department of the treasury internal_revenue_service washington d c date of f i c e of c h i e f c ou n s e l number release date cc intl br4 tl-n-5158-00 uilc 6038b internal_revenue_service national_office field_service_advice memorandum for from charles p besecky branch chief cc intl br4 subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend parent corpa corpb corpc shareholder1 shareholder2 tax adviser cpa tax adviser businessa businessb businessc countrya yearx-2 yearx-1 yearx yearx yearx date1 date2 date3 date4 date5 a b c d e f g h i j k m n p q issue what are the standards for determining whether the reasonable_cause exception of sec_6038b should excuse parent from the penalty for failure to report a transfer of property to a foreign_corporation in an exchange described in sec_367 conclusions parent a domestic_corporation was subject_to the sec_6038b reporting requirements because parent made a transfer subject_to sec_367 in the date5 yearx reorganization parent would have reasonable_cause for failing to file timely the required information if parent exercised ordinary business care and prudence but was still unable to comply with its obligations because of circumstances beyond its control all the facts and circumstances should be considered in determining whether parent exercised ordinary business care and prudence it appears that parent did not have reasonable_cause for failing to file the form_926 parent has the burden of proving that it had reasonable_cause for failing to file timely facts we understand that the facts developed as of the date of the submission are as follows a general facts and date5 yearx reorganization parent is the parent of an affiliated_group_of_corporations that files consolidated federal_income_tax returns with a may taxable_year end parent has been in existence since date1 for over a years parent is engaged in several types of businesses including businessa and businessa holdings businessb and businessc parent is a privately held company that had assets between dollar_figurei million and dollar_figurej million for taxable years yearx-2 through year x and gross_receipts between dollar_figurek million and dollar_figurem million for taxable years yearx-2 through year x shareholder1 an individual owns a g majority interest in parent and shareholder2 owns a h interest in parent shareholder1 was a shareholder of both parent and corpa prior to the date5 yearx reorganization shareholder1 is the president of parent and was the former president chief_executive_officer and chairman of the board_of directors of corpa on date2 yearx-1 shareholder1 resigned from his position as chairman of corpa and on date3 yearx-1 shareholder1 resigned from his board_of directors position of corpa parent has only q employees prior to the date5 yearx reorganization parent owned shares in corpa a publicly traded domestic_corporation engaged in businessa to implement a reorganization plan corpa organized corpb as a wholly owned countrya corporation and corpb organized corpc as a wholly owned domestic subsidiary on date5 yearx corpc merged with and into corpa with corpa remaining as the surviving corporation and the shareholders of corpa transferred their shares of corpa stock to corpb a countrya corporation in exchange for equal shares of corpb stock as a result of the date5 yearx reorganization corpb a countrya corporation became the parent holding_company of corpa a domestic_corporation on date5 yearx parent owned b shares of corpa common_stock valued at dollar_figurec per share which it exchanged for an equal number of corpb stock parent’s basis in the corpa stock was dollar_figuree parent’s amount_realized on the exchange was dollar_figured and parent’s gain was dollar_figuref from the date5 yearx reorganization b information about the date5 yearx reorganization on date4 yearx corpa introduced a plan to reorganize into a countrya corporation corpa sent a letter dated date4 yearx to all its shareholders including parent seeking approval of the date5 yearx reorganization the letter dated date4 yearx included a proxy statement and prospectus for the reorganization and information about the tax implications of the proposed date5 yearx reorganization which collectively will be referred to as the date4 yearx letter the date4 yearx letter provided that individual shareholders could be taxed on the exchange in the proposed date5 yearx reorganization at the relevant capital_gains_rate in addition the date4 yearx letter provided an alternative for those shareholders wishing to have a portion of the reorganization treated as a non-taxable exchange by allowing shareholders to elect to subscribe to and receive non-taxable equity in exchange for corpa stock parent did not make an election to receive non-taxable equity following the date5 yearx reorganization corpb sent a letter dated january yearx to all its shareholders about the date5 yearx reorganization the january yearx letter explained to shareholders that under sec_367 most corpa shareholders were required to recognize gain on the date5 yearx reorganization in addition the january yearx letter explicitly informed the shareholders of the requirement to file form_926 return by a u s transferor_of_property to a foreign_corporation foreign_estate_or_trust or foreign_partnership with their tax returns that included the date of the date5 yearx reorganization and warned shareholders about the penalty under sec_6038b for failure_to_file the required form corpb attached with the january yearx letter information including a partially completed form_926 to allow the shareholders to determine and report the correct amount of gain from the exchange parent received corpb’s letter including the partially completed form_926 on january yearx c filing of tax returns related to the date5 yearx reorganization parent’s tax_return for its tax_year ended may yearx with extensions was due on february year x and filed on february yearx parent asserts that it was not until june of yearx that it