Partnership received more time to change its tax year

Plain-English summary

A partnership used a calendar tax year because its tax firm mistakenly believed the majority-interest partner also used a calendar year. After learning that the majority partner used a different year-end, the firm advised the partnership to change its tax year through the automatic procedures of Revenue Procedure 2006-46. The partnership engaged the firm to prepare the short-period return and Form 1128, but the firm's team failed to request an extension or file them by the deadline. The partnership sought relief less than 90 days after the due date. The IRS found reasonable reliance on a qualified tax professional and no prejudice to the government, and granted 60 days to file Form 1128. The ruling did not extend the deadline for the short-period return or decide whether the partnership otherwise qualified for the automatic change.

Ruling snapshot

• Question: May the partnership file a late Form 1128 to change from a calendar year to its majority partner's tax year?
• Outcome: Approved, with Form 1128 due within 60 days
• Key authorities: IRC §§ 441, 442; Treas. Reg. §§ 1.441-1, 1.442-1, 301.9100-1, 301.9100-3(c)(3); Rev. Proc. 2006-46

Full text (IRS public release)

 Internal Revenue Service                                        Department of the Treasury
                                                                 Washington, DC 20224

 Number: 202350002                                               Third Party Communication: None
 Release Date: 12/15/2023                                        Date of Communication: Not Applicable
  Index Number: 9100.00-00, 442.00-00
                                                                 Person To Contact:
                                                                 --------------------------, ID No. -----------------
                                                                 Telephone Number:
                                                                 --------------------
 ------------------------                                        Refer Reply To:
 ---------------------------------------------------             CC:ITA:B05
 -----------------------------                                   PLR-105862-23
 ------------------------------------                            Date:
                                                                 September 15, 2023
 In re: ------------------------------------------------------
 -----------------------------------------------------------
 EIN: ----------------




Legend:
 Taxpayer                          =    ---------------------------------------------------
 Date 1                            =    ---------------------
 New Date                          =    -------------------
 Date 2                            =    ---------------------------
 State                             =    -------------
 Date 3                            =    ----------------------
 Year 1                            =    -------
 Year 2                            =    -------
 Tax Firm                          =    ----------------------------
 Date 4                            =    --------------------------
 Executive Director                =    ----------------


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

This ruling responds to Taxpayer’s request dated Date 1. Specifically, Taxpayer
requests relief under §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations, to file a Form 1128, Application to Adopt, Change or Retain
a Tax Year, to change its taxable year from a calendar year to a taxable year ending
New Date, effective Date 2.

This letter is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-
21 I.R.B. 859.
PLR-105862-23                                2

                                         FACTS

Taxpayer is a partnership formed under the laws of State. Taxpayer is treated as a
partnership for Federal income tax purposes and files a Form 1065, US Return of
Partnership Income. Taxpayer currently uses an accrual method of accounting for
Federal Income tax purposes and has a calendar year as its tax year. Taxpayer intends
to change to a taxable year ending New Date. The short year period caused by the
change would begin on Date 3 and end on Date 2.

Tax Firm has prepared Taxpayer’s returns for all years prior to the short year period.
For years prior to the short year period, Tax Firm thought that Taxpayer’s required
taxable year was a calendar year, due to the Tax Firm’s mistaken belief that Taxpayer’s
majority interest partner used a calendar year for Federal income tax purposes.

In the fall of Year 1, Tax Firm discovered that Taxpayer’s majority interest partner used
a taxable year ending on New Date. Tax Firm advised Taxpayer to obtain consent from
the IRS to change its taxable year to a taxable year ending on New Date, effective as of
Date 2. Taxpayer represents that if timely filed, the request to change its taxable year
end to New Date would have qualified under the automatic procedures found in Rev.
Proc. 2006-46, 2006-2 C.B. 859.

In the summer of Year 2, Taxpayer engaged Tax Firm to assist in changing its taxable
year, effective as of Date 2, including a request for an extension of time to prepare and
file the return and Form 1128. Pursuant to Rev. Proc. 2006-46, Taxpayer was required
to file Form 1128 no later than the due date (including any extensions) for the short year
period return. The due date for the return for the short year period Date 3 to Date 2 is
Date 4.

A team lead by Executive Director at Tax Firm failed to file the request for an extension
of time by the due date. Due to this oversight, the Taxpayer’s return and Form 1128
were not timely filed. Subsequently, Taxpayer requested that Tax Firm prepare the
submission to seek relief to timely file the Form 1128.

                                  LAW AND ANALYSIS

Section 441(a) of the Internal Revenue Code provides that taxable income is computed
on the basis of the taxpayer’s taxable year. Section 441(b) and § 1.441-1(b)(1) of the
Income Tax Regulations provide that the term “taxable year” generally means the
taxpayer’s required taxable year.

Section 442 and § 1.442-1(a) provides that if a taxpayer wants to change its annual
accounting period and use a new taxable year, it generally must obtain the approval of
the Commissioner. Section § 1.442-1(b)(1) provides that in order to secure approval of
the Commissioner to change an annual accounting period, a taxpayer must file an
application, generally on Form 1128, “Application to Adopt, Change, or Retain a Tax
PLR-105862-23                                 3

Year,” with the Commissioner within such time and in such manner as provided in
administrative procedures published by the Commissioner.

