IRS grants extra time to make a branch-profits-tax E&P election after a check-the-box conversion

Plain-English summary

A foreign parent corporation wholly owned a U.S. limited liability company that
was a disregarded entity running a U.S. trade or business, so the parent paid
the branch profits tax on the branch's earnings. The LLC later filed a
check-the-box election to be taxed as a corporation, retroactively. That
election is treated as a deemed section 351 transfer of the U.S. branch assets
to a new corporation. To keep that transfer from triggering the branch profits
tax, the regulations let the new corporation elect to increase its earnings and
profits under Treas. Reg. § 1.884-2T(d)(4)(i), with the parent filing a matching
statement under § 1.884-2T(d)(5). The taxpayers' original CPA firm missed the
deadline for that election. After hiring a new firm and discovering the miss,
the parent asked for relief under Treas. Reg. § 301.9100-3. The IRS found the
taxpayers acted reasonably and in good faith and that relief would not prejudice
the government, so it granted 30 days from the ruling to make the election and
file the statement.

Ruling snapshot

• Question: Should the taxpayers get an extension of time under Treas. Reg. § 301.9100-3 to make the § 1.884-2T(d)(4)(i) election and file the perfecting statement?
• Outcome: Approved (30-day extension granted)
• Key authorities: Treas. Reg. §§ 301.9100-1(c), 301.9100-3; Treas. Reg. § 1.884-2T(d)(4)-(5); Treas. Reg. § 301.7701-3(g); IRC § 351

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202245005
Release Date: 11/11/2022
Index Number: 884.00-00, 884.08-00, 884.08-40, 9100.00-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
-----------------------, ID No. -----------------
Telephone Number:

Refer Reply To:
CC:INTL:B01
PLR-106607-22
Date:
July 29, 2022

Legend

Parent = ---------------------------------------------------------------------------------------
----------------------------
Subsidiary = ---------------------------------------------------------------------------------------
-----------------------------
Country X = -------
State A = -------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Date 1 = ----------------
Date 2 = -------------
Date 3 = --------
Date 4 = ------------------
CPA Firm 1 = -----------------------
CPA Firm 2 = ---------------

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

This replies to a letter dated March 30, 2022, from your authorized representative, in
which you request an extension of time pursuant to Treas. Reg. § 301.9100-1(c) and
Treas. Reg. § 301.9100-3 to permit Subsidiary to make an election under Treas. Reg.
§ 1.884-2T(d)(4)(i) to increase its earnings and profits by the amount determined under
Treas. Reg. § 1.884-2T(d)(4)(ii) with respect to its Year 1 tax year and to permit Parent
to file the appropriate statement under Treas. Reg. § 1.884-2T(d)(5) to perfect this
election.

The rulings contained in this letter are based upon facts and representations submitted
by Parent and accompanied by a penalty 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 a part of the audit process.

Parent, a Country X Entity, is classified as a corporation for federal income tax purposes
and is a calendar-year taxpayer. As of the beginning of its Year 1 tax year, Parent
wholly owned Subsidiary, a State A limited liability company that was treated as a
disregarded entity for federal tax purposes pursuant to Treas. Reg. § 301.7701-
3(b)(1)(ii) and that was engaged in a U.S. trade or business. Parent timely filed its Year
1 Form 1120-F to report its income effectively connected with the U.S. trade or business
of Subsidiary and branch profits tax with respect to the earnings of Subsidiary.

On Date 1, Year 3, Subsidiary, based on advice of CPA Firm 1, filed a Form 8832
(Entity Classification Election) pursuant to Rev. Proc. 2009-41, 2009-39 I.R.B. 43, to
elect to be treated as a corporation for federal income tax purposes with retroactive
effect to Date 2, Year 2. Subsidiary received a letter dated Date 3, Year 3, from the IRS
granting its classification election. Pursuant to Treas. Reg. § 301.7701-3(g)(1)(iv), as a
consequence of the election, Parent was deemed to have contributed all of the assets
and liabilities of Subsidiary to a newly formed association in exchange for stock of the
association in a transaction that Parent states was described in section 351. Pursuant to
Treas. Reg. § 301.7701-3(g)(3)(i), the transaction deemed to occur as a result of
Subsidiary's change in classification is treated as occurring immediately before the
close of the day before the entity classification election effective date (i.e., on Date 4,
Year 1).