determined that the date5 yearx reorganization was taxable we understand that parent did not file an amended tax_return for its yearx tax_year to take into account the taxable gain on the exchange nor did parent file a form_926 with its yearx tax_return to disclose the date5 yearx reorganization in february yearx parent filed its tax_return for the year ended may yearx and included as long-term_capital_gain the dollar_figuref gain on the exchange of the corpa stock from the date5 yearx reorganization parent also had a yearx long-term_capital_loss of dollar_figuren that it used to offset a substantial portion of the gain from the date5 yearx reorganization parent included a completed form_926 with the yearx tax_return and the form_926 correctly stated that the dollar_figuref gain arose from a date5 yearx reorganization parent’s yearx tax_return was prepared by cpa tax adviser shareholder1 as an individual shareholder of corpa was also required to report the gain from the date5 yearx reorganization on a form_926 filed with his yearx tax_year shareholder1 filed his yearx tax_return in august of yearx included in income in his yearx tax_return the gain from the date5 yearx reorganization and attached a form_926 d irs audit the irs examined corpa’s income_tax return for yearx and in yearx the irs examined parent as a shareholder of corpa and as a result of its examination of corpa’s yearx tax_return the irs questioned parent on its failure to timely file the form_926 and report the date5 yearx reorganization parent responded that it had filed the form_926 reporting the date5 yearx reorganization and reported the gain in its yearx tax_return law and analysis a statute and regulations for transfers made on or before date sec_6038b as then in effect required that each person transferring property to a foreign_corporation in an exchange described in sec_332 sec_351 sec_354 sec_355 sec_356 or sec_361 or making a sec_336 distribution to a foreign_person furnish certain information regarding the transfer to the irs under sec_6038b a taxpayer who fails to furnish the information required must pay a penalty equal to percent of the gain realized on the exchange or distribution unless the taxpayer’s failure to comply is due to reasonable_cause and not willful neglect under sec_6038b as then in effect any u_s_person making certain transfers described in sec_367 or sec_367 was required to report certain prescribed information related to the transfer on a form_926 and was required to file the form_926 with its federal_income_tax return for the year which included the date of the transfer temp sec_1_6038b-1t and c regulations describe the consequences of a failure to comply with the sec_6038b reporting requirements and provide that a failure to comply with the sec_6038b reporting requirements includes the failure to report at the proper time and in the proper manner any material information required to be reported under the rules temp sec_1 6038b- 1t f the general consequences resulting from a failure to comply do not apply when the taxpayer’s failure is due to reasonable_cause and not willful neglect temp sec_1_6038b-1t although sec_6724 does not explicitly address information reporting required by sec_6038b sec_6724 provides that any penalties imposed for failure to furnish certain information returns may be waived if such failure is shown to be due to reasonable_cause and not to willful neglect sec_301_6724-1 provides that reasonable_cause is present if the filer establishes that either there are significant mitigating factors for the failure or the failure arose from events beyond the filer's control the filer must also establish that it acted in a responsible manner both before and after the failure occurred sec_301_6724-1 under sec_301_6724-1 significant mitigating factors include but are not limited to the following the filer is a first-time filer of the particular type of return or the filer has an established history of compliance with the information reporting requirements for which the failure occurs the regulations specifically provide that if the filer establishes that there are significant mitigating factors for a failure but the filer is unable to establish that it acted in a responsible manner the mitigating factors will not be sufficient for the filer to obtain a waiver of the penalty sec_301_6724-1 similarly if the filer establishes that a failure arose from an impediment but is unable to establish that it acted in a responsible manner the impediment will not be sufficient for the filer to obtain a waiver of the penalty sec_301_6724-1 unavailability of relevant business records may be considered in determining whether the taxpayer’s failure_to_file was due to events beyond the taxpayer’s control sec_301_6724-1 to establish reasonable_cause because of the unavailability of business records the filer must show that its business records were unavailable under such conditions in such manner and for such period as to prevent timely compliance sec_301_6724-1 ordinarily the taxpayer should have the relevant business records for at least a 2-week period prior to the due_date with extensions of the required return sec_301_6724-1 b taxpayer’s position parent asserts that it had reasonable_cause for its failure_to_file timely with its year x tax_return a form_926 reporting the date5 yearx reorganization first based on corpa’s oral and written assurances that the shareholders had a non- taxable equity alternative available to them parent contends that it believed that the date5 yearx reorganization was non-taxable to it even though parent did not elect the non-taxable equity alternative_tax adviser also believed that the date5 yearx reorganization was non-taxable to parent it was not until the receipt of the january yearx letter from corpb that parent had any reason to question the availability of the non-taxable equity alternative or the taxability of the date5 yearx reorganization parent contends that there was inadequate time to make