Three elections were treated as timely after an adviser failed to file the extension

Plain-English summary

A foreign corporation hired a tax adviser to file an extension and prepare its federal return. The adviser sent the corporation a copy of Form 7004 and indicated that it had been filed, but an internal communication failure meant the processing team never transmitted it. The corporation filed its return on what it believed was the extended due date and included elections to opt out of the section 382(l)(5) bankruptcy rule, use the de minimis safe harbor for tangible property, and capitalize repair and maintenance costs also capitalized for book purposes. An IRS late-filing penalty notice revealed that the extension had not been filed, which also made the elections late. The IRS found reasonable and good-faith conduct, concluded that the government would not be prejudiced, and treated all three elections on the late return as timely.

Ruling snapshot

• Question: Could three elections filed with a late return be treated as timely when the taxpayer reasonably believed its adviser had filed the requested extension?
• Outcome: approved, all three elections deemed timely
• Key authorities: IRC §§ 263(a), 382(l)(5); Treas. Reg. §§ 1.263(a)-1(f), 1.263(a)-3(n), 1.382-9(i), 301.9100-1, and 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202401014                                              Third Party Communication: None
 Release Date: 1/5/2024                                         Date of Communication: Not Applicable
 Index Number: 9100.00-00
                                                                Person To Contact:
 -----------------------------                                  -----------------, ID No. -----------------
 ------------------------                                       Telephone Number:
 ---------------------------------------------                  --------------------
 ------------------------------------------------               Refer Reply To:
 ---------------------------------------                        CC:ITA:B01
                                                                PLR-108547-23
 In Re: Request for an Extension of Time                        Date: 09/29/2023
 To Make Elections




 Taxpayer            =    -----------------------------------------------------------------------
 Parent              =    -----------------------------------------
 A                   =    -----
 B                   =    --------------------------------------------------
 C                   =    -------------
 D                   =    --------------------------------------------------
 E                   =    --------------------
 F                   =    --------------------------------------------------------------------------------------------
 G Business          =    --------------------------------------------------------------------------------------------
 Date1               =    --------------------------
 Date2               =    ------------------
 Date3               =    ------------------
 Date4               =    -------
 Date5               =    ------------------
 Date6               =    ------------------
 Date7               =    -----------------------
 Date8               =    ---------------------

Dear ------------------

This letter responds to Taxpayer’s submission dated April 14, 2023, and supplemental
correspondence dated September 11, 2023 and September 27. 2023, requesting a
private letter ruling granting relief to make late regulatory elections pursuant to Treas.
Reg. §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.
Specifically, Taxpayer requests an extension of time to make the following three
elections on its Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, for the
taxable year ended Date1 (or alternatively referred to as the Date4 Form 1120-F, U.S.
Income Tax Return of a Foreign Corporation): an election under § 1.382-9(i) of the
Income Tax Regulations to opt out of the application of the provisions of § 382(l)(5) of
the Internal Revenue Code; an election under § 1.263(a)-1(f) to apply the de minimis

PLR-108547-23                                2

safe harbor for capital expenditures; and an election under § 1.263(a)-3(n) to capitalize
any amounts paid to repair and maintain tangible property that is capitalized for book
purposes (the “Elections”).

                                         FACTS

Taxpayer is a E exempted company treated as an association (and a controlled foreign
corporation) for U.S. federal income tax purposes which is affiliated with the U.S.
corporation, Parent.

Parent is the common parent of affiliated group of corporations filing a consolidated U.S.
federal income tax return (“Parent Consolidated Group”). Parent Consolidated Group,
along with its foreign affiliates (collectively, “Parent Group”), was a G Business.

Parent directly owned and owns A% of B, a state of C corporation and a member of
Parent Consolidated Group. B directly owned and owns A% of the outstanding equity
interests in D, a state of C corporation and a member of Parent Consolidated Group, but
converted into a limited liability corporation treated as an entity disregarded as separate
from B as part of an internal restructuring that preceded the events described herein. D
directly owned and owns A% of the outstanding common equity interests in Taxpayer, a
E exempted company treated as a corporation (and a controlled foreign corporation) for
U.S. federal income tax purposes. Parent acquired preferred stock in Taxpayer as part
of an internal restructuring that preceded the events described herein.

