IRS grants a corporate parent extra time to make the elections that close its foreign subsidiaries' tax years

Plain-English summary

A U.S. corporate parent needed to make special elections to avoid an unfavorable result under the dividends-received-deduction rules for foreign subsidiaries (§ 245A and Treas. Reg. § 1.245A-5). When a "controlling section 245A shareholder" has an "extraordinary reduction" in its indirect ownership of a controlled foreign corporation (CFC), it can trigger an "extraordinary reduction amount" (and a "tiered extraordinary reduction amount") that limits the deduction, unless it elects to close the CFC's tax year as of the reduction date and enters a binding agreement with the relevant U.S. shareholders. The parent intended to make this election for five CFCs and even filed its consolidated return consistent with having done so, but it failed to attach the required election statement and never executed the required binding agreement. It asked for relief under the "9100" regulations (Treas. Reg. §§ 301.9100-1 and 301.9100-3), which let the IRS grant more time to make a missed regulatory election when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. The IRS agreed the standards were met and granted the parent 90 days from the date of the letter to file the elections and agreements. The IRS stressed it was only granting extra time, not deciding whether the parent is actually eligible to make the election or whether the extraordinary reduction rules even apply.

Ruling snapshot

• Question: Should the IRS grant more time to file the § 1.245A-5(e)(3)(i) elections and binding agreements the parent failed to complete on its original return?
• Outcome: Approved (90-day extension granted under Treas. Reg. § 301.9100-3)
• Key authorities: Treas. Reg. §§ 301.9100-1, 301.9100-2, 301.9100-3; Treas. Reg. § 1.245A-5(e)(3)(i); IRC § 245A

Full text (IRS public release)

Internal Revenue Service                                   Department of the Treasury
                                                           Washington, DC 20224

Number: 202226009                                          Third Party Communication: None
Release Date: 7/1/2022                                     Date of Communication: Not Applicable
Index Number: 9100.00-00, 245A.00-00
                                                           Person To Contact:
------------------------                                   --------------------------------, ID No. ----------
---------------------------                                Telephone Number:
----------------------------------                         --------------------
                                                           Refer Reply To:
                                                           CC:INTL:B04
                                                           PLR-124711-21
                                                           Date:
                                                           April 04, 2022

TY: -------

Legend

Parent = --------------------------------------------------------------------------------------------------
         --------------------------------------------------------------------------------------------------
         -----------------------
CFC 1 = --------------------------------------------------------------------------------------------------
         --------------------------------------------------------------------------------------------------
         ---------------
CFC 2 = --------------------------------------------------------------------------------------------------
         --------------------------------------------------------------------------------------------------
         ---------------
CFC 3 = --------------------------------------------------------------------------------------------------
         --------------------------------------------------------------------------------------------------
         ---------------
CFC 4 = --------------------------------------------------------------------------------------------------
         --------------------------------------------------------------------------------------------------
         ------------------------
CFC 5 = --------------------------------------------------------------------------------------------------
         --------------------------------------------------------------------------------------------------
         ------------------------
Date 1 = --------------------------
Date 2 = --------------------------
Date 3 = -----------------------
a      = --------

PLR-124711-21                                2

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

This is in response to your letter dated November 16, 2021, and additional
correspondence dated March 4, 2022, submitted on behalf of Parent by its authorized
representative, requesting an extension of time under Treas. Reg. § 301.9100-3 for
Parent to file elections and agreements under Treas. Reg. § 1.245A-5(e)(3)(i) to close
the taxable year of certain controlled foreign corporations.

The ruling contained in this letter is based upon information and representations
submitted by Parent and accompanied by penalties of perjury statements executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for a ruling, it is subject to verification on examination.
Information submitted in the request is set forth below. Unless otherwise provided, all
Code and section references are to the Internal Revenue Code of 1986, as amended.

FACTS

On its consolidated tax return for the year ending on Date 2, Parent treated an upper-
tier CFC (within the meaning of Treas. Reg. § 1.245A-5(i)(28)) as receiving, or being
deemed to receive, a dividend with respect to the stock of each of CFC 1, CFC 2, CFC
3, and CFC 4. Parent determined that, absent an election under Treas. Reg. § 1.245A-
5(e)(3)(i), there would be (i) an extraordinary reduction with respect to the indirect
ownership of the stock of CFC 1, CFC 2, CFC 3, and CFC 4, and (ii) a tiered
extraordinary reduction amount (as described in Treas. Reg. § 1.245A-5(f)(2)) with
respect to dividends received by an upper-tier CFC that are attributable to the stock of
each of CFC 1, CFC 2, CFC 3, and CFC 4. To avoid having a tiered extraordinary
reduction amount, Parent determined that it would make the election permitted under
Treas. Reg. § 1.245A-5(e)(3)(i) for each of CFC 1, CFC 2, CFC 3, and CFC 4. Parent
timely filed the consolidated tax return for its group on Date 3 and reported consistently
with the making of an election under Treas. Reg. § 1.245A-5(e)(3)(i) to close the taxable
year on Date 1 for each of CFC 1, CFC 2, CFC 3, and CFC 4. However, Parent failed to
attach the required election statement described in Treas. Reg. § 1.245A-5(e)(3)(i)(D) to
the consolidated tax return. In addition, the binding agreement described in Treas. Reg.
§ 1.245A-5(e)(3)(i)(C)(2) was not executed.