an informed judgment on the information received from corpb between january yearx when parent received the letter dated january yearx from corpb and february yearx when parent’s tax_return and form_926 for the year ending may yearx was due the second reason that parent contends that it had reasonable_cause for failing to file timely a form_926 with its yearx tax_return is that in january yearx tax adviser parent’s financial officer and accountant contracted a very painful and debilitating illness and as a result parent’s financial reporting matters were not given the same attention that they would have received had tax adviser been well the third reasonable_cause reason that parent asserts that it had for not filing timely the form_926 with its yearx tax_return is that not only was there initial confusion about whether the transaction was taxable to parent but because parent has a may tax_year end there was also confusion about the appropriate year to report the date5 yearx reorganization moreover parent reported the date5 yearx reorganization before the irs ever approached parent about auditing its yearx tax_return in particular parent reported the date5 yearx reorganization and filed a form_926 with its yearx tax_return parent contends that the amount placed at risk to the irs by parent reporting the gain in the wrong year was an interest amount for the period from the date the tax should have been paid until the date it was paid parent has paid the tax related to the date5 yearx reorganization as well an amount for interest finally parent contends that even if it had no reasonable_cause for failing to file timely the form_926 because parent filed the form_926 prior to notification of the irs audit a consistent application of the irs’ penalty policy statement p-1-18 would constrain the irs to forgive the penalty in this case parent contends that in view of its good_faith payment and filings the imposition of the penalty under sec_6038b is excessively punitive and unreasonable c applicability of sec_6038b to date5 yearx reorganization each u_s_person that makes certain transfers described in sec_367 or d is required to file a form_926 temp sec_1_6038b-1t parent is a u_s_person and based on the information included in the letter dated january yearx from corpb parent transferred property in a transfer described in sec_367 in the date5 yearx reorganization thus parent generally would be subject_to the sec_6038b penalty for failure to report the transfer of property in the date5 yearx reorganization if parent’s transfer of property in the date5 yearx reorganization is described in sec_367 d applicability of sec_6038b reasonable_cause exception sec_6038b and the related regulations do not define the terms reasonable_cause and willful neglect courts have however developed definitions of these terms for purposes of delinquency related penalties and other information reporting provisions in addition the regulations under sec_6724 provide guidance on when a taxpayer’s failure_to_file certain information returns is due to reasonable_cause and not willful neglect finally the irs has developed internal policies for determining when penalties should be imposed and for determining if a taxpayer’s failure_to_file is due to reasonable_cause and not willful neglect based on case law parent would have reasonable_cause for failing to file timely a form_926 with its yearx tax_return if parent exercised ordinary business care and prudence but was still unable to comply with its obligations because of circumstances beyond its control see u s v boyle 469_us_241 39_tc_93 aff’d in part rev’d in part and rem’d in part on other grounds 324_f2d_633 8th cir although parent has the burden of proving that it had reasonable_cause for failing to file timely the form_926 with its yearx tax_return all the facts and circumstances should be considered in determining whether parent exercised ordinary business care and prudence in filing the form_926 id below we provide our initial thoughts about the applicability of the reasonable_cause exception to parent’s failure_to_file timely the form_926 with its yearx tax_return irm handbook no should be used in considering what additional facts should be considered in making a final_determination parent contends that based on corpa’s oral and written assurances that the shareholders had a non-taxable equity alternative both parent and tax adviser believed that the date5 yearx reorganization was non-taxable to parent moreover parent contends that it was not until the receipt of the january yearx letter from corpb that parent had any reason to question the availability of the non-taxable equity alternative or the taxability of the date5 yearx reorganization according to parent there was inadequate time to make an informed judgment on the information received from corpb between january yearx when parent received the corpb package and february yearx when parent’s tax_return and form_926 for the year ending may yearx was due sec_6038b reporting however is not conditioned upon an exchange being taxable and thus parent would have been responsible for reporting under sec_6038b even if the date5 yearx reorganization were non-taxable see generally sec_6038b and temp sec_1_6038b-1t - c in addition the date4 yearx letter specifically noted that the proposed date5 yearx reorganization could be taxable to corpa shareholders it appears that a taxpayer such as parent an established company in existence over a years exercising ordinary business care and prudence would have considered its tax obligations independently of general statements made by corpa especially since parent did not elect the non-taxable equity alternative also shareholder1 a key officer of parent and recent key officer of corpa correctly filed his form_926 with his yearx tax_return the irs in determining whether a taxpayer exercised ordinary business care and prudence but was unable to file a return timely because of lack of knowledge about the information reporting