Under Treas. Reg. § 1.884-2T(d)(3), if a foreign corporation (transferor) engaged in the
conduct of a U.S. trade or business makes a transfer under section 351(a) of the Code
of all or part of its U.S. assets to a U.S. corporation (transferee) in exchange for stock or
securities in the transferee, the transferor's dividend equivalent amount will be
determined without regard to the section 351 transfer, provided the transferee makes an
election under Treas. Reg. § 1.884-2T(d)(4)(i) to increase its earnings and profits by an
allocable portion of the transferor's effectively connected earnings and profits and non-
previously taxed accumulated earnings. The election is generally only effective if the
transferee attaches the requisite statement described in Treas. Reg. § 1.884-2T(d)(4)(i)
to its timely filed (including extensions) income tax return for the taxable year in which
the transaction occurs. The transferor must also file a statement agreeing that, upon
disposition of part or all of the stock or securities it owns in the transferee, it will treat as
a dividend equivalent amount for the taxable year in which the disposition occurs an
amount equal to the lesser of (A) the amount realized upon such disposition or (B) the
total amount of the effectively connected earnings and profits and non-previously taxed
accumulated earnings and profits that was allocated from the transferor corporation to
the transferee corporation pursuant to the election under Treas. Reg. § 1.884-
2T(d)(4)(i). Treas. Reg. § 1.884-2T(d)(5)(i). This statement must be attached to a timely
filed (including extensions) return of the transferor for the taxable year in which the
section 351 transaction occurs. Treas. Reg. § 1.884-2T(d)(5)(iv).

At the time CPA Firm 1 advised Subsidiary to file Form 8832, CPA Firm 1 did not
identify or advise on the possibility of making an election under Treas. Reg. § 1.884-
2T(d)(4)(i). Subsequently, CPA Firm 1 determined that, because the election could not
be made on a timely-filed return for Year 1, Subsidiary should instead make the election
under Treas. Reg. § 1.884-2T(d)(4)(i) on its income tax return for Year 2 and Parent
should attach a statement pursuant to Treas. Reg. § 1.884-2T(d)(5)(i) on its income tax
return for Year 2. CPA Firm 1 prepared and timely filed both Parent's and Subsidiary's
income tax returns for Year 2 accordingly.

In Year 4, Parent engaged CPA Firm 2 which determined that Subsidiary failed to make
a timely election in accordance with Treas. Reg. § 1.884-2T(d)(4)(i) and Parent failed to
timely file the appropriate statement in accordance with Treas. Reg. § 1.884-
2T(d)(5)(iv). Upon learning this information, Parent authorized CPA Firm 2 to begin the
process to request late election relief, which Parent filed as soon as practicable
thereafter. The IRS did not discover Subsidiary's failure to timely make the election or
Parent's failure to timely file the required statement before this request for relief was
filed.

Treas. Reg. § 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the standards set forth in Treas. Reg. § 301.9100-3
to make a regulatory election under all subtitles of the Internal Revenue Code except
subtitles E, G, H, and I.

Treas. Reg. § 301.9100-1(b) defines a regulatory election as an election whose due
date is prescribed by a regulation, a revenue ruling, revenue procedure, notice, or
announcement.

Treas. Reg. § 301.9100-3 provides standards for extensions of time for making
regulatory elections when the deadline for making the election is other than a due date
prescribed by statute.

Treas. Reg. § 301.9100-3(a) provides that requests for relief subject to this section 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 the grant of relief will not
prejudice the interests of the Government. Except as otherwise provided in Treas. Reg.
§ 301.9100-3(b)(3)(i) through (iii), a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer requests relief before the failure to make the regulatory
election is discovered by the IRS. Treas. Reg. § 301.9100-3(b)(1)(i).

In the present situation, Treas. Reg. § 1.884-2T(d)(4)(i) fixes the time for Subsidiary to
make the election and Treas. Reg. § 1.884-2T(d)(5)(iv) fixes the time for Parent to file
the statement. Therefore, the Commissioner has discretionary authority under Treas.
Reg. § 301.9100-1(c) to grant Parent and Subsidiary an extension of time, provided that
each satisfies the standards set forth in Treas. Reg. § 301.9100-3(a).

Based on the facts and circumstances of this case, we conclude that Parent and
Subsidiary acted reasonably and in good faith, and the grant of relief will not prejudice
the interests of the Government. Accordingly, under Treas. Reg. § 301.9100-3,
Subsidiary is granted an extension of time until 30 days from the date of this ruling letter
to make an election under Treas. Reg. § 1.884-2T(d)(4)(i) to increase its earnings and
profits by the amount determined under Treas. Reg. § 1.884-2T(d)(4)(ii) with respect to
its Year 1 tax year, and Parent is granted an extension of time until 30 days from the
date of this ruling letter to file the appropriate statement under Treas. Reg. § 1.884-
2T(d)(5) to perfect this election. The granting of an extension of time is not a
determination that Subsidiary is otherwise eligible to make the election. Treas. Reg.
§ 301.9100-1(a).

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 under other provisions of the Code and regulations, or about the tax treatment
of any conditions existing at the time of, or effects resulting from the transactions not
specifically covered by the above rulings. In particular, no opinion is expressed with
respect to (i) the application of Treas. Reg. § 301.7701-3(g) or section 351 and related
provisions to the transactions discussed, and (ii) whether the federal income tax returns
for Year 1 or Year 2 were timely filed (including extensions).

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

A copy of this letter must be attached to any income tax return to which it is relevant.

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,

                                           _____________________________
                                           Richard F. Owens
                                           Senior Technical Reviewer, Branch 1
                                           Associate Chief Counsel (International)

Enclosure:
Copy for 6110 Purposes

cc: