IRS grants a late § 108(b)(5) election letting an insolvent company cut depreciable-property basis instead of its net operating losses

Plain-English summary

When debt is cancelled, the forgiven amount is normally taxable, but § 108 lets an insolvent taxpayer exclude it from income; the price is that the taxpayer must "reduce tax attributes," which by default first burns up net operating losses (NOLs). Section 108(b)(5) offers an alternative: the taxpayer can elect to instead reduce the tax basis of its depreciable property first, preserving its NOLs at the cost of smaller future depreciation deductions. That election is made by filing Form 982 with a timely return. This company, the parent of a consolidated group, was insolvent, excluded its cancellation-of-debt income, decided it wanted the § 108(b)(5) election, and actually reduced its asset basis on its books accordingly, but its accounting firm inadvertently left Form 982 off the filed return, so no valid election was made. The failure surfaced years later during due diligence for an acquisition. The company sought "9100 relief" under Treas. Reg. § 301.9100-3. The IRS granted a 45-day extension to file an amended Year 1 return with Form 982, finding the company relied reasonably on its tax professional and, because the relevant years were closed by the statute of limitations, accepting an independent auditor's certification that the Government's interests are not prejudiced. The IRS expressed no opinion on whether the company was actually insolvent or properly excluded the income. The result lets the company lock in the basis-reduction election it always intended and keep its NOLs.

Ruling snapshot

• Question: Should the IRS grant an extension under § 301.9100-3 to make a late § 108(b)(5) election (reduce depreciable-property basis instead of NOLs) by filing Form 982?
• Outcome: approved (45-day extension to file an amended Year 1 return with Form 982)
• Key authorities: IRC § 108(a)(1)(B), (b)(1), (b)(5), (d)(9); Treas. Reg. §§ 1.108-4(b), 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202048001                                              Third Party Communication: None
 Release Date: 11/27/2020                                       Date of Communication: Not Applicable
 Index Number: 108.00-00, 108.01-00,
               108.02-00, 108.02-01,                            Person To Contact:
               9100.00-00                                       ------------------, ID No. -----------------
                                                                Telephone Number:
 -------------                                                  --------------------
 --------------------                                           Refer Reply To:
 ---------------------                                          CC:ITA:B04
 --------------------------------------------                   PLR-100436-20
 ---------------------------------                              Date:
 --------------------------------                               August 31, 2020




LEGEND

Taxpayer                                     =         ---------------------------------------------------------
----------------------------------------------------------------------------
State                                        =        ------
Year 1                                       =        -------
Year 2                                       =        -------
Year 9                                       =        -------
x                                            =        -----------------
y                                            =        ------------
z                                            =        -----------------
Accounting Firm                              =        ---------------------------------------- -----
Representative                               =        ---------------------
Independent Auditor                          =        --------------------------



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


This letter responds to a letter from your authorized representative requesting an
extension of time under § 301.9100-3 of the Procedure and Administration Regulations
for Taxpayer to make a regulatory election. Specifically, Taxpayer has requested an
extension of time to make an election under § 108(b)(5) of the Internal Revenue Code
and § 1.108-4(b) of the Income Tax Regulations, with respect to discharge of
indebtedness income, effective for Taxpayer’s Year 1 federal income tax return. This
PLR-100436-20                               2



letter ruling is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-
21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.

                                         FACTS

Taxpayer, incorporated in State, files its federal income tax return reporting income on a
calendar year and uses the accrual method of accounting. Taxpayer is the common
parent of an affiliated group that files consolidated federal income tax returns. In Year
1, Taxpayer completed two debt restructuring transactions that Taxpayer represents
resulted in cancelation of indebtedness income in the amount of x , and that it was
insolvent immediately before the discharge and that the amount of the discharge did not
exceed the amount by which Taxpayer was insolvent.

Taxpayer did not have in-house personnel to prepare its federal and state income tax
returns and engaged Accounting Firm to prepare its Year 1 federal, state, and local
income tax returns. Taxpayer provided all the relevant facts relating to the income from
discharge of indebtedness to Accounting Firm. Also, Accounting Firm was engaged
(and continues to be engaged) to render an opinion on Taxpayer’s financial statements.

Accounting Firm advised Taxpayer that its federal income tax net operating loss would
be the first tax attribute to be reduced unless Taxpayer made an election under §
108(b)(5) to first reduce the adjusted tax basis of its depreciable property. After
considering its financial and tax projections, Taxpayer determined that it would be
beneficial to preserve its net operating loss and reduce its future depreciation
deductions. Taxpayer determined that this election would be made and directed
Accounting Firm to prepare its Year 1 federal income tax return in a manner consistent
with this election.

Taxpayer timely filed its federal income tax return including extension for Year 1. The
cancelation of indebtedness income was not reported on Taxpayer’s Year 1 federal
income tax return. However, Taxpayer’s return did not include Form 982, Reduction of
Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment),
which is required to make a valid election under § 108(b)(5). Nor did Taxpayer’s return
include any other statement setting forth the election under § 108(b)(5) to reduce the
basis of depreciable property.

