Late accounting-method change request denied

Plain-English summary

A taxpayer's accounting firm prepared a Form 3115 to change the accounting method of a disregarded subsidiary under section 263A. Shortly before the return deadline, the manager handling the return resigned on very short notice, and the remaining partner filed the return without attaching the original Form 3115 or sending the signed duplicate to the IRS service center. The taxpayer requested permission to amend the return with the original and file the duplicate late. Special rules treat the government's interests as prejudiced for late accounting-method elections unless unusual and compelling circumstances exist. After a conference and review of the submitted information, the IRS concluded that the staffing disruption did not meet that standard. It denied the extension because the taxpayer had not established unusual and compelling circumstances.

Ruling snapshot

• Question: May the taxpayer file both the original and duplicate Form 3115 after omitting them from the timely return and service-center filing?
• Outcome: Denied
• Key authorities: IRC §§ 263A, 446(e); Treas. Reg. §§ 1.446-1(e)(3)(i), 301.9100-1, 301.9100-3(c)(2); Rev. Proc. 2015-13

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202350007                                              Third Party Communication: None
 Release Date: 12/15/2023                                       Date of Communication: Not Applicable
 Index Number: 9100.10-00, 9100.10-01
                                                                Person To Contact:
 ----------------------------------------                       ------------------------, ID No. ------------
 -------------------------------                                Telephone Number:
 -------------------------                                      --------------------
                                                                Refer Reply To:
 ------------------------------------------------------------   CC:ITA:B06
 --------                                                       PLR-106785-23
                                                                Date:
                                                                September 22, 2023




 Taxpayer = ----------------------------------------------------------------------------------------------
            -----------------------

 Applicant      = ----------------------------------------------------------------------------------------------
                  ---------------------

 CPA            = --------------------

 Date A         = ---------------------------

 Date B         = --------------------------

 Date C         = -------------------------

 Date D         = ------------------

 Date E         = --------------------------

 Year           = ---------------------------------------------------


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

This ruling responds to a recent letter that was submitted by Taxpayer’s representative,
CPA. CPA has requested that the Commissioner of the Internal Revenue Service give
Taxpayer an extension of time pursuant to §§ 301.9100-1 and 301-9100-3 of the
Procedure and Administration Regulations to file both the original and signed duplicate
copies of the Form 3115, Application for Change in Accounting Method. Taxpayer
PLR-106785-23                                2

should have filed the Form 3115 on behalf of Applicant, pursuant to section 6.03(1)(a)(i)
of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, on or before Date A.

                                           FACTS

Taxpayer represents the following facts:

Applicant is a limited liability company wholly owned by Taxpayer and is disregarded for
tax purposes. Taxpayer engaged CPA to prepare and file its federal income tax return.
While preparing Taxpayer’s federal income tax return for Year, CPA determined that
Applicant was likely using an improper method of accounting under § 263A of the
Internal Revenue Code. Subsequently, CPA was also engaged to prepare a Form 3115
to change Applicant’s method of accounting under § 263A, using the automatic consent
procedures of Rev. Proc. 2015-13, and Rev. Proc. 2022-14, 2022-7 I.R.B. 502.

Taxpayer timely filed Form 7004, Application for Automatic Extension of Time to File
Certain Business Income Tax, Information, and Other Returns, which provided
Taxpayer an extension until Date A to file its federal income tax return for Year.

In the weeks leading up to the Date A deadline, the manager preparing Taxpayer’s
federal income tax return at CPA resigned his position at CPA on extremely short
notice. This left the partner on CPA’s team to finish preparing Taxpayer’s tax return.

CPA timely filed Taxpayer’s federal income tax return on Date B. The tax return was
filed on a basis consistent with Applicant’s method change having been properly
implemented. However, on Date C, CPA determined that the Form 3115 had not been
properly attached to the tax return, nor had a copy been sent to the appropriate IRS
Service Center. See section 6.03(1)(a)(i) of Rev. Proc. 2015-13. CPA subsequently
submitted this request for an extension of time to file both the original and duplicate
copies of Form 3115.

A conference of right was held on Date D. On Date E, after considering the information
provided at the conference of right and the earlier submitted materials, Taxpayer’s
authorized representative, CPA, was notified that an extension of time to file the missing
original and signed duplicate copy could not be granted.

                                 RULING REQUESTED

Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 to
file an amended federal income tax return with the original Form 3115 and to file the
duplicate copy of the Form 3115 with the appropriate IRS Service Center so as to timely
request to change Applicant’s method of accounting under § 263A for Year.
PLR-106785-23                                3

                                  LAW AND ANALYSIS

Section 446(e) requires a taxpayer to secure consent before changing its method of
accounting. Section 1.446-1(e)(3)(i) of the Income Tax Regulations provides that, to
secure the Commissioner’s consent for a change in method of accounting, a taxpayer
must file an application on Form 3115 with the Commissioner.

Rev. Proc. 2015-13 provides the procedures by which a taxpayer may obtain automatic
consent to change certain accounting methods. A taxpayer complying with all the
applicable provisions of this revenue procedure has obtained the consent of the
Commissioner to change its method of accounting under § 446(e) and the regulations
thereunder.

Section 6.03(1)(a)(i) of Rev. Proc. 2015-13 provides that a taxpayer changing an
accounting method pursuant to the automatic consent provisions of Rev. Proc. 2015-13
must complete and file a Form 3115 in duplicate. The original must be attached to the
taxpayer’s timely filed (including any extensions) original federal income tax return for
the year of change, and a copy (with signature) of the Form 3115 must be filed with the
appropriate office of the Internal Revenue Service no earlier than the first day of the
year of change and no later than when the original is filed with the federal income tax
return for the year of change.

Section 6.03(4)(b) of Proc. 2015-13 provides that, except in unusual and compelling
circumstances or as provided in section 6.03(4)(a) of Rev. Proc. 2015-13 (the 6-month
automatic extension for filing a Form 3115), a taxpayer is not eligible for an extension of
time to file a Form 3115.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under rules set forth in §§ 301.9100-2 and 301.9100-3 to
make certain regulatory elections. For purposes of § 301-9100, an “election” includes a
request to change an accounting method.

Sections 301.9100-1 through 301.9100-3 provide the standard the Commissioner will
use to determine whether to grant an extension of time to make an election. Section
301.9100-2 provides automatic extensions of time for making certain elections. Section
301.9100-3 provides extensions of time for making elections that do not meet the
requirements of § 301.9100-2.

Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3 will be
granted when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith and that the
granting of relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) provides circumstances in which a taxpayer is deemed to
have acted reasonably and in good faith. Section 301.9100-3(b)(3) provides
PLR-106785-23                                 4

circumstances in which a taxpayer is deemed not to have acted reasonably and in good
faith.

Section 301.9100-3(c)(2) imposes special rules for accounting method regulatory
elections. These rules provides that the interests of the Government are deemed to be
prejudiced when the regulatory election concerns accounting methods unless there are
unusual and compelling circumstances. What are unusual and compelling
circumstances must be determined on a case-by-case basis considering all applicable
facts and circumstances. T.D. 8742, 1998-1 C.B. 388 (February 2, 1998). For
example, if the missed regulatory election relates to a nonrecurring transaction, this fact
would be considered in determined whether there are unusual and compelling
circumstances. Id.

While the Commissioner has discretion to grant an extension of time under the rules set
forth in §§ 301.9100-2 and 301.9100-3 to make certain regulatory elections, the
Commissioner must weigh the extension requested with “the policy of promoting
efficient tax administration.” T.D. 8742. Balancing a taxpayer’s desire to correct its
mistake with the need to provide “limited time periods” to perfect accounting methods
and considering why the taxpayer’s mistake occurred, the Commissioner concludes that
the taxpayer has failed to show unusual and compelling circumstances within the
meaning of § 301.9100-3(c)(2). Id. Accordingly, the Government’s interests are
deemed prejudiced.

                                      CONCLUSION

Based solely on the representations submitted, this office concludes that the
requirements of §§ 301.9100-1 and 301.9100-3 have not been satisfied in this case.
Specifically, Taxpayer has failed to demonstrate unusual and compelling circumstances,
and, accordingly, the Government’s interests are deemed prejudiced.

The ruling contained in this letter ruling is based upon facts and representations
submitted by CPA on behalf of itself, Taxpayer, and Applicant, with accompanying
penalties of perjury statements executed by appropriate parties. While this office has
not verified any of the material submitted in support of this request for an extension of
time to file the required Form 3115, all material is subject to verification on examination.

This ruling is directed only to Taxpayer. Section 6110(k)(3) provides that it may not be
used or cited as precedent.
PLR-106785-23                                         5

In accordance with the power of attorney on file with our office, we will send a copy of
this letter to each of Taxpayer’s authorized representatives.


                                                Sincerely,



                                                ANNA W. GLEYSTEEN
                                                Senior Counsel, Branch 6
                                                (Income Tax & Accounting)


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