Rev. Proc. 2006-46 provides the exclusive procedures for a partnership within its scope
to secure the Commissioner’s automatic approval to change its annual accounting
period under § 442. A partnership complying with all the applicable provisions of Rev.
Proc. 2006-46 will be deemed to have established a business purpose and obtained the
approval of the Commissioner to change its annual accounting period.

Section 7.02(2) of Rev. Proc. 2006-46 provides that a Form 1128 filed pursuant to the
revenue procedure will be considered timely filed only if it is filed no later than the due
date (including any extensions) for filing the Federal income tax return for the first
effective year.

Section 5.10 of Rev. Proc. 2006-46 provides that the “first effective year” is the first
taxable year for which a change in annual accounting period is effective. The first
effective year is generally the short period required to effect the change. Section 5.11
of Rev. Proc. 2006-46 provides that a “short period” is the period beginning with the day
following the close of the old taxable year and ending with the day preceding the first
day of the new taxable year.

Under § 301.9100-1(b), a “regulatory election” is defined as an election whose due date
is prescribed by regulations published in the Federal Registrar, or a revenue ruling,
revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.
Because Rev. Proc 2006-46 sets forth the manner and timing for an entity to file a Form
1128 to change its taxable year, these elections are regulatory elections.

Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner
will use to determine whether to grant an extension of time to make a regulatory
election. Section 301.9100-3(a) provides that requests for extensions of time for
regulatory elections (other than the automatic extensions covered in in § 301.9100-2)
will be granted when the taxpayer provides evidence (including affidavits) to establish
that the taxpayer acted reasonably and in good faith and the grant of relief will not
prejudice the interests of the government.

Under § 301.9100-3(b), a taxpayer is determined 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 Service, or reasonably relied on a qualified tax professional, and the
tax professional failed to make, or advise the taxpayer to make, the election. However,
a taxpayer is not considered to have reasonably relief on a qualified tax professional if
the taxpayer knew or should have known that the professional was not competent to
render advice on the regulatory election or was not aware of all relevant facts.

In addition, § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted
reasonably and in good faith if the taxpayer—
PLR-105862-23                                 4


       (i)     seeks to alter a return position for which an accuracy-related penalty has
               been or could be imposed under § 6662 at the time the taxpayer requests
               relied, and the new position requires or permits a regulatory election for
               which relief is requested;

       (ii)    was fully informed in all material respects of the required election and
               related tax consequences but chose not to make the election; or

       (iii)   uses hindsight in requesting relief. If specific facts have changed since
               the original deadline that make the election advantageous to a taxpayer,
               the Service will ordinarily not grant relief.

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

Under § 301.9100-3(c)(1)(i) 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 made on a timely basis.

Section 301.9100-3(c)(1)(ii) provides that relief ordinarily will not be granted if the
taxable year in which the regulatory election should have been made, or any taxable
year that would have been affected by the election had it been timely made, is closed by
the statute of limitation on assessment before the taxpayer’s receipt of the ruling
granting 9100 relief.

Section 301.9100-3(c)(3) provides that a change with respect to an accounting period
regulatory election prejudices the interests of the government if the request for relief is
made more than 90 days after the due date for filing the Form 1128.

Based on the facts and information submitted and the representations made, we
conclude that Taxpayer acted reasonably and in good faith, and that the granting of
relief would not prejudice the interests of the government. Taxpayer relied on a
qualified tax professional and that professional failed to make or advise Taxpayer to
make the election. Further, Taxpayer’s request for relief was filed less than 90 days
after the due date of the Taxpayer’s first effective year tax return.

Accordingly, based solely on the facts and information submitted, and the
representations made in the ruling request, Taxpayer has satisfied the requirements for
the granting of relief. Taxpayer’s Form 1128, requesting permission to change to a
taxable year ending New Date, effective Date 2, must be filed under the Provisions of
Rev. Proc. 2002-46 within 60 days of this letter. This letter ruling grants an extension of
time to file a Form 1128. This letter ruling does not grant an extension of time to file
PLR-105862-23                                  5

Taxpayer’s short year period return. A copy of this letter must be attached to the
Taxpayer’s Form 1128. Alternatively, taxpayers filing their returns electronically may
satisfy this requirement by attaching a statement to their return that provides the date
and control number of the letter ruling.

This ruling is based upon facts and representations submitted by Taxpayer 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.
However, as part of an examination process, the Service may verify the factual
information, representations, and other data submitted.

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. Specifically, this letter expresses no opinion as to whether Taxpayer qualifies
to make an automatic change under Rev. Proc. 2006-46.

This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the
Code 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 faxed to your authorized representatives.



                                                   Sincerely,



                                                   Amy J. Pfalzgraf
                                                   Branch Chief, Branch 5
                                                   (Income Tax and Accounting


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