At the beginning of Year 2, consistent with a valid § 108(b)(5) election, Taxpayer
reduced the adjusted tax basis of its depreciable fixed assets by y and the adjusted tax
basis of its amortizable § 197 intangibles by z, which equals x, the amount of income
from cancelation of indebtedness. Taxpayer represents that it had depreciable property
(including amortizable § 197 intangibles) with an adjusted tax basis, determined at the
beginning of Year 2, in excess of the amount of its cancelation of indebtedness income.
PLR-100436-20                               3



Additionally, Taxpayer has submitted contemporaneously prepared and maintained
schedules of tax depreciation and amortization reflecting the reduction of the adjusted
tax basis of its depreciable fixed assets and amortizable § 197 intangibles. Taxpayer

did not reduce its net operating loss or any net operating loss carryovers to Year 1 due
to the cancelation of indebtedness income in Year 1.

For subsequent taxable years, Taxpayer continued to engage Accounting Firm to
prepare its tax returns until a controlling interest in Taxpayer was acquired by an
unrelated party. In Year 9, during a due diligence process, it was discovered that
Taxpayer failed to file Form 982 to make a valid § 108(b)(5) election to reduce the basis
of depreciable property.

Shortly after discovering the failure to file Form 982, Taxpayer’s Representative
prepared a request for a ruling to grant an extension of time under §§ 301.9100-1 and
301.9100-3 to file Form 982 and to make the election under § 108(b)(5) with respect to
its income from cancelation of indebtedness for Year 1.

In separate affidavits, Taxpayer and Accounting Firm represent that Taxpayer had
communicated its intention to make the § 108(b)(5) election to Accounting Firm,
Accounting Firm was ultimately responsible for making the election, and
Form 982 was inadvertently omitted by Accounting Firm from Taxpayer’s Year 1 federal
income tax return.

The period of limitations on assessment under Code § 6501(a) is closed for at least
Year 1 and Year 2. However, Taxpayer has provided a statement from an Independent
Auditor as described in §301.9100-3(c)(1)(ii) confirming that the interests of the
Government are not prejudiced under the standards contained in § 301.9100-3(c)(i).

                                  LAW AND ANALYSIS

Section 108(a)(1)(B) provides that gross income does not include any amount that
would be includible in gross income by reason of the discharge of indebtedness if the
discharge occurs while the taxpayer is insolvent.

Section 108(b)(1) provides, in general, that amounts excluded from gross income under
§ 108(a)(1) will be applied to reduce the tax attributes of the taxpayer as provided in §
108(b)(2).

Section 108(b)(5)(A) permits a taxpayer to elect to apply any portion of the reduction
referred to in § 108(b)(1) to the reduction under § 1017 of the basis of the depreciable
property of the taxpayer in lieu of applying the order specified in § 108(b)(2).
PLR-100436-20                                 4



Section 108(b)(5)(B) limits the amount to which the election in § 108(b)(5)(A) applies to
an amount not exceeding the aggregate adjusted basis of the depreciable property held
by the taxpayer as of the beginning of the taxable year following the taxable year in
which the discharge occurs.

Section 108(d)(9) provides that an election under § 108(b)(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) provides, in part, that to make an election under § 108(b)(5), a
taxpayer must complete and file Form 982 together with its timely filed (including
extensions) 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 Service 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 changes 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 granting relief will not prejudice the interests of the
Government.

Section 301.9100-3(b) provides that 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, 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 will not be 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.

Section 301.9100-3(b)(3) provides that a taxpayer is deemed to have not 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 a regulatory election for which relief is requested;

(ii) was fully informed 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 original
deadline that make the election advantageous to a taxpayer, the Service will not
ordinarily grant relief.
PLR-100436-20                                5



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 interest 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. The IRS may condition a
grant of relief on the taxpayer providing the IRS with a statement from an independent
auditor certifying that the interests of the Government are not prejudiced under the
standards set forth in § 301.9100-3(c)(i).

Under the facts submitted by Taxpayer, we conclude that Taxpayer has acted
reasonably and in good faith under §301.9100-3(b). In addition, we conclude that
granting relief will not prejudice the interests of the government 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 to file an amended return to make an election under §
108(b)(5) and § 1.108-4(b) by filing Form 982 for Year 1.

The ruling granted in this letter should not have any effect on amounts reported on
Taxpayer's previously filed federal income tax returns, Taxpayer should not file
amended returns for such closed years to adjust any amounts and should only file an
amended return for Year 1 to make the election under § 108(b)(5).

                                        CAVEATS

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, including whether Taxpayer was, immediately prior to the discharge of its
indebtedness in Year 1, insolvent by an amount exceeding the amount of indebtedness
discharged and whether Taxpayer properly excluded its income from discharge of
indebtedness from its gross income pursuant to §108(a).
PLR-100436-20                                 6



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.

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 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 the Power of Attorney on file with this office, a copy of this
letter is being faxed to your authorized representative.


                                       Sincerely,



                                    Angella L. Warren
                                    Branch Chief, Branch 4
                                    Office of Associate Chief Counsel
                                    (Income Tax & Accounting)




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