Further, in the course of preparing its amended tax return for the year ending on Date 2,
Parent determined that there would have been (i) an extraordinary reduction with
respect to the indirect ownership of the stock of CFC 5, and (ii) a tiered extraordinary
reduction amount that was not in excess of $a attributable to a dividend with respect to
the stock of CFC 5.

LAW

Treasury Reg. § 1.245A-5(e)(3)(i)(A) provides that for a taxable year of a controlled
foreign corporation in which an extraordinary reduction occurs with respect to a

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controlling section 245A shareholder and for which absent Treas. Reg. § 1.245A-
5(e)(3)(i) there would be an extraordinary reduction amount or tiered extraordinary
reduction amount greater than zero, no amount is considered an extraordinary reduction
amount or tiered extraordinary reduction amount with respect to the controlling section
245A shareholder if each controlling section 245A shareholder elects, and each U.S. tax
resident described in Treas. Reg. § 1.245A-5(e)(3)(i)(C) agrees, to close the controlled
foreign corporation's taxable year for all purposes of the Internal Revenue Code as of
the end of the date on which the extraordinary reduction occurs (or if the extraordinary
reduction occurs by reason of multiple transactions, as of the end of each date on which
a transaction forming part of the extraordinary reduction occurs).

Treasury Reg. § 1.245A-5(e)(3)(i)(C)(1) provides that an election pursuant to Treas.
Reg. § 1.245A-5(e)(3)(i) is made and effective if the statement described in Treas. Reg.
§ 1.245A-5(e)(3)(i)(D) is timely filed (including extensions) by each controlling section
245A shareholder making the election with its original U.S. tax return for the taxable
year in which the extraordinary reduction occurs. If a controlling section 245A
shareholder is a member of a consolidated group (within the meaning of Treas. Reg. §
1.1502-1(h)) and participates in the extraordinary reduction, the agent for such group
(within the meaning of Treas. Reg. § 1.1502-77(c)(1)) must file the election on behalf of
such member.

Treasury Reg. § 1.245A-5(e)(3)(i)(C)(2) provides that, before the filing of the statement
pursuant to Treas. Reg. § 1.245A-5(e)(3)(i)(C)(1), each controlling section 245A
shareholder must enter into a written, binding agreement with each U.S. tax resident
that on the end of the date on which the extraordinary reduction occurs (or, if the
extraordinary reduction occurs by reason of multiple transactions, each U.S. tax
resident that on the end of each date on which a transaction forming a part of the
extraordinary reduction occurs) owns directly or indirectly, without regard to the final two
sentences of Treas. Reg. § 1.245A(e)(3)(i)(A), stock of the controlled foreign
corporation and is a United States shareholder with respect to the controlled foreign
corporation. The written, binding agreement must provide that each controlling section
245A shareholder will elect to close the taxable year of the controlled foreign
corporation.

Treasury Reg. § 301.9100-1(a) provides that Treas. Reg. §§ 301.9100-1 through
301.9100-3 provide the standards the Commissioner will use to determine whether to
grant an extension of time to make a regulatory election.

Treasury Reg. § 301.9100-1(c) provides that 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 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. Treasury Reg. § 301.9100-1(b) provides that the term "regulatory
election" includes an election whose due date is prescribed by a regulation published in
the Federal Register.

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Treasury Reg. § 301.9100-2 provides the rules governing automatic extensions of time
for making certain elections. Treasury Reg. § 301.9100-3 provides the standards the
Commissioner will use to determine whether to grant an extension of time for regulatory
elections that do not meet the requirements of Treas. Reg. § 301.9100-2.

Treasury Reg. § 301.9100-3(a) provides that requests for relief subject to Treas. Reg. §
301.9100-3 will be granted when the taxpayer provides the evidence (including
affidavits described in Treas. Reg § 301.9100-3(e)) to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and that the grant
of relief will not prejudice the interests of the government.

CONCLUSION

Based solely on the information submitted and on the representations set forth above,
we conclude that the requirements of Treas. Reg. §§ 301.9100-1 and 301.9100-3 have
been satisfied. As a result, Parent is granted an extension of 90 days from the date of
this letter to file elections and agreements under Treas. Reg. § 1.245A-5(e)(3)(i) to
close the taxable year of CFC 1, CFC 2, CFC 3, CFC 4, and CFC 5 as of Date 1.

Except as specifically set forth above, we express or imply no opinion concerning the
facts of this case under any other provision of the Code. Further, no opinion is
expressed or implied concerning the tax consequences of any aspect of any transaction
or item discussed or referenced in this letter.

Treasury Reg. § 301.9100-1(a) provides that the granting of an extension of time for
making an election is not a determination that the taxpayer is otherwise eligible to make
the election. Thus, no inference should be taken concerning Parent's eligibility to make
the election under Treas. Reg. § 1.245A-5(e)(3)(i) (for example, whether there is a
tiered extraordinary reduction amount absent the election).

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 representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by

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attaching a statement to their return that provides the date and control number of the
letter ruling.

Sincerely,

Robert B. Williams, Jr.
Senior Counsel, Branch 4
(International)

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