Investment funds receive relief for elections on late-filed returns

Plain-English summary

Four regulated investment company funds timely extended their returns, but the employees who coordinated filing at the adviser and custodian both left before the extended due date. The unfiled returns were found on a former employee’s desk days after the deadline and were mailed immediately. The late returns delayed spillover-dividend elections under IRC § 855 and constant-interest market-discount elections under § 1276, plus a late-year-loss election for one fund and a foreign-currency election verification for another. The IRS found that the funds acted reasonably and in good faith and that relief would not prejudice the government. Their elections and verification were therefore treated as timely made on the late-filed returns.

Ruling snapshot

• Question: May the four funds receive regulatory relief for elections and a verification omitted from timely filing because their returns were mailed after the extended deadline?
• Outcome: Approved
• Key authorities: IRC §§ 852(b)(8), 855(a), 988(a)(1)(B), and 1276(b)(2); Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201619004                                              Third Party Communication: None
Release Date: 5/6/2016                                         Date of Communication: Not Applicable
Index Number: 9100.00-00, 855.00-00,
              1276.02-02, 852.00-00,                           Person To Contact:
              988.00-00                                        --------------------, ID No. ----------------
                                                               Telephone Number:
---------------------------------------                        --------------------
------------------------------------------------------------   Refer Reply To:
----------------------------------------------------------     CC:FIP:B03
-----------------------------                                  PLR-132421-15
--------------------------                                     Date:
----------------------------------------------                 February 05, 2016




LEGEND

Fund 1                     =         -------------------------------------------------
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Fund 2                     =         -------------------------------------------------
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Fund 3                     =         -------------------------------------------------
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Fund 4                     =         -----------------------------------------------------
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Trust 1                    =        ---------------------------------------------

Trust 2                    =        -------------------------------------------------

Advisor                    =        --------------------------------------------------

Accounting Firm            =        -------------------------------

Custodian                  =        --------------------------------------------------
PLR-132421-15                                             2

State A                    =        -----------

Taxable Year               =         --------------------------------------------------------------------------------
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Extended Due Date =                 -----------------

Date                       =        --------------

Date 1                     =        -----------------

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

        This responds to a letter dated September 25, 2015, submitted on behalf of
Fund 1, Fund 2, Fund 3, and Fund 4 (each, a “Fund,” and, together, the “Funds”). The
Funds request a reasonable extension of time under sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to (1) make elections
(a) under section 855(a) of the Internal Revenue Code (“Code”) (all Funds); (b) under
section 1276(b)(2) (all Funds); and (c) under section 852(b)(8)(A) (Fund 4); and (2) to
verify an election made under section 988(a)(1)(B) (Fund 2), for each Fund’s Taxable
Year.

                                                        FACTS

       Each of Fund 1, Fund 2 and Fund 3 is a series of Trust 1. Fund 4 is a series of
Trust 2. Each of Trust 1 and Trust 2 is a State A statutory trust (each, a “Trust”). Each
Trust is registered as an open-end, diversified management investment company under
the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq., as amended.

       The Funds represent that each Fund: (1) is classified as an association that is
taxable as a corporation for federal tax purposes; (2) is a “fund” (as defined in section
851(g)(2)) of the relevant Trust; (3) elected in a taxable year prior to Taxable Year to be
a “regulated investment company,” as defined in section 851(a) (“RIC”) by filing its
federal income tax return on Form 1120-RIC; and (4) satisfied the requirements of
sections 851(b)(2) and 851(b)(3) for Taxable Year.

       The Funds further represent that, at all relevant times, each Fund has operated
in a manner intended to enable it to qualify as a RIC, consistent with its prospectus,
statement of additional information, and financial statements. Each Fund uses a fiscal
year that ends on Date each year, including Taxable Year, and employs an accrual
method of accounting for federal income tax purposes.
PLR-132421-15                                 3

        Each Trust has a board of trustees and officers but no employees. The Funds
have engaged Advisor to provide them with the facilities and services necessary to
administer them. In addition to its furnishing investment management services, Advisor
also performs certain accounting functions for Funds for which Advisor directly employs
experienced mutual fund accounting professionals. Advisor works with Accounting
Firm, which is responsible for preparing and reviewing the Funds’ tax returns and
extension requests, including any federal income tax elections. Advisor is responsible
for reviewing those documents and for arranging for the execution and filing thereof.

       Custodian is the custodian for the assets of each Fund. As custodian, Custodian
creates and maintains all records relating to each Fund’s activities and supplies Advisor
with a daily tabulation of the securities each Fund owns and that are held by Custodian.
In addition, Custodian is responsible for coordinating with Advisor to ensure that the tax
returns for Funds, which are prepared and reviewed by Accounting Firm, are filed in a
timely manner. That is accomplished in two steps. First, Accounting Firm delivers the
tax returns to Advisor in batches, which a designated person employed by Advisor
(“Advisor Designee”) compiles and collates, which information is then reviewed by
Advisor for accuracy and completeness. Second, Advisor Designee coordinates with a
designated person at Custodian (“Custodian Designee”), who sends a checklist of the
tax returns that must be filed on each particular due date (“Return Checklist”), to ensure
that the tax returns are mailed to the Service by their due date. The administrative
coordination of those persons generally has resulted in the timely filing of the Funds’ tax
returns.

        Each Fund filed a timely Form 7004, Application for Automatic Extension of Time
to File Certain Business Income Tax, Information, and Other Returns, for Taxable Year
extending the due date for filing its tax return for Taxable Year to Extended Due Date.
In accordance with the established practice described above, Advisor Designee and
Custodian Designee would have coordinated to ensure each tax return was mailed to
the Service by Extended Due Date.

       However, months before Extended Due Date, Advisor Designee ceased
employment with Advisor. In addition, within the same time frame, Custodian
Designee’s employment with Custodian ended, and the Return Checklist for tax returns
was not prepared and delivered. As a result of the departure of two individuals who
were responsible for ensuring that the administrative task of duly and timely filing tax
returns with the Service was complete, and who served as each other’s backup and
control, tax returns were not filed with the Service by Extended Due Date, a fact of
which Advisor was not aware at that time. This inadvertent omission was an
administrative human error and was discovered by Advisor within days after Extended
Due Date, when a review of Advisor Designee’s desk contents revealed the unfiled
returns, whereupon Advisor immediately mailed the returns to the Service. Prior to this
incident, Advisor had never failed to timely file a federal tax return for any of the Funds.
PLR-132421-15                                  4

        The failure to timely file the Funds’ tax returns for Taxable Year resulted in
Funds’ not timely making certain elections made on such returns. Each Fund’s return
contained an election under section 855(a) to treat certain distributions paid after
Taxable Year as paid during Taxable Year. Each Fund’s return also contained an
election under section 1276(b)(2) to accrue market discount on the basis of a constant
interest rate. Fund 4’s return contained an election under section 852(b)(8)(A) to defer
its “qualified late-year loss” (as defined in section 852(b)(8)(B)), consisting of its current
“late-year ordinary loss” (as defined in section 852(b)(8)(D)). Fund 2’s return contained
a verification of an election made under section 988(a)(1)(B) (“988 Verification”).

       Each Fund represents that its Spillover Dividends were duly declared before
Extended Due Date for the Fund’s tax return for Taxable Year and distributed within
twelve months after the end of Taxable Year and not later than the date of the first
regular dividend payment made after such declaration.

       As required by section 301.9100-3(e)(2) of the Procedure and Administration
Regulations, a detailed affidavit from Trusts’ Treasurer, who, in that capacity, is the
individual who acts on the Funds’ behalf with respect to federal tax matters, and who
has personal knowledge of the facts and circumstances at issue in this ruling letter,
accompanied by the perjury declaration required by that section, was submitted
together with the ruling request submitted on behalf of the Funds.

       Each Fund makes the following additional representations:

       (1) At no time was either Trust, any Fund, or Advisor contacted by the
       Service respecting the failure to file a timely tax return;

       (2) This request for relief was filed before the failure to make the elections
       was discovered by the Service;

       (3) The statutory and regulatory requirements associated with the
       elections were duly complied with, except as they relate to the filing of a
       timely filed Return, where applicable;

       (4) Granting the requested relief will not result in the Funds having a lower
       tax liability in the aggregate for the Taxable Year than the Funds would
       have had if the elections had been timely made;

       (5) The Funds do not seek to alter a return position for which an accuracy-
       related penalty has been or could have been imposed under section 6662
       at the time they requested relief and the new position requires or permits a
       regulatory election for which relief is requested;
PLR-132421-15                                  5

       (6) Being fully informed of the required regulatory election and related tax
       consequences, the Funds did not choose to not file them; and

       (7) The Fund has not used hindsight in making its decision to seek the
       relief requested.

                                   LAW AND ANALYSIS

       Section 852(b)(8)(A) provides that a RIC may elect for any taxable year to treat
any portion of any qualified late-year loss for such taxable year as arising on the first
day of the following taxable year.

        Section 855(a) provides, in relevant part, that if a RIC declares a dividend by the
15th day of the 9th month following the close of the taxable year and distributes the
amount of such dividend to shareholders in the 12-month period following the close of
such taxable year and not later than the date of the first dividend payment of the same
type of dividend made after such declaration, then the amount so declared and
distributed shall, to the extent the RIC elects in such return in accordance with
regulations prescribed by the Secretary, be considered as having been paid during such
year.

       Section 1.855-1(b)(1) provides, in relevant part, that a section 855(a) election
must be made in the return filed by the RIC for the taxable year and is made by the RIC
treating the dividend (or portion thereof) to which the election applies as a dividend paid
during the taxable year in computing its investment company taxable income, or if the
dividend (or portion thereof) to which the election applies is a capital gain dividend, in
computing the amount of capital gain dividends paid during such taxable year.

        Section 988(a)(1)(B) provides that a taxpayer may elect to treat any foreign
currency gain or loss attributable to a forward contract, futures contract, or option
described in section 988(c)(1)(B)(iii) that is a capital asset in its hands and is not part of
a straddle as capital gain or loss if the taxpayer makes the election and identifies the
transaction before the close of the day on which the transaction is entered into. Section
1.988-3(b)(3) provides requirements for making the election. Section 1.988-3(b)(4)
(“Verification”) provides, in part, that a “taxpayer that has made an election under
§1.988-3(b)(3)” must attach to his income tax return a statement setting forth certain
specified information.

       Section 1276(b)(2) provides that gain on the disposition of any market discount
bond is treated as ordinary income to the extent of accrued market discount on the
bond. Section 1278(a)(1) defines a market discount bond as any bond having market
discount with certain exceptions. Market discount is generally defined by section
1278(a)(2) as the excess of the stated redemption price of a bond at maturity over the
basis of the bond immediately after its acquisition. Section 1276(b)(1) states that,
PLR-132421-15                                 6

except as otherwise provided, market discount should be calculated by the taxpayer
using the ratable accrual method. Section 1276(b) allows an election by a taxpayer to
calculate the accrued market discount using the constant interest rate method. This
irrevocable election must be made on a bond-by-bond basis, and must be made in an
income tax return that is filed by the taxpayer with the Internal Revenue Service no later
than the due date (including extensions) for the income tax return for which the taxpayer
is required to determine accrued market discount. See Rev. Proc. 92-67, 1992-2 C.B.
429, Section 2.12.

        Section 301.9100-1(c) of the Procedure and Administration Regulations provides
that the Commissioner has discretion to grant a reasonable extension of time to make a
regulatory election or a statutory election (but no more than 6 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 301.9100-1(b) defines a regulatory election as an
election whose due date is prescribed by regulations or by a revenue ruling, a revenue
procedure, a notice, or an announcement published in the Internal Revenue Bulletin.

        Section 301.9100-3(c)(2) provides special rules for accounting method regulatory
elections. Under these rules, the interests of the Government are deemed to be
prejudiced except in unusual and compelling circumstances if the accounting method
regulatory election for which relief is requested (i) is subject to the procedure described
in § 1.446-1(e)(3)(i) (requiring the advance written consent of the Commissioner);
(ii) requires an adjustment under section 481(a) (or would require an adjustment under
section 481(a) if the taxpayer changed to the method of accounting for which relief is
requested in a taxable year subsequent to the taxable year the election should have
been made); (iii) would permit a change from an impermissible method of accounting
that is an issue under consideration by examination, an appeals office, or a federal court
and the change would provide a more favorable method or more favorable terms and
conditions than if the change were made as part of an examination; or (iv) provides a
more favorable method of accounting or more favorable terms and conditions if the
election is made by a certain date or taxable year.

        Section 301.9100-3(a) through (c)(1)(i) sets forth rules that the Service generally
will use to determine whether, under the facts and circumstances of each situation, the
Commissioner will grant an extension of time for regulatory elections that do not meet
the requirements of section 301.9100-2. Section 301.9100-3(a) provides that requests
for relief subject to this section will be granted when the taxpayer provides the evidence
(including affidavits described in section 301.9100-3(e)) to establish to the satisfaction
of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant
of relief will not prejudice the interests of the Government.

        Section 301.9100-3(b) provides that a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer (i) requests relief under this section before
the failure to make the regulatory election is discovered by the Service; (ii) failed to
PLR-132421-15                                 7

make the election because of intervening events beyond the taxpayer’s control;
(iii) failed to make the election because, after exercising reasonable diligence (taking
into account the taxpayer’s experience and the complexity of the return or issue), the
taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the
written advice of the Service; or (v) reasonably relied on a qualified tax professional,
including a tax professional employed by the taxpayer, and the tax professional failed to
make, or advise the taxpayer to make, the election. Moreover, a taxpayer will be
deemed not to have acted 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 section
6662 at the time the taxpayer requests relief and the new position requires or permits 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.

       Section 301.9100-3(c) provides that a reasonable extension of time to make a
regulatory election will be granted only when the interests of the government will not be
prejudiced by the granting of relief. Section 301.9100-3(c)(i) provides that the interests
of the government are prejudiced if granting relief would result in the 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 (taking into account the
time value of money). Section 301.9100(3)(c)(ii) provides 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 section 6501(a) before the taxpayer’s receipt of a ruling granting relief under this
section.

                                      CONCLUSION

       Based on the information submitted and representations made, we conclude that
section 301.9100-3(c)(2) does not apply and that each of the Funds has satisfied the
requirements for granting a reasonable extension of time to (1) make elections (a) under
section 855(a) (all Funds); (b) under section 1276(b)(2) (all Funds); and (c) under
section 852(b)(8)(A) (Fund 4); and (2) to verify an election made under section
988(a)(1)(B) (Fund 2). Since each Fund filed its Form 1120-RIC on Date 1, each
Fund’s elections, as described in this letter, will be treated as having been timely made,
despite having been made after the due date prescribed for making the elections.

       This ruling is limited to each Fund’s timeliness of filing the elections described
herein. This ruling’s application is limited to the facts, representations, Code sections,
and regulations cited herein. Except as specifically provided otherwise, no opinion is
expressed on the federal income tax consequences of the transactions described
above. Specifically, no opinion is expressed regarding any material item or
representation on each Fund’s Form 1120-RIC. Additionally, no opinion is expressed
PLR-132421-15                                  8

with regard to whether each Fund otherwise qualifies as a RIC under subchapter M of
the Code.

         No opinion is expressed with regard to whether the tax liability of each Fund is
not lower in the aggregate for all years to which the election applies than such tax
liability would have been if the elections had been timely made (taking into account the
time value of money). Upon audit of the federal income tax returns involved, the
director’s office will determine such tax liability for the years involved. If the director’s
office determines that such tax liability is lower, that office will determine the federal
income tax effect.

      This 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 sent to your authorized representative.

       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.

             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 request for rulings, it is subject to verification on
examination.

                                        Sincerely,



                                        ___________________________
                                        Steven Harrison
                                        Branch Chief, Branch 1
                                        Office of Associate Chief Counsel
                                        (Financial Institutions & Products)


Enclosures (2):
      Copy of this letter
      Copy for section 6110 purposes