Late basis-reduction election allowed after adviser missed extension filing

Plain-English summary

A company emerging from bankruptcy reported cancellation-of-debt income and intended to elect under section 108(b)(5) to reduce the basis of depreciable property first. Its return included Form 982 making that election, but the accounting firm responsible for the filing failed to submit Form 7004, so the return and election were not protected by the expected automatic extension. After discovering the error, the company sought extra time and represented that relief would not lower its tax liability for the year. The IRS found that the company acted reasonably and in good faith because it relied on a qualified tax adviser, and that granting relief would not prejudice the government. It gave the company 45 days to file an amended return with Form 982 making the election.

Ruling snapshot

• Question: Could the company receive extra time to make its section 108(b)(5) basis-reduction election after its adviser failed to file Form 7004?
• Outcome: approved
• Key authorities: IRC §§ 108(b)(5), 1017; Treas. Reg. §§ 1.108-4, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201750015                                             Third Party Communication: None
Release Date: 12/15/2017                                      Date of Communication: Not Applicable
Index Number: 108.01-00, 108.02-01,
              9100.00-00                                      Person To Contact:
                                                              ------------------------, ID No. --------------
---------------------                                         Telephone Number:
-----------                                                   ----------------------
--------------------------                                    Refer Reply To:
-----------------------------------------------               CC:ITA:B05
------------------------                                      PLR-113769-17
                                                              Date: September 12, 2017




Legend

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

Bankruptcy Court              = --------------------------------------------------------------------------------
Plan                          = ---------------------------------------------------------------------------------------
                                ----------------------
State                         = --------------
Date 1                        = ------------
Date 2                        = ---------------------------
Date 3                        = --------------------------
Date 4                        = --------------------
Date 5                        = -------------------------
Year                          = -------
x                             = ------------------
Firm 1                        = -------------------------
Firm 2                        = -----------------------------------------


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

This letter responds to your letter requesting an extension of time under §§ 301.9100-1
and 301.9100-3 of the Procedure and Administration Regulations to make an election
under § 108(b)(5) of the Internal Revenue Code. Specifically, you have requested an
extension of time to make an election under § 108(b)(5) and § 1.108-4 of the Income
Tax Regulations to exclude income resulting from the discharge of indebtedness and to
reduce the basis of depreciable real property, effective for Taxpayer’s Year federal
income tax return.

PLR-113769-17                                2


FACTS

Taxpayer uses the accrual method of accounting and has a Date 1, taxable year end as
an annual accounting period. It is incorporated in State. Originally, Taxpayer was
engaged in the development and production of, and exploration for, crude oil, natural
gas, and natural gas liquids. On Date 2, Taxpayer filed a voluntary petition in the
Bankruptcy Court. On Date 3, Bankruptcy Court entered an order confirming the Plan.
On Date 4, Taxpayer was converted into a State limited liability company, and,
subsequently, changed its name.

Taxpayer made an election to be classified as a corporation for federal income tax
purposes, effective on Date 4. As a result of the bankruptcy proceedings, Taxpayer
represents that it had cancellation of indebtedness (COD) income of x. At the time,
Taxpayer did not have an internal tax advisor. In addition, Taxpayer had significant
turnover in key management personnel, including the chief financial officer and internal
legal counsel.

For Year, Taxpayer engaged Firm 1 as its new auditor and tax advisor. As part of the
tax advisory engagement, Firm 1 was to prepare Taxpayer’s Form 1120, including filing
of Form 7004, Application for Automatic Extension of Time to File Certain Business
Income Tax, Information, and Other Returns, which extends the due date of Form 1120.
Filing an extension was explicitly written in the engagement letter, and Taxpayer relied
on Firm 1 for filing of the tax forms, including Form 7004. Firm 1, however, did not file
Form 7004. On, or about Date 5, Taxpayer filed Form 1120 for Year under the
assumption that the automatic extension was obtained through the timely filing of Form
7004. Taxpayer’s Form 1120, as filed, included Form 982, Reduction of Tax Attributes
Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), which
documented the discharge of indebtedness and elected under § 108(b)(5) to first apply
the reduction to the basis of depreciable property.

Once Taxpayer discovered that the automatic extension was not obtained, it consulted
Firm 2 and was advised to request relief under § 301.9100-1 for an extension of time to
file the election under § 108(b)(5) and § 1.108-4.

Taxpayer represents that it relied on Firm 1 to timely file Form 7004. Taxpayer further
represents that granting of the relief under § 301.9100-3 will not result in a lower tax
liability for Year.

LAW AND ANALYSIS

Under § 108(a), gross income does not include an amount otherwise includible in
income due to a discharge of indebtedness if the discharge is described in

PLR-113769-17                                 3

§ 108(a)(1)(A), (B), (C), or (D). If a taxpayer excludes income under § 108(a)(1)(A),(B)
or (C), the taxpayer must reduce certain tax attributes, as described in § 108(b).
Section 108(b)(5)(A) permits a taxpayer to elect to apply any portion of the reduction to
the reduction under § 1017 of the basis of taxpayer’s depreciable property. Section
1017 provides the rules for making the basis reductions required by §§ 108(b)(2) and
108(b)(5). Section 108(d)(9) provides that an election under § 108(d)(5) is made on the
taxpayer’s return for the taxable year in which the discharge of indebtedness occurs or
at such time and manner as permitted in regulations prescribed by the Secretary.

Section 1.108-4(b) of the Income Tax Regulations provides, in part, that to make an
election under § 108(b)(5), a taxpayer must complete and file Form 982 together with its
federal income tax return for the taxable year in which the taxpayer has discharge of
indebtedness income that is excludable under § 108(a).

Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner
will use to determine whether to grant an extension of time to make a regulatory
election. Section 301.9100-3(a) provides that requests for extensions of time for
regulatory elections (other than automatic 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 Service, or reasonably relied on a qualified tax professional, and the
tax professional failed to make, or advise the taxpayer to make, the election. However,
a taxpayer is not considered to have reasonably relied on a qualified tax professional if
the taxpayer knew or should have known that the professional was not competent to
render advice on the regulatory election or was not aware of all relevant facts.

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 fully informed in all material respects of the required election and
               related tax consequences but chose not to make 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.

PLR-113769-17                                 4


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).

Section 301.9100-3(c)(1)(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 year 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.

Based on the information submitted by Taxpayer, we conclude that (1) Taxpayer has
acted reasonably and in good faith under § 301.9100-3(b), and (2) the interests of the
Government will not be prejudiced by the granting of relief under § 301.9100-3(c).

CONCLUSION

Accordingly, based solely on the facts and information submitted and the
representations made in the ruling request, we grant Taxpayer an extension of 45 days
from the date of this letter ruling to file an amended return to make the election under
§ 108(b)(5) and § 1.108-4(b). The election is to be made on Form 982.

Except as expressly provided in the preceding paragraph, 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, this letter does not rule on whether
the income at issue is properly treated as COD income under § 61(a)(12). In addition,
we express no opinion as to whether the taxpayer qualifies to make the election set
forth in § 108(b)(5).

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.

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 ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed

PLR-113769-17                                  5

by an appropriate party. While this office has not verified any of the material submitted
in support of the request for ruling, it is subject to verification on examination.

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,




                                       Shareen S. Pflanz
                                       Senior Technician Reviewer, Branch 5
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)