requirements may consider among other factors a taxpayer’s education and exposure to the type of tax and reporting requirements the complexity of the compliance issue and changes in tax forms or law see irm handbook no that tax obligations are complex does not necessarily make noncompliance reasonable see 39_tc_93 generally reasonable_cause should never be presumed even where ignorance of the law is claimed see 39_tc_93 and irm handbook no it appears that parent and shareholder1 an officer of parent and the majority shareholder have been exposed to complex tax and compliance issues and presumably parent because it has been in existence for over a years and engaged in various businesses has experience with various complex tax reporting rules and forms thus it appears that parent should have researched its tax reporting obligations and should have been aware of its reporting obligations so as to file the form_926 in a timely manner parent has noted that in january yearx tax adviser parent’s financial officer and accountant contracted a very painful and debilitating illness and as a result parent’s financial reporting matters were not given the same attention that they would have received had tax adviser been well courts have held that the duty to file a return is non-delegable and if that responsibility is shifted to an agent the taxpayer must accept the consequences of shortcomings in the performance of that duty by an agent asat inc v commissioner t c estate of maltaman v commissioner 73_tcm_100 in conjunction with all other facts and circumstances including the length of time to comply and whether the taxpayer is a corporation a tax adviser’s illness may be considered in determining whether a taxpayer exercised ordinary business care and prudence but was still unable to comply with its reporting obligations see irm handbook no it appears that parent as an established corporation in existence for over a years and exercising ordinary business care and prudence should have been aware that it had potential tax reporting obligations when parent received the date4 yearx letter from corpa about the proposed date5 yearx reorganization and should have determined its tax obligations and filing_requirements regardless of tax adviser’s illness parent and its majority shareholder shareholder1 have been involved in many different types of complex businesses and transactions parent could have hired another tax adviser to determine its tax obligations related to the date5 yearx reorganization cpa tax adviser signed parent’s yearx tax_return the third reasonable_cause reason that parent asserts that it had for not filing timely the form_926 with its yearx tax_return is that not only was there initial confusion about whether the transaction was taxable to parent but because parent has a may tax_year end there was also confusion about the appropriate tax_year in which to report the date5 yearx reorganization generally that a mistake was made is not consistent with the ordinary business care and prudence standard and does not provide a basis for reasonable_cause see irm handbook no parent however contends that it reported the date5 yearx reorganization and filed a form_926 with its yearx tax_return and before the irs ever approached parent about auditing its yearx tax_return according to parent the amount placed at risk to the irs by it reporting the gain in the wrong year was an interest amount for the period from the date the tax should have been paid until the date it was paid parent has paid the tax related to the date5 yearx reorganization as well as an amount for interest it appears that if parent had exercised ordinary business care and prudence parent would have been able to determine the correct_tax year for including the date5 yearx reorganization parent has been in existence for over a years and engaged in multiple businesses in addition the 469_us_241 105_sct_687 specifically emphasized the importance of filing dates by noting that deadlines are inherently arbitrary but fixed dates are often essential to accomplish necessary results the court further noted that the government has millions of taxpayers to monitor and that the federal_income_tax system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one of strict filing standards any less rigid standard would risk encouraging a lax attitude toward filing dates u s v boyle 469_us_241 finally parent contends that even if it had no reasonable_cause for failing to file timely the form_926 because parent paid taxes related to the date5 yearx reorganization and filed the form_926 prior to notification of the irs audit a consistent application of the irs’ penalty policy statement p-1-18 would constrain the irs to forgive the penalty in this case parent contends that in view of its good_faith payment and filings the imposition of the penalty under sec_6038b is excessively punitive and unreasonable the irs’ penalty policy statement p-1-18 provides in part as follows penalties are used to enhance voluntary compliance penalties constitute one important tool of the irs in pursuing its mission of collecting the proper amount of tax revenue at the least cost penalties support the irs’ mission only if penalties enhance voluntary compliance even though other results such as raising of revenue punishment or reimbursement of the costs of enforcement may also arise when penalties are asserted the irs will design administer and evaluate penalty programs solely on the basis of whether they do the best possible job of encouraging compliant conduct in the interest of an effective tax system the irs uses penalties to encourage voluntary compliance by helping taxpayers understand that compliant conduct is appropriate and that noncompliant conduct is not deterring noncompliance by imposing costs on it and establishing the fairness of the tax system by justly penalizing the noncompliant taxpayer as we previously stated it appears that parent had no reasonable_cause for failing to file with its yearx