Taxpayers get 60 days for late investment income election

Plain-English summary

Married taxpayers had investment interest expense and carryovers that exceeded their net investment income. Their return preparer omitted earlier carryovers and failed to advise them that they could elect to include net capital gain and qualified dividend income in investment income under § 163(d)(4)(B). The IRS found that the taxpayers reasonably relied on tax professionals, acted promptly after discovering the error, and were not using hindsight. It also found that relief would not prejudice the government because the election would affect only the timing of tax liability and the relevant years remained open. The IRS granted 60 days to make the election by filing Form 4952 with an amended return.

Ruling snapshot

• Question: Could the taxpayers make a late election to treat net capital gain and qualified dividend income as investment income?
• Outcome: approved
• Key authorities: IRC § 163(d)(4)(B); Treas. Reg. §§ 1.163(d)-1(b) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201646003                                              Third Party Communication: None
Release Date: 11/10/2016                                       Date of Communication: Not Applicable
Index Number: 9100.00-00, 163.00-00
                                                               Person To Contact:
                                                               -------------------------------, ID No. -----------
                                                               -----------------
-------------------------------------                          Telephone Number:
------------------------                                       ----------------------
 ------------------------------------                          Refer Reply To:
                                                               CC:ITA:B02
                                                               PLR-129802-14
                                                               Date:
                                                               July 18, 2016

TY: -------

LEGEND:

Taxpayers =                         --------------------------------------------------------
                                    -----------------------------------------------
Preparer =                          -----------------------
CPA =                               ---------------------------------------------
Year 1 =                            -------
Year 2 =                            -------
Year 3 =                            -------
Date 1 =                            ---------------------------
Date 2 =                            ---------------------------
Date 3 =                            ----------------------
Date 4 =                            ------------------------
Date 5 =                            ----------------------
$a =                                ------------
$b =                                ----------------
$c =                                -------
$d =                                --------------


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

This is in response to your letter dated August 5, 2014, requesting an extension of time
to make an election under § 163(d)(4)(B)(iii) of the Internal Revenue Code to include net
capital gain income and qualified dividend income in investment income, effective for
the taxable year ended Date 1. The request is made in accordance with §§ 301.9100-1
and 301.9100-3 of the Procedure and Administration Regulations. This letter
supersedes the letter ruling dated January 23, 2015.
PLR-129802-14                                 2


FACTS

Taxpayers file joint returns on Form 1040, U.S. Individual Income Tax Return, on a
calendar year basis using the cash method of accounting. Taxpayers incurred
investment interest expense of $a in Year 3 and had an investment interest expense
carryover from Year 2 of $b. Taxpayers earned $c of net investment income in Year 3.
Taxpayers also earned $d of net capital gain and qualified dividend income in Year 3.

Taxpayer engaged and relied on Preparer to prepare their Year 2 and Year 3 Form
1040s. Taxpayers provided Preparer with all relevant information, including their Year 1
Form 1040, and Year 1 investment interest expense carryover.

Preparer delivered Taxpayers’ Year 3 Form 1040 for signature and filing on Date 2, just
three days before the due date of the return. Taxpayers had concerns about the return
and decided to delay the filing of the return until it could discuss the return with Preparer
and their CPA. On Date 3, Taxpayers questioned their Preparer why their deduction for
investment interest was so low. On Date 4, Taxpayers’ CPA advised Preparer that it
should have made an election under § 163(d)(4)(B) to include net capital gain income
and qualified dividend income in investment income. After researching the issue,
Preparer advised Taxpayers that the election could not be made on a late return.
Preparer filed the return on behalf of Taxpayers without the election on Date 5.

Preparer informed Taxpayers that they inadvertently omitted Taxpayers’ Year 1
investment interest expense carryover from Taxpayers’ Year 2 Form 1040, and again
from Taxpayers’ Year 3 Form 1040 and consequently failed to consider whether
Taxpayers should have made the election to include net capital gain income and
qualified dividend income in investment income under § 163(d)(4)(B) effective for
Year 3. Preparer admitted that they failed to inform Taxpayers of the available election.
Upon discovering their oversight, Preparer advised Taxpayers to file this request for an
extension of time to make the election.

LAW AND ANALYSIS

Section 163(d)(1) provides that in the case of a taxpayer other than a corporation, the
amount allowed as a deduction for investment interest for any taxable year shall not
exceed the net investment income of the taxpayer for the taxable year.

Section 163(d)(4)(B) provides, in part, that investment income means the sum of --

(i) gross income from property held for investment (other than any gain taken into
account under clause (ii)(I)),

(ii) the excess (if any) of –
PLR-129802-14                                    3


(I) the net gain attributable to the disposition of property held for investment, over

(II) the net capital gain determined solely by taking into account gains and losses from
dispositions of property held for investment, plus

(iii) so much of the net capital gain referred to in clause (ii)(II) (or, if lesser, the net gain
referred to in clause (ii)(I)) as the taxpayer elects to take into account under this clause.

The term investment income shall include qualified dividend income (as defined in
§ 1(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment
income for purposes of this subsection.

Section 1.163(d)-1(b) of the Income Tax Regulations provides that the election for net
capital gains and qualified dividend income must be made on or before the due date
(including extensions) of the income tax return for the taxable year in which the qualified
dividend income is received.

Section 301.9100-1(c) provides that the Commissioner of Internal Revenue, in
exercising his discretion, may grant a reasonable extension of time under the rules set
forth in § 301.9100-3 to make a regulatory election under all subtitles of the Internal
Revenue Code except subtitles E, G, H, and I. The term "regulatory election" is defined
in § 301.9100-1(b) as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, or
announcement published in the Internal Revenue Bulletin.

Section 301.9100-3(a) provides that requests for relief subject to this section will be
granted when the taxpayer provides the evidence 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.

Under § 301.9100-3(b)(1), except as provided in § 301.9100-3(b)(3) (i) through (iii), a
taxpayer is deemed to have acted reasonably and in good faith if the taxpayer:

(i) requested relief under this section before the failure to make the regulatory election
was discovered by the Internal Revenue 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 (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;
PLR-129802-14                                 4

(iv) reasonably relied on the written advice of the Internal Revenue 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.

Paragraphs (b)(3)(i) through (iii) of § 301.9100-3 provide that a taxpayer is deemed not
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 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. If specific facts have changed since the due date
for making the election that make the election advantageous to a taxpayer, the Service
will not ordinarily grant relief. In such a case, the Service will grant relief only when the
taxpayer provides strong proof that the taxpayer's decision to seek relief did not involve
hindsight.

Section 301.9100-3(c)(1) 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. 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 § 6501(a) before the
taxpayer's receipt of a ruling granting relief under this section.

Taxpayers’ election is a regulatory election, as defined under § 301.9100-1(b), because
the due date of the election is prescribed in the regulations under § 1.163(d)-1(b). In
the present situation, the requirements of §§ 301.9100-1 and 301.9100-3 of the
regulations have been satisfied. The information and representations made by
Taxpayers establish that they acted reasonably and in good faith. The affidavits
presented show that Taxpayers reasonably relied on qualified tax professionals for the
filing of Taxpayers’ return, however, the tax professionals failed to make, or advise
Taxpayers to make, the election. The affidavits presented show that Taxpayers were
unaware of the necessity for the election and, upon discovery of the error by Preparer,
promptly requested relief.

The information and representations presented establish that Taxpayers are not
seeking to alter a return position for which an accuracy-related penalty had been or
PLR-129802-14                                 5

could be imposed under § 6662 at the time relief was requested. Taxpayers were not
informed in all material respects of the required election, and its related tax
consequences. Furthermore, Taxpayers are not using hindsight in requesting relief,
and no facts have changed since the time of the original filing deadline.

Finally, granting an extension will not prejudice the interests of the Government. It is
represented that Taxpayers will not have a lower tax liability in the aggregate for all
taxable years affected by the election if given permission to make the election in the
appropriate amount at this time than Taxpayers would have had if the election were
made in the appropriate amount by the original deadline for making the election.
Taxpayers have represented that the granting of an extension will only affect the timing
of when they will incur the tax liability. Moreover, 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 of
limitations on assessment.

CONCLUSION

Accordingly, Taxpayers are granted an extension of time of 60 days from the date of
this letter to make an election under § 163(d)(4)(B)(iii) to include net capital gain income
and qualified dividend income in investment income, effective for the taxable year
ended Date 1. The election should be made by filing a Form 4952 and by including a
copy of this ruling with an amended return for the Year 3 taxable year. Alternatively, a
taxpayer filing returns electronically may satisfy this requirement by attaching a
statement to the return that provides the date and control number of the letter ruling.

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.

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.
PLR-129802-14                               6


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,


                                     Thomas D. Moffitt
                                     _____________________________
                                     THOMAS D. MOFFITT
                                     Special Counsel
                                     Associate Chief Counsel
                                     (Income Tax & Accounting)


cc:


Enc: copy for § 6110 purposes