IRS grants extra time to file a late LIFO inventory election after an S-corp conversion

Plain-English summary

A business that inventories goods using the last-in, first-out (LIFO) method asked
the IRS for more time to file the form that elects LIFO. The taxpayer had used LIFO
since it operated as a partnership and had elected it on Form 970. It later converted
to an S corporation (through a late S election of its own), and it says that
conversion required filing a fresh Form 970 for the first S-corporation year to keep
using LIFO. Nobody filed the new form, and the miss surfaced only when the company
switched tax advisors, even though it had kept applying LIFO the whole time. Under
the "9100 relief" standard in Treas. Reg. § 301.9100-3, the IRS found the taxpayer
acted reasonably and in good faith and that relief would not prejudice the
government, so it granted 45 days to file the missing Form 970. Section 472 governs
the LIFO election. The IRS pointedly expressed no opinion on whether the taxpayer
actually qualifies for LIFO, whether it applied LIFO correctly, or whether its earlier
S election and technical termination were proper. This is routine late-election relief.

Ruling snapshot

• Question: Should the taxpayer get an extension of time under Treas. Reg. § 301.9100-3 to file a late LIFO election on Form 970?
• Outcome: Approved (45-day extension granted)
• Key authorities: IRC § 472; Treas. Reg. § 1.472-3; Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201850017 Third Party Communication: None
Release Date: 12/14/2018 Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.11-00
Person To Contact:

• ---------------------, ID No. ------------------
• Telephone Number:
  ------------------------------------------------------------ ----------------------
  ------------------------------- Refer Reply To:
  ------------------------- CC:ITA:B06
  PLR-121270-18
  ------------------------------- Date:
  ----------------------- September 14, 2018

LEGEND

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

Shareholder 1 = ----------------------
---------------------------

Shareholder 2 = -------------------------
---------------------------

CPA = -----------------------------------------

LIFO Inventory = -----------------------------------------

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

Year 5 = -------

Year 6 = -------
PLR-121270-18 2

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

This letter is in reply to a request for a private letter ruling made by Taxpayer. Taxpayer
requests an extension of time under § 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations to file Form 970, Application to Use LIFO Inventory Method,
for Year 4.

                                       FACTS

Taxpayer represents the following facts:

Taxpayer represents that it was incorporated as a limited liability company during Year
1 and that it filed its Federal income tax returns as a partnership from Year 1 through
Year 3. Taxpayer represents that it files its Federal income tax return on a calendar
year basis.

During Year 2, Shareholder 1, an individual, who at that time owned a profit and loss
interest and no capital interest in Taxpayer, purchased all other profit, loss, and capital
interests from all other partners of Taxpayer. Simultaneous with this purchase,
Shareholder 1 gifted a certain percentage of the profit, loss, and capital interest of
Taxpayer to his spouse, Shareholder 2. Taxpayer represents that the purchase of all of
the interests in Taxpayer by Shareholder 1 resulted in a technical termination of
Taxpayer in Year 2, which caused Taxpayer to file short period returns for the portion of
Year 2 predating the technical termination, and for the portion of Year 2 following the
technical termination.

As part of Taxpayer's trade or business, it carries certain items in inventory. In Year 2,
Taxpayer elected to account for a certain subset of those inventory items under the last-
in, first-out (LIFO) method (hereinafter, the "LIFO Inventory") by filing a Form 970 along
with the tax return that it filed for portion of Year 2 following the technical termination.
Taxpayer represents that during the period that it has accounted for the LIFO inventory
using the LIFO method for tax purposes, it has also accounted for the LIFO inventory
using the LIFO method for book accounting purposes.

In Year 5, Taxpayer, with the assistance of CPA, prepared a Form 2553, Election by a
Small Business Corporation, to elect to be treated as an S corporation for the Year 4
taxable year. However, although the Form 2553 was prepared by CPA, it was never
filed by Taxpayer due to an administrative oversight. Not realizing that the Form 2553
was never filed, Taxpayer filed its Federal income tax return for the Year 4 taxable year
as though the S corporation election had been made. Only after receiving
communication from the Internal Revenue Service during Year 5 enquiring about
Taxpayer's entity status did Taxpayer and CPA realize that the Form 2553 had never
PLR-121270-18 3

been filed. Consequently, Taxpayer filed a second Form 2553 under the automatic
provisions of § 301.9100 to elect S corporation treatment for the Year 4 taxable year.

In Year 6, Taxpayer engaged another external tax advisor to prepare its Federal income
tax returns. During the transition to the new tax advisor, Taxpayer discovered that it did
not file a new Form 970 in Year 4 when it converted to being treated as an S
corporation. Taxpayer represents that, because of its conversion from a partnership to
an S corporation, it was required to file a new Form 970 in the first year that Taxpayer
was considered an S corporation in order to continue using the LIFO method. However,
despite not filing a new Form 970, Taxpayer has continued using the same LIFO
method for its LIFO Inventory that it has been using since Year 2. Therefore, Taxpayer
has filed this request for a private letter ruling requesting an extension of time to file the
missing Form 970 for Year 4.

                              RULING REQUESTED

Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-3 to file
Form 970, effective for Year 4.

                               LAW AND ANALYSIS

Section 472 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 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 §§ 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 a 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 automatic extension of time for making certain elections.
Section 301.9100-3 provides extensions of time for making elections that do not meet
the requirements of § 301.9100-2.

The requested election is a regulatory election as defined under § 301.9100-1(b)
because the due date of the election is prescribed in § 1.472-3. Taxpayer's request is
analyzed under the requirements of § 301.9100-3 because the automatic provisions of
PLR-121270-18 4

§ 301.9100-2 are not applicable.

Requests for relief under § 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 interests
of the government. See § 301.9100-3(a).

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 the
regulatory election is 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, 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.

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 was 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 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)(1)(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, § 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 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.

                                  CONCLUSION

On the basis of Taxpayer's representations, we conclude that the requirements of
§ 301.9100-3 have been satisfied. Accordingly, we hereby grant an extension of time
PLR-121270-18 5

for Taxpayer to file the missing Form 970 for Year 4. 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
provision of the Code or regulations. Specifically, we have no opinion, either expressed
or implied: (1) as to whether Taxpayer qualifies to use the LIFO inventory method, (2)
as to whether Taxpayer has been properly applying its LIFO inventory method; (3) as to
whether the purchase of all of the profit, loss, and capital interests in Taxpayer by
Shareholder 1 caused a technical termination of Taxpayer; (4) as to any Federal tax
consequences of the gift of certain profit, loss and capital interests from Shareholder 1
to Shareholder 2; (5) as to whether Taxpayer properly received relief under § 301.9100
to elect S corporation status for the Year 4 taxable year; and (6) as to whether Taxpayer
is required to file a Form 970 in Year 4 to elect to use the LIFO inventory method.

The ruling contained in this letter ruling is based upon facts and representations
submitted by Taxpayer, with accompanying penalties of perjury statements executed by
appropriate parties. 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 our office, we are sending copies
of this letter to Taxpayer's authorized representative.

                               Sincerely,



                               CHRISTINA MORRISON
                               Senior Technician Reviewer
                               Office of Associate Chief Counsel
                               (Income Tax & Accounting)

Enc.: Copy for § 6110 purposes

CC: