Extension granted to file a late LIFO election (Form 970) after a partnership liquidation

Plain-English summary

A taxpayer owned an interest in a partnership that used the last-in, first-out
(LIFO) method to value its inventory. When the partnership liquidated, its LIFO
inventory was distributed to the taxpayer, who then had inventory for the first
time and began using LIFO for both tax and financial reporting. To use LIFO, a
taxpayer must file Form 970 with its return, but this taxpayer did not, wrongly
assuming the partnership's earlier Form 970 covered it. An outside accounting
firm caught the mistake, and the taxpayer promptly asked the IRS for an
extension of time under the section 301.9100-3 relief rules. The IRS granted 45
days to file the missing Form 970 and treat it as timely, finding the taxpayer
acted reasonably and in good faith and that relief would not prejudice the
government. The IRS was careful to note it was not deciding whether the
taxpayer may actually use LIFO, whether the form was even required, or whether
the distribution was a liquidating distribution. This matters because the LIFO
method can produce meaningful tax deferral, and a missed election form would
otherwise jeopardize it.

Ruling snapshot

• Question: Should the IRS grant an extension of time to file a late Form 970 LIFO election after the taxpayer mistakenly relied on a partnership's prior filing?
• Outcome: approved (45-day extension to file Form 970 granted under Treas. Reg. § 301.9100-3)
• Key authorities: IRC § 472; Treas. Reg. §§ 1.472-3, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201847009 Third Party Communication: None
Release Date: 11/23/2018 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------------- ----------------------------, ID No. -------------

-------------- Telephone Number:
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Refer Reply To:
------------------------------ CC:ITA:B06
---------------------------------- PLR-122398-18
Date:
August 14, 2018

LEGEND

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

Tax Year = -------

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

This letter is in reply to a request for a private letter ruling made by Taxpayer. Taxpayer
requests an extension of time under sections 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to file Form 970, Application to Use LIFO
Inventory Method, for the Tax Year.

                                                 FACTS

Prior to the Tax Year, Taxpayer owned an interest in a partnership. During the Tax
Year the partnership liquidated and the partnership’s inventory, which had previously
been accounted for using the last-in-first-out (LIFO) inventory method, was distributed to
Taxpayer. Prior to the Tax Year Taxpayer did not own inventory. Taxpayer began to
use the LIFO inventory method for both tax and financial reporting purposes for the Tax
Year and all subsequent tax years. However, Taxpayer failed to file Form 970 with its
tax return for the Tax Year. Taxpayer assumed the Form 970 which was attached to
the partnership’s return in a previous year satisfied the necessary requirements for
PLR-122398-18 2

Taxpayer to use the LIFO inventory method. It was not until a review of Taxpayer’s
accounting methods by an outside accounting firm that the error became apparent.

After realizing that Taxpayer failed to file the necessary Form 970, it promptly filed this
request for a private letter ruling.

                              RULING REQUESTED

Taxpayer requests an extension of time to file Form 970 and for it to be considered
timely for the Tax Year under sections 301.9100-1 and 301.9100-3.

                               LAW AND ANALYSIS

Section 472 of the Internal Revenue Code provides that a taxpayer may use the LIFO
method in inventorying goods specified in an application to use such method, filed at
such time, and in such manner, as the Secretary may prescribe.

Section 1.472-3 of the Income Tax Regulations provides that the LIFO inventory method
may be adopted and used only if the taxpayer files with its income tax return for the
taxable year as of the close of which the method is first to be used a statement of its
election to use such inventory method. The statement is to be made on Form 970.

Section 301.9100-1(c) provides that the Commissioner has the discretion to grant a
reasonable extension of time under the rules set forth in sections 301.9100-2 and
301.9100-3 to make certain regulatory elections. Section 301.9100-1(b) defines a
regulatory election as an election whose due date is prescribed by regulations published
in the Federal Register, or in a revenue ruling, revenue procedure, notice, or
announcement published in the Internal Revenue Bulletin.

Section 301.9100-2 provides for automatic extensions of time for making certain
elections. Section 301.9100-3 provides for extensions of time for making elections that
do not meet the requirements of section 301.9100-2.

The requested election is a regulatory election as defined under section 301.9100-1(b)
because the due date of the election is prescribed in section 1.472-3. Taxpayer’s
request is analyzed under the requirements of section 301.9100-3 because the
automatic provisions of section 301.9100-2 are not applicable.

Requests for relief under section 301.9100-3 will be granted when a taxpayer provides
evidence to establish to the satisfaction of the Commissioner (1) that the taxpayer acted
reasonably and in good faith, and (2) that granting relief will not prejudice the interest of
the government. See section 301.9100-3(a).
PLR-122398-18 3

Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer: (i) requests relief before the failure to make a
regulatory election is discovered by the Internal Revenue Service (IRS); (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, the taxpayer
was unaware of the necessity of the election; (iv) reasonably relied on written advice of
the IRS; 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.

Section 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 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 and chose not to file the election; or (iii)
uses hindsight in requesting 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). The
section also provides that, if the tax consequences of more than one taxpayer are
affected by the election, the government’s interests are prejudiced if extending the time
for making the election may result in the affected taxpayers, in the aggregate, having a
lower tax liability than if the election had been timely made

Further, section 301.9100-3(c)(1)(ii) provides, in part, that the interests of the
government are ordinarily prejudiced if the taxable year in which the regulatory election
should be 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

On the basis of Taxpayer’s representations, we conclude that the requirements of
section 301.9100-3 have been satisfied. Accordingly, we hereby grant an extension of
time for Taxpayer to file the missing Form 970 for the Tax Year. This extension shall be
for a period of 45 days from the date of this ruling. Please attach a copy of this ruling to
the Form 970 filed pursuant to this private letter ruling request.

Except as expressly set forth above, this office neither expresses nor implies any
opinion concerning the tax consequences of the facts described above under any other
PLR-122398-18 4

provision of the Code or regulations. Specifically, we have no opinion, either express or
implied: (1) as to whether Taxpayer may permissibly use the LIFO inventory method;
(2) as to whether Taxpayer has correctly used or is correctly using the LIFO inventory
method; (3) as to whether Taxpayer was required to file a Form 970 in order to use the
LIFO inventory method; (4) as to whether the partnership was or is required to file a
Form 970; (5) as to whether the partnership’s distribution of assets to Taxpayer was a
liquidating distribution.

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
an appropriate party. While this office has not verified any of the material submitted in
support of this request for an extension of time to file the required Form 970, all material
is subject to verification on examination.

This ruling is directed only to Taxpayer who requested it. Section 6110(k)(3) 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 Taxpayer’s authorized representatives.

                                    Sincerely,



                                    Cheryl L. Oseekey
                                    Senior Counsel, Branch 6
                                    Office of Associate Chief Counsel
                                    (Income Tax & Accounting)

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