May 12, 2021 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 make an election under section 853 of the Internal Revenue Code (the “Code”) for the taxable year ended on Date 1.
PLR-110929-21
2

FACTS

Corporation is a State A corporation that is registered as an open-end investment company under the Investment Company Act of 1940, as amended. Taxpayer was created as an investment portfolio on Date 2 and elected under section 851(b) of the Code to be a regulated investment company (“RIC”) beginning with its taxable year that began on Date 2. Taxpayer uses the calendar year as its taxable year and an accrual method of accounting for U.S. federal income tax purposes.

On Date 1, Taxpayer transferred all its assets to Surviving Fund in exchange for shares in Surviving Fund, which Taxpayer distributed to its shareholders in complete liquidation of Taxpayer (the “Fund Combination”). As a result, Taxpayer had a short taxable year ended Date 1.

For each of its taxable years prior to the taxable year ended on Date 1, Taxpayer made an election under section 853 to pass through to its shareholders the deduction or credit for foreign taxes that Taxpayer paid. For its taxable year ended Date 1, Taxpayer represents that it satisfied the requirements to make an election under section 853.

Manager managed and advised Taxpayer pursuant to an advisory and management agreement. Neither Manager nor Taxpayer has an internal tax department. Administrator is Parent’s accounting agent and custodian for all series of Parent, including Taxpayer. Taxpayer engaged Firm for U.S. tax advice and relied on Administrator to prepare and file federal and state income tax returns and extension requests. For Taxpayer’s taxable year ended Date 1, Administrator was engaged to prepare Taxpayer’s (1) Form 1120-RIC, U.S. Federal Income Tax Return for Regulated Investment Companies, and (2) Form 7004, Application for Automatic 6-month Extension of Time to File Certain Business Income Tax, Information, And Other Returns. The original due date for Taxpayer’s return was Date 3. Administrator drafted the Form 7004 before Date 3 and thought that the Form 7004 was timely filed.

In early Month A, Administrator discovered that the Form 7004 had not been timely filed during a routine review of all filings for Corporation. There were several factors that lead to Administrator’s failure to file Form 7004, including (1) the liquidation of Taxpayer in the Fund Combination, which changed the due date for its return, and (2) workplace restrictions relating to the COVID-19 emergency, which limited personnel in the office. Because Form 7004 was not timely filed, the deadline for filing Taxpayer’s federal income tax return, on which Taxpayer’s section 853 election was to be made, was not extended from Date 3 to Date 4.

On Date 5, Administrator filed Taxpayer’s Form 1120-RIC for its taxable year ended Date 1. Taxpayer represents that the Form 1120-RIC contained, and was consistent with, a section 853 election. Taxpayer also represents that it has issued the written statements to its shareholders required by section 853(c) and section 1.853-3.
PLR-110929-21
3

Taxpayer makes the following additional representations in connection with its request for an extension of time:

1. The request for relief was filed before the failure to make the regulatory election was discovered by the Service.

2. Granting the relief requested will not result in Taxpayer having a lower U.S. federal tax liability in the aggregate for all years to which the election applies than Taxpayer would have had if the election had been timely made (taking into account the time value of money).

3. Taxpayer does not seek to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 of the Code at the time Taxpayer requested relief and the new position requires or permits the regulatory election for which relief is requested.

4. Being fully informed of the required regulatory election and related tax consequences, Taxpayer did not choose to not file the election.

5. Taxpayer is not using hindsight in making the decision to seek the relief requested. No specific facts have changed since the due date for making the election that make the election advantageous to Taxpayer.

6. The period of limitations on assessment under section 6501(a) has not expired for Taxpayer for the taxable year in which the election should have been filed, nor for any taxable year(s) that would have been affected by the election had the election been timely filed.

In addition, affidavits on behalf of Taxpayer, Surviving Fund, Administrator, and Firm have been provided as required by sections 301.9100-3(e)(2) and (3).

LAW AND ANALYSIS

Section 853(a) provides that a RIC, more than 50 percent of the value (as defined in section 851(c)(4)) of whose total assets at the close of the taxable year consist of stock or securities in foreign corporations, and which meets the requirements of section 852(a) for the taxable year, may elect the application of section 853 for the taxable year with respect to certain taxes paid by the RIC during the taxable year to foreign countries and possessions of the United States.

Section 853(b)(1) provides that the electing RIC (A) is not allowed for the taxable year any deduction under section 164(a) or any credit under section 901 for these taxes, and (B) is allowed an addition to its dividends paid deduction for the taxable year for the amount of these taxes.
PLR-110929-21
4

Section 853(b)(2) provides that each shareholder of the electing RIC shall (A) include in gross income and treat as paid by the shareholder its proportionate share of these taxes, and (B) treat as gross income from sources within the respective foreign countries and possessions of the United States the sum of the shareholder’s proportionate share of these taxes and the portion of any dividend paid by the RIC that represents income derived from sources within foreign countries or possessions of the United States.

Section 853(c) provides that the amount to be treated by a shareholder of the electing RIC as the shareholder’s proportionate share of taxes paid to any foreign country or possession of the United States, and gross income derived from sources within any foreign country or possession of the United States, shall not exceed the amounts so reported by the RIC in a written statement furnished to the shareholder.

Section 1.853-4(b) of the Income Tax Regulations provides that an election under section 853 must be made not later than the time prescribed for filing the return (including extensions). The election, once made, is irrevocable with respect to the dividend (or portion thereof), and the foreign taxes paid with respect thereto, to which the election applies

Section 1.853-4(c) requires that certain information pertinent to the election, including, among other things, the date, form, and contents of its notice to its shareholders, shall accompany the RIC' s timely filed federal income tax return for the taxable year on or with a modified Form 1118.

Section 301.9100-1(c) provides 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) defines a regulatory election as an election whose due date is prescribed by regulations or by a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin.

Section 301.9100-3(a) through (c)(1) sets forth rules that the Service generally will use to determine whether, under the particular facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements for an automatic extension under section 301.9100-2. Section 301.9100-3(a) provides that requests for relief subject to section 301.9100-3 will be granted when the taxpayer provides the evidence (including affidavits described in section 301.9100-3(e)) 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 that a taxpayer generally is deemed to have acted reasonably and in good faith if the taxpayer (i) requests relief under section
PLR-110929-21
5

301.9100-3 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 reasonable diligence (taking into account the taxpayer's experience and the 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 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. A taxpayer will be deemed to have not acted reasonably and in good faith, however, 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.

Section 301.9100-3(c)(1) provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides 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 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 under section 301.9100-3.

CONCLUSION

Based on the information submitted and representations made, we conclude that Taxpayer has satisfied the requirements for granting a reasonable extension of time to elect under section 853 for the taxable year ended on Date 1. Accordingly, Taxpayer’s Form 1120 RIC filed on Date 5 will be treated as a timely filed return for purposes of the election under section 853(a).

This ruling is limited to the timeliness of the filing of the election in section 853 of the Code. This ruling's application is limited to the facts, representations, Code sections, and regulations cited herein. No opinion is expressed with regard to whether Taxpayer qualifies as a RIC or satisfies the requirements of section 853(a). No opinion is expressed on the timeliness of Taxpayer’s tax return for any purpose other than the section 853 election.

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
PLR-110929-21
6

In accordance with the terms of a power of attorney on file in this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

_______
Steven Harrison
Branch Chief, Branch 1
Office of Associate Chief Counsel
(Financial Institutions and Products)

cc: