Foreign corporation receives relief for two late tax elections

Plain-English summary

A foreign corporation sold its interest in a partnership holding U.S. real property and later learned that the sale produced taxable gain. It wanted to elect out of installment reporting and report the full gain, a choice that could reduce or eliminate branch profits tax, but the election normally had to appear on a timely filed return. The corporation also had not been told that it needed Form 8848 by the return deadline to support treatment as having completely terminated its U.S. business. It filed its return with the installment-method election and disclosed that it would seek late-election relief. The IRS granted 60 days to complete the election-out relief and 60 days to file the signed Form 8848, while expressly declining to rule that the corporation otherwise qualified for the Form 8848 treatment.

Ruling snapshot

• Question: Could the foreign corporation make a late election out of installment reporting and file a late Form 8848?
• Outcome: approved
• Key authorities: IRC §§ 453(d), 884; Treas. Reg. §§ 15a.453-1(d)(3), 1.884-2, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201750008                                            Third Party Communication: None
Release Date: 12/15/2017                                     Date of Communication: Not Applicable
Index Number: 453.06-00, 453.06-06,
              884.08-10, 9100.00-00,
              9100.10-01
                                                             Person To Contact:
                                                             --------------------------, ID No. ----------------
-------------------------                                    -----------------
-----------                                                  Telephone Number:
------------------------                                     ----------------------
---------------------                                        Refer Reply To:
-------------------------------------                        CC:ITA:B04
-------------------------------                              PLR-109010-17
----------------------------------                           Date:
                                                             September 12, 2017




Legend


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

PRS 1              = ----------------------------------------------------------

LLC                = ----------------------------------------------------------------------------------

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

Date 2             = --------------------

Date 3             = --------------------

Date 4             = ----------------------

Date 5             = ---------------------------

Tax Year 1         = -------

Firm 1             = -----------------------

Firm 2             = -----------------

X                  = ---------------------------------------------------------------------------------------------

PLR-109010-17                                          2

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


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

This letter responds to Taxpayer’s request for a private letter ruling for permission to
make a late election out of the installment method for the installment sale of its
partnership interest in PRS 1 on Date 1 and a late election to file Form 8848, Consent to
Extend the Time to Assess the Branch Profits Tax Under Regulations Sections 1.884-
2(a) and (c) for Tax Year 1, which includes Date 1.

FACTS

Taxpayer is a foreign corporation organized in a non-treaty jurisdiction that for U.S. tax
purposes uses an accrual method of accounting and a calendar year. During Tax Year
1 and in prior years, Taxpayer was engaged in a U.S. trade or business pursuant to
§ 875 of the Internal Revenue Code, as a limited partner in PRS 1, which at all relevant
times owned U.S. real property in State A. Taxpayer filed Forms 1120-F, U.S. Income
Tax Return of a Foreign Corporation, for each year it was a partner in PRS 1.

On Date 1, Taxpayer sold its limited partnership interest in PRS 1 to LLC in an
installment sale. Taxpayer represents that during the negotiations of the sale and
subsequently it always understood that the sale would not be subject to U.S. tax based
on statements made by LLC’s representatives.

One week before Taxpayer’s Tax Year 1 tax return or extension was due, Firm 1 alerted
Taxpayer that based on an initial read of the sales agreement Taxpayer had a taxable
gain on the sale. On Date 2, Firm 1 informed Taxpayer that the sale was reportable on
the installment method and that Taxpayer could elect out of the installment method,
which would minimize or eliminate branch profits tax that otherwise would be due under
§ 884. On Date 3, Taxpayer’s Tax Year 1 Form 1120-F or an extension to file was due.
Because Taxpayer was on Date 3 still attempting to reconcile Firm 1’s views with LLC’s
representations concerning whether the gain on the sale was subject to federal income
tax, it directed Firm 1 not to file for an extension of time to file its Tax Year 1 Form
1120-F.

Neither Taxpayer nor Firm 1 can recall with certainty whether Firm 1 informed Taxpayer
by the due date of the return that an election out of the installment method had to be
made on a timely filed return. Shortly after the due date of Taxpayer’s Tax Year 1
return, Firm 1 informed Taxpayer that an election out of the installment method
generally needed to be made on a timely filed return (including extensions) and
because Taxpayer did not file an extension, Firm 1 would need to research whether

PLR-109010-17                                 3

Taxpayer could elect out of the installment method. Ultimately, Firm 1 declined the
engagement to prepare Taxpayer’s Tax Year 1 Form 1120-F.

Taxpayer subsequently engaged Firm 2 to prepare its Tax Year 1 Form 1120-F. On
Date 4, Taxpayer filed its Tax Year 1 Form 1120-F, electing out of the installment
method for the sale of its limited partnership interest in PRS 1 and reporting all of the
gain from the sale in accordance with § 897(g). Taxpayer attached a statement to the
Form 1120-F stating that it would request a private letter ruling to extend the time to
make an election under § 453(d). Taxpayer represents that it has no independent
knowledge of the law surrounding the taxation of installment gains or the procedure for
electing out of the installment method. Moreover, Taxpayer represents that at all
relevant times it was not aware, and was not advised by its representatives, that it was
required to file Form 8848, Consent To Extend the Time To Assess the Branch Profits
Tax Under Regulations Sections 1.884-2(a) and (c), on or before the due date (including
extensions) of Form 1120-F for Tax Year 1, in order to be treated as completely
terminating its U.S. trade or business activities in such year under § 1.884-2T(a)(2) of
the temporary Income Tax Regulations.

On Date 5, you and Taxpayer filed a complaint in X against LLC and others alleging
various claims. Taxpayer represents that, in the event that it receives any amounts as a
result of or in settlement of its claims in X other than prejudgment interest, post-
judgment interest, or punitive damages, or an interest in PRS 1, it will report such
amounts as income in the year that such claims are finally resolved, and that the source
and character of any amounts other than prejudgment interest, post-judgment interest,
or punitive damages or any interest in PRS 1, shall be determined and reported by
Taxpayer in the same manner as proceeds from the sale of Taxpayer’s interest in PRS
1 on Date 1. If Taxpayer is awarded any interest in PRS 1 as a result of the claims in X,
Taxpayer will treat such interest as having been repurchased in the year in which it
receives that interest. See Rev. Rul. 80-58, 1980-1 C.B. 181. Taxpayer also
represents that it has not and will not receive, in settlement or otherwise, any interest in
PRS 1 prior to the end of the three-year period following the close of Tax Year 1.

Furthermore, Taxpayer represents that: (1) at the close of Tax Year 1, Taxpayer did not
own any U.S. assets; (2) neither Taxpayer nor a related corporation (within the meaning
of § 1.884-2T(a)(2)(iv)) has used or will use, directly or indirectly, in the conduct of a
trade or business in the U.S. at any time during the three-year period following the close
of Tax Year 1: (a) any of the U.S. assets of the terminated U.S. trade or business; (b)
any property attributable to those assets; or (c) any property attributable to effectively
connected earnings and profits of Taxpayer for Tax Year 1; and (3) Taxpayer has not
had, and will not have, any income that is, or is treated as, effectively connected income
during the three-year period following the close of Tax Year 1 (other than solely by
reason of § 864(c)(6) or (c)(7)).

PLR-109010-17                                 4

LAW

Section 453(a) provides that, except as otherwise provided, income from an installment
sale shall be taken into account under the installment method. Section 453(d)(1)
provides that the installment method will not apply to a disposition if the taxpayer elects
to have the installment method not apply to such disposition.

Under § 453(d)(2), except as otherwise provided by regulations, an election out of the
installment method with respect to a disposition may be made only on or before the due
date prescribed by law (including extensions) for filing the taxpayer's tax return for the
taxable year in which the disposition occurs. Such an election shall be made in the
manner prescribed by regulations.

Section 15a.453-1(d)(3)(i) of the Temporary Regulations under the Installment Sales
Revision Act of 1981 provides, in general, that an election out of the installment method
must be made on or before the due date prescribed by law (including extensions) for
filing the taxpayer's return for the taxable year in which the installment sale occurs.

Section 15a.453-1(d)(3)(ii) provides that elections after the due date prescribed by law
(including extensions) for filing the taxpayer's return will be permitted only in those rare
circumstances when the IRS concludes that the taxpayer had good cause for failing to
make a timely election.

Regarding allowing a taxpayer to extend the period of assessment of the branch profits
tax for Tax Year 1, § 1.884-2T(a)(1) provides, in relevant part, that “[a] foreign
corporation shall not be subject to the branch profits tax for the taxable year in which it
completely terminates all of its U.S. trade or business within the meaning of [§ 1.884-
2T(a)(2)].”

Section 1.884-2(a)(2)(ii) provides that the waiver referred to in § 1.884-2T(a)(2)(i)(D)
must be executed on Form 8848 on or before the date (including extensions) prescribed
for filing the foreign corporation’s income tax return for the year of complete termination
and shall extend the period of assessment of the branch profits tax for the year of
complete termination to a date not earlier than the close of the sixth taxable year
following that taxable year.

Section 301.9100-1(a) of the Procedure and Administration Regulations provides rules
for granting an extension of time to make a regulatory election. Section 301.9100-
1(b)(1) provides that a regulatory election means an election whose due date is
prescribed by a regulation published in the Federal Register or a revenue ruling,
revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the standards set forth in § 301.9100-3 to make a

PLR-109010-17                                  5

regulatory election under all subtitles of the Internal Revenue Code except subtitles E,
G, H, and I.

Section 301.9100-3(a) provides that requests for extension of time for regulatory
elections (other than automatic extensions covered in § 301.9100-2) will be granted
when the taxpayer provides evidence (including affidavits) to establish that the taxpayer
acted reasonably and in good faith and the grant of relief will not prejudice the interests
of the government.

Under § 301.9100-3(b) a taxpayer is deemed to have acted reasonably and in good
faith if the taxpayer requests relief before the failure to make the regulatory election is
discovered by the Internal Revenue Service. In addition, § 301.9100-3(b)(3) provides
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 has been or
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 respects of the required election and related consequences, but
chose not to make the election; or

(iii) Uses hindsight in requesting relief.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time to make the regulatory election only when the interests of the
government will not be prejudiced by the granting of relief.

Section 301.9100-3(c)(1)(i) provides that the interests of the government are prejudiced
if granting relief would result in a taxpayer having a lower tax liability in the aggregate
for all taxable years affected by the election than the taxpayer would have had if the
election had been timely made (taking into account the time value of money).

CONCLUSIONS

Based on the facts and circumstances of this case, we conclude as follows:

    1. Taxpayer is granted an extension of time to elect out of the installment method
      on its Tax Year 1 Form 1120-F filed on Date 4 because Taxpayer satisfies
      § 15a.453-1(d)(3)(ii) and § 301.9100-3(a), if, within 60 days from the date of this
      letter ruling, Taxpayer sends a copy of this letter ruling to the IRS office with
      jurisdiction over the Taxpayer’s Tax Year 1 Form 1120-F.

PLR-109010-17                                 6

    2. Taxpayer satisfies § 301.9100-3(a) and is granted an extension of time to file a
      signed Form 8848 for Tax Year 1 within 60 days from the date of this ruling letter.
      A copy of this ruling letter should be attached to Form 8848.

Except as expressly provided under CONCLUSIONS (1) and (2) above, we do not
express or imply an opinion concerning the tax consequences of any aspect of any
transaction or item discussed or referenced in this letter. Specifically, as provided in
§ 301.9100-1(a), the granting of an extension of time is not a determination that
Taxpayer is otherwise eligible to file Form 8848.

Pursuant to section 7.06 of Rev. Proc. 2017-1, 2017-1 I.R.B 1, a taxpayer must attach a
copy of this letter ruling to any federal income tax to which it is relevant. If a taxpayer
files its returns electronically, it may satisfy this requirement by attaching a statement to
the return that provides the date and control number of this letter ruling.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

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.

In accordance with a power of attorney on file in this office, we are sending copies of
this letter ruling to your authorized representatives.


                                       Sincerely,



                                       Michael J. Montemurro
                                       Branch Chief
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)


cc------Internal Revenue Service Center
        P.O. Box 409101
        Ogden, UT 84409