tax_return a form_926 reporting the date5 year x reorganization although parent included the gain from the date5 yearx reorganization and filed a form_926 with its yearx tax_return parent had losses in yearx to offset partially such gain as the supreme court noted in u s v boyle 469_us_241 the government has millions of taxpayers to monitor and the federal_income_tax system of self-assessment in the initial calculation of a tax simply cannot work on any basis other than one of strict filing standards any less rigid standard would risk encouraging a lax attitude toward filing dates u s v boyle 469_us_241 it appears that parent’s failure_to_file timely the form_926 is a type of situation for which penalties should be imposed parent appears to have a lax attitude about properly following the information reporting and income reporting tax rules our federal_income_tax system should not and cannot tolerate such a lax attitude parent apparently never attempted to comply with the reporting requirements specifically provided under temp sec_1_6038b-1t - c but instead reported as it chose and now contends that its manner of reporting was sufficient case development hazards and other considerations for transfers made after date congress amended sec_6038b to provide that for failures to report taxpayers will pay a penalty equal to percent of the fair_market_value of the property at the time of the exchange parent is subject_to a penalty equal to percent of the amount of the gain realized on the date5 yearx reorganization for transfer made after date the amount of the penalty may not exceed dollar_figure parent’s penalty is equal to dollar_figurep a court could infer from the amendments made to sec_6038b that congress viewed the percent penalty as excessive on the other hand a court could also infer that congress initially imposed the percent penalty because of concerns about the extent of abuses and the irs’ ability to obtain the information required under sec_6038b and the related regulations congress did make the amendments applicable to exchanges made after date and not before also as parent’s representatives noted in plr the irs determined that because the taxpayer voluntarily complied with the gift_tax laws prior to notice by the irs of an examination under sec_6662 the taxpayer should not be required to pay a percent negligence_penalty for underpayment_of_tax the irs in that letter_ruling noted that its determination was consistent with the irs’ penalty policy statement p-1-18 as penalties should be used to enhance voluntary compliance it appears that parent never fully complied with sec_6038b and parent’s penalty results from a failure to report certain basic information related to the date5 yearx reorganization not from an understatement of an amount parent however did file a form_926 and did pay taxes and interest related to the date5 yearx reorganization please call camille evans if you have any further questions charles p besecky branch chief camille b evans cc intl br4


internal_revenue_service number release date index number ------------------------- -------------------------- ------------------------ ------------------------------ ------------------------------------- in re letter_ruling request regarding success-based fees department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ---------------- ---------------- telephone number ------------------ refer reply to cc ita b01 plr-120853-14 date july legend representative state taxpayer taxable_year date1 date2 date3 date4 date5 date6 target firm advisor dollar_figurex dear ------------ ------------------- ---------- ------------------------ ------ ------------------ -------------------------- -------------------------- ------------------------- --------------------------- --------------- --------- ------------------------------------- ---------------------- -------------- this letter responds to the date1 letter submitted by your representative representative on behalf of taxpayer requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to make the election described in sec_4 of revproc_2011_29 i r c the letter notes that taxpayer failed to attach the statement described in sec_4 of revproc_2011_29 to its original federal_income_tax return for the taxable_year ending date2 plr-120853-14 facts taxpayer is a state corporation organized on date3 that is the operating parent of a consolidated_group on date4 taxpayer acquired percent of the stock of target taxpayer engaged firm to provide advisory services taxpayer paid firm a success- based fee in the amount of dollar_figurex for the taxable_year ending date2 taxpayer’s full-time tax department prepared the consolidated_return taxpayer engaged advisor to review the return before it was filed taxpayer filed the return timely on date5 on the return taxpayer deducted percent of the success-based_fee and capitalized the remaining percent of the success- based fee under sec_263 as if making the election under revproc_2011_29 taxpayer however omitted the election statement and advisor did not notice the omission in its review taxpayer learned of the omission in date6 before the internal_revenue_service could learn of the omission taxpayer now asks for additional time to make the election and argues that it reasonably relied on advisor and that advisor failed to identify the omission in its review law and analysis sec_263 of the internal_revenue_code provides generally that no deduction shall be allowed for any amount_paid for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized see sec_1_263_a_-5 503_us_79 397_us_572 sec_1_263_a_-5 provides that an amount_paid that is contingent on the successful closing of a transaction described in paragraph a of this section is an amount_paid to facilitate the transaction except to the extent the taxpayer maintains sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction this documentation must be completed on or before the due_date of the taxpayer’s timely filed original federal_income_tax return including extensions for the taxable_year during which the transaction closes in lieu of maintaining the documentation required in sec_1_263_a_-5 revproc_2011_29 offers a safe_harbor election for allocating success-based fees it states that the service will not challenge a taxpayer’s allocation of a success-based_fee between activities that facilitate a transaction described in sec_1_263_a_-5 and activities that do not facilitate the transaction if the taxpayer plr-120853-14 treats of the amount of the success-based_fee as an amount that does not facilitate the transaction capitalizes the remaining as an amount that does facilitate the transaction and attaches a statement to its original federal_income_tax return for the tax_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized taxpayer satisfied the first two requirements of revproc_2011_29 by deducting and capitalizing of the success-based_fee but it failed to attach the statement to the original federal_income_tax return as required in item three sec_301_9100-1 gives the service discretionary authority to grant a reasonable extension of time to make a regulatory election provided that the time for making such election is not expressly prescribed by statute sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the service will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be 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 inadvertently failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or plr-120853-14 v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election a taxpayer will not be deemed to have reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that professional was not competent to render advice on the election or was not aware of all of the relevant facts sec_301_9100-3 in this case the affidavits presented show that taxpayer acted reasonably and in good_faith having reasonably relied on advisor to ensure that the statement required by revproc_2011_29 would be attached to the taxable_year consolidated_return taxpayer completed the return as if it intended to make the election but merely failed to attach the required statement additionally taxpayer has requested relief before the omission has been discovered by the service under sec_301_9100-3 a taxpayer will be deemed to have not acted reasonably and in good_faith if the taxpayer-- i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account sec_1_6664-2 of the income_tax regulations and the new position requires a regulatory election for which relief is requested ii was informed in all material respects 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 taxpayer is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time relief is requested the affidavits show that taxpayer was informed of the election and intended to make it but was not informed in all material respects of the required election furthermore taxpayer is not using hindsight in requesting relief because taxpayer completed its original return as if it intended to make the election and taxpayer has represented that no facts have changed since the original deadline of the taxable_year consolidated_return sec_301_9100-3 provides in part that the commissioner will grant an extension to make a regulatory election 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 the taxpayer having a lower tax_liability in the plr-120853-14 aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under these criteria the interests of the government are not prejudiced in this case taxpayer has represented that granting relief would not result in taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than if the election had been timely made taking into account the time_value_of_money furthermore the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected by the election had it been timely made are not closed by the period on assessment sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a sec_481 adjustment would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination or in any other setting or provides a more favorable method_of_accounting if the election is made by a certain date or taxable_year granting relief will not prejudice the interests of the government associated with the special rules for accounting_method regulatory elections the election provided by revproc_2011_29 for allocating success-based fees is granted on an automatic basis if all proper procedures including the attaching the mandatory statement are followed does not require a sec_481 adjustment is not an issue under consideration and does not provide a more favorable method_of_accounting if the election is made by a certain date or taxable_year conclusion based solely on the facts and representations submitted we conclude that taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government accordingly the requirements of sec_301_9100-1 and sec_301_9100-3 have been met therefore taxpayer is granted an extension of days from the date of this ruling to file its mandatory statement as required by section dollar_figure of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized plr-120853-14 the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by appropriate parties while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination 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 including whether taxpayer properly included the correct costs as success- based fees subject_to the retroactive election or whether taxpayer’s transactions were within the scope of revproc_2011_29 moreover this ruling does not express or imply any opinion whether taxpayer’s acquisition is within the scope of revrul_90_95 this ruling is directed only to the taxpayer requesting it sec_6110 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 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 in accordance with the power_of_attorney we are sending copies of this letter to taxpayer’s authorized representative we are also sending a copy of this letter to the appropriate operating area director sincerely lewis k brickates branch chief branch income_tax accounting cc