On Date2, Parent and certain of its direct and indirect subsidiaries, including Taxpayer,
underwent an ownership change as defined in § 382(g) and Treas. Reg. § 1.1502-
92(b)(1)(i), and that immediately before the ownership change on Date2, these entities
were under the jurisdiction of a bankruptcy court in a title 11 case.

Taxpayer files its returns on a calendar year basis and uses an accrual method as its
overall method of accounting.

Taxpayer has an applicable financial statement and, in addition to the other
requirements of Treas. Reg. § 1.263(a)-1(f)(1), the amount paid for the property does
not exceed $5,000 per invoice (or per item as substantiated by the invoice).

Also, Taxpayer incurs repair and maintenance costs in carrying on its trade or business,
treats these amounts as capital expenditures on its book and records, and that, after
making the Treas. Reg. § 1.263(a)-1(f) election, Taxpayer will treat all repair and
maintenance costs treated as capital expenditures on its books and records as amounts
paid to improve tangible property.

Taxpayer's Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, for the
taxable year ending on Date1 was originally due on Date3 (without extensions).
Taxpayer engaged a tax advisor, F, to prepare and e-file its federal and state income

PLR-108547-23                               3

tax returns for the Date4 taxable year, including all related statements and elections.
Taxpayer also engaged F to prepare and e-file Form 7004, Application for Automatic
Extension of Time to File Certain Business Income Tax, Information, and Other Returns,
by Date3, in order to extend the due date of Taxpayer’s Date 4 Form 1120-F, U.S.
Income Tax Return of a Foreign Corporation.

On Date5, F provided Taxpayer with Form 7004 for Taxpayer’s approval. Via telephone
communication, Taxpayer provided F approval to e-file its Form 7004. On Date6,
Taxpayer received an email with a copy of the Form 7004 via email from F indicating
that the Form 7004 was e-filed on its behalf. Thus, Taxpayer and F were under the
belief that Form 7004 had been timely filed for Taxpayer extending the due date of
Taxpayer’s Form 1120-F, U.S. Income Tax Return of a Foreign Corporation for the
taxable year ended Date1 from Date3 to Date7.

On Date7, F e-filed Taxpayer’s Date4 Form 1120-F, U.S. Income Tax Return of a
Foreign Corporation, which was the extended due date for filing Taxpayer’s Date4 Form
1120-F, U.S. Income Tax Return of a Foreign Corporation. The tax return included all
required elections (including the elections subject to this request) and associated
statements.

In Date8, Taxpayer received a notice from the IRS assessing penalties related to the
late filing of the Date4 Form 1120-F, U.S. Income Tax Return of a Foreign Corporation.
Taxpayer provided this notice to F for review, since both Taxpayer and F believed that
the Date4 Form 1120-F, U.S. Income Tax Return of a Foreign Corporation was timely
filed, on extension.

After reviewing its records, F determined that the proper internal approvals had
inadvertently not been communicated to instruct its tax processing team to electronically
file Taxpayer’s Form 7004 before Date3 (i.e., no email or electronic indication was sent
instructing the tax processing team to e-file Form 7004).

After F identified that Form 7004 was not timely filed, F informed Taxpayer that the
elections subject to this request would be considered late because such elections are
required to be filed on a timely filed return (i.e., by the original due date or by the
extended due date with a timely filed extension). Also, F advised Taxpayer that it can
seek relief under §§ 301.9100-1 and 301.9100-3 for the IRS to grant an extension of
time to make such elections.

Taxpayer was not under examination for the taxable year ending on Date 1 at the time
this request was submitted.

PLR-108547-23                                 4

                                  LAW AND ANALYSIS

Section 1.263(a)-1(f) generally provides that if a taxpayer elects to apply the de minimis
safe harbor, then the taxpayer may not capitalize under §§ 1.263(a)-2(d)(1) or 1.263(a)-
3(d) any amount paid in the taxable year for the acquisition or production of a unit of
tangible property nor treat as materials or supply under § 1.162-3(a) any amount paid in
the taxable year for tangible property if the amount meets certain requirements specified
in the regulations.

Section 1.263(a)-3(n) generally provides that a taxpayer may elect to treat amounts paid
during the taxable year for repair and maintenance (as defined under § 1.162-4) to
tangible property as amounts paid to improve that property and as an asset subject to
the allowance for depreciation if the taxpayer incurs these amounts in carrying on the
taxpayer's trade or business and if the taxpayer treats these amounts as capital
expenditures on its books and records regularly used in computing income.

Section 382(l)(5) provides that if certain requirements are met, § 382(a) shall not apply
to an ownership change. If § 382(l)(5) applies, certain limitations are placed on a
corporation.

Section 382(l)(5)(G) provides that a new loss corporation may elect, subject to such
terms and conditions as the Secretary may prescribe, not to have the provisions of
section 382(l)(5) apply. Any such election must be made by the due date (including any
extensions of time) of the loss corporation’s tax return for the taxable year which
includes the change date. See Treas. Reg. § 1.382-9(i).

The Elections for the taxable year ending on Date 1 were due on the last day prescribed
by law for the filing of Taxpayer's return. The Commissioner has discretionary authority
under § 301.9100-3 to grant extensions of time for Taxpayer and other Electing Entities
to file the Elections.

Sections 301.9100-1 through 301.9100-3 provide the standards that the Service 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 automatic changes covered 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 granting relief will not prejudice the interests of the
Government.

Section 301.9100-3(b)(1) provides that, in general, a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer: (i) requests relief 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, the taxpayer was unaware of
the necessity for the election; (iv) reasonably relied on the written advice of the Service;

PLR-108547-23                                 5

or (v) reasonably relied on a qualified tax professional, and the professional failed to
make, or advise the taxpayer to make, the election.

Under § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably
and in good faith if the taxpayer: (i) seeks to alter a return position for which an
accuracy-related penalty could be imposed under § 6662 at the time the taxpayer
requests relief and the new position requires a regulatory election for which relief is
requested; (ii) was fully informed of the required election and related tax consequences,
but chose not to file 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 not ordinarily grant relief.

Section 301.9100-3(c) provides that the Service will grant a reasonable extension of
time only when the interests of the Government will not be prejudiced by the granting of
relief. 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 timely made.

                                      CONCLUSION

Based on the facts and representations made, we conclude that Taxpayer has acted
reasonably and in good faith, and that the granting of relief would not prejudice the
interests of the Government. Accordingly, Taxpayer has satisfied the requirements for
the granting of relief, and Taxpayer is granted an extension of time to make the
Elections subject of this ruling request. Given the Elections for Taxpayer were made on
Taxpayer's late filed Federal income tax return for the taxable year ending on Date 1,
the Elections are deemed to be timely made for Taxpayer.

This ruling is based upon facts and representations submitted by Taxpayer. This office
has not verified any of the material submitted in support of the request for a ruling, and
the information is subject to verification and audit on examination.

No opinion is either express or implied on whether Taxpayer meets the substantive
requirements of § 382(l)(5), Treas. Reg. § 1.382-9(i), Treas. Reg. § 1.263(a)-1(f) or
Treas. Reg. § 1.263(a)-3(n). Further, this office expresses no opinion regarding the tax
treatment of Taxpayer under the provisions of any other sections of the Code or
regulations.

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.

PLR-108547-23                                     6

In accordance with the Power of Attorney on file with this office, we are sending a copy
of this letter to your authorized representatives. We are also sending a copy of this
letter to the appropriate operating division director. Enclosed is a copy of the letter
ruling showing the deletions proposed to be made in the letter when it is disclosed
under § 6110.

                                            Sincerely,

                                            SHARON Y. HORN

                                            ______________________
                                            Sharon Y. Horn
                                            Senior Counsel, Branch 1
                                            Office of Associate Chief Counsel
                                            (Income Tax & Accounting)


Enclosure (1):
Copy for § 6110 purposes

CC:
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