t c summary opinion united_states tax_court peter john mihok petitioner v commissioner of internal revenue respondent docket no 5260-0o1s filed date peter john mihok pro_se brook d remick for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect when the petition was filed ’ the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax unless otherwise indicated section references hereafter are to the internal_revenue_code in effect for the year at issue after concessions by petitioner of unreported interest_income a state_income_tax refund and a retirement income distribution the sole issue for decision is whether under sec_86 social_security_benefits for the year at issue are includable in petitioner's gross_income where a portion of such benefits includes overpayments that must be repaid to the social_security administration due to excess earnings by petitioner during the year at issue some of the facts were stipulated those facts and the accompanying exhibits are so found and are incorporated herein by reference petitioner's legal residence at the time the petition was filed was weslaco texas petitioner attained the age of on date he applied for and began receiving retirement social_security_benefits as of that date petitioner continued in gainful employment as an aeronautical engineer and was employed through the remainder of and at the time of trial petitioner was no longer employed because of petitioner's continued employment his social_security_benefits were overpaid in each of the years and the overpayments were paid back through a reduction in petitioner's monthly social_security_benefits from date through date all of petitioner's monthly benefits were applied toward the accumulated overpayment from date through date no reductions were made to his benefits however in date regular reductions of dollar_figure per month were made to apply against new overpayments in benefits at the time of trial petitioner still owed a balance of approximately dollar_figure which was being reduced by the dollar_figure monthly deduction from his social_security_benefits for the year at issue petitioner's social_security_benefits for that year totaled dollar_figure before any reductions to offset prior overpayments of benefits for that year dollar_figure was withheld from petitioner's benefits and applied to the overpayments thus petitioner was paid a net amount of dollar_figure during because petitioner was gainfully_employed during and his earnings that year as in past years exceeded the allowable_amount under social_security he continued accruing an overpayment of benefits the amount of the overpayments for could not be determined until the succeeding year for the year the social_security administration issued a form ssa-1099 social_security_benefit statement to petitioner which reflected total benefits to him of dollar_figure for less reductions of dollar_figure that were applied to reduce the overpayments in benefits to petitioner in prior years the form ssa-1099 reflected net taxable benefits of dollar_figure dollar_figure less dollar_figure on his federal_income_tax return for petitioner did not include in gross_income any social_security retirement benefits for that year in the notice_of_deficiency respondent determined that the net social_security_benefits of dollar_figure paid to petitioner during constituted income and pursuant to sec_86 dollar_figure of that amount was taxable_income petitioner does not dispute the net amount of dollar_figure he received during he argues however that the net amount_paid to him includes amounts representing an overpayment to him for his excess earnings during and therefore he should not be liable for income_tax on benefits that have to be paid back to the social_security administration through reductions in his social_security_benefits in subsequent years there is no dispute that under the formula provided in sec_86 the taxable_portion of petitioner's social_security_benefits for is dollar_figure the net amount petitioner received after the reduction of dollar_figure for overpayments in benefits for years prior to additionally there is no dispute that petitioner's earnings during were also in excess of allowable earnings for that year that would cause social_security_benefits payable in future years to be reduced to offset the excess_benefits paid to petitioner during as noted above petitioner's argument is that because some of the net benefits paid to him during will be affected because of his excess earnings during he should not be required to include in income the net benefits paid to him during the court rejects petitioner's argument sec_86 a provides adjustment for repayments during year --- a in general ---for purposes of this section the amount of social_security_benefits received during any taxable_year shall be reduced by any repayment made by the taxpayer during the taxable_year of a social_security_benefit previously received by the taxpayer whether or not such benefit was received during the taxable_year thus it 1s evident from sec_86 a that a taxpayer is allowed a reduction for tax purposes of any repayment of benefits made during the taxable_year however there is no provision in the statute that allows an additional reduction for excess_benefits paid that year due to the taxpayer's excess earnings that year petitioner's employment earnings during were not known until the close of that year and only then could it be determined whether those earnings constituted excess earnings that would cause an overpayment of social_security_benefits it is well settled that income is taxable when it has been actually or constructively received 71_tc_371 citing n am oil consol co v burnet 286_us_417 petitioner actually received dollar_figure in social_security_benefits during that amount is includable in petitioner's income for to the extent any portion of that amount represented an overpayment due to petitioner's excess employment earnings petitioner is provided relief in the following year by a reduction in the taxable_portion of his benefits respondent therefore is sustained on this issue reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent the form ssa-1099 issued by the social_security administration to petitioner for reflected total benefits of dollar_figure benefits repaid to the social_security administration of dollar_figure and net taxable benefits of dollar_figure thus for the year petitioner was allowed an offset or reduction of his social_security_benefits for the overpayments to him during and prior years


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date uil conex-146731-14 mr thomas a barthold chief of staff joint_committee on taxation united_states congress washington dc dear mr barthold i am responding to your letter dated date about the joint_committee on taxation’s review of a report about a refund to ------------------------------------------------------ the report included an appeals case memorandum that references --------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------- though i have not reviewed the settlement recommended by appeals we agree this is an important issue due to its recurring nature accordingly we are considering the administrative options available on this issue including designating it for litigation and publishing guidance under sec_132 in this regard the internal revenue service’s priority guidance plan includes g uidance under sec_119 and sec_132 regarding employer-provided meals while this project is in its early stages we do intend to publish guidance clarifying the tax rules applicable to certain employer-provided meals conex-146731-14 thank you again for contacting commissioner koskinen with your thoughts and recommendations if you or your staff have additional comments please contact me at ----- ------------- sincerely victoria a judson associate chief_counsel tax exempt and government entities


internal_revenue_service number release date index number ------------------------------------------------ ----------------------------------------- --------------------------------------- ------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ---------------- telephone number -------------------- refer reply to cc psi plr-105691-16 date june legend x ----------------------------------------- ------------------------------------------ y ----------------------------------------- --------------- z -------------------- state ------------ date1 --------------------------- date2 -------------------------- date3 -------------------------- dear ----------------- this letter responds to a letter dated date submitted on behalf of x by x’s authorized representatives requesting rulings under sec_301_7701-3 and sec_301_9100-3 of the procedure and administration regulations facts the information submitted states that x was formed as a limited_liability_company in state y is a state corporation x filed an entity classification election to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date1 until date2 x was owned entirely by z x represents that z has at all times been unrelated plr-105691-16 to y on date2 y purchased all of x’s membership units from z for cash consideration since date2 y has been the sole owner of x as a result of the sale more than of the ownership of x changed x represents that it is a domestic entity eligible to elect to be treated as an entity disregarded as separate from its owner for federal tax purposes effective date3 date3 is within sixty months of llc’s previous entity classification election effective date2 x requests the service’s consent under sec_301_7701-3 to change its entity classification further x failed to timely file a valid form_8832 entity classification election effective date3 x represents that granting relief to allow it to file a late election to be treated as a disregarded_entity will not prejudice the interest of the government in addition x represents that it acted reasonably and in good_faith and that no hindsight is involved law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that if an eligible_entity makes an election under paragraph c i of this section to change its classification other than an election made by an existing entity to change its classification as of the effective date of this section the entity cannot change its classification by election again during the sixty months succeeding the effective date of the election however the commissioner may permit the entity to change its classification by election within the sixty months if more than fifty percent of the ownership interests in the entity as of the effective date of the subsequent election are owned by persons that did not own any interests in the entity on the filing_date or on the effective date of the entity’s prior election an election by a newly formed eligible_entity that is effective on the date of formation is not considered a change for purposes of this paragraph c iv plr-105691-16 under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register or the revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we consent to x changing its classification for federal tax purposes less than months after its previous entity classification election we further conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective date3 x must make the election by filing a properly executed form_8832 entity classification election with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on x and y filing within days of this letter any required federal_income_tax and information returns including amended returns consistent with the requested relief a copy of this letter should be attached to any such forms this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling requests it is subject_to verification on examination plr-105691-16 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 laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc