IRS grants late affiliated-group election for personal service corporations

Plain-English summary

A medical-services group restructured under a new corporate parent and continued using the cash method based on qualified personal service corporation treatment. The parent intended to elect under Section 448(d)(4)(C) to treat all affiliated-group members as one taxpayer for the employee-ownership test, but its tax adviser failed to attach the election statement to the first-year return. The group consistently filed as though the election had been made, and the affected year was already closed under the assessment limitation period. The IRS found that the discretionary relief standards were satisfied. It granted the parent 60 days to file an amended return with the required election statement, while expressing no opinion on whether the group actually qualified for the election or the cash method.

Ruling snapshot

• Question: Could the parent make a late election to aggregate its affiliated group for the qualified personal service corporation ownership test?
• Outcome: Approved.
• Key authorities: IRC § 448(d)(4)(C); Treas. Reg. §§ 1.448-1T, 301.9100-1, 301.9100-3, and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202130012 [Third Party Communication:
Release Date: 7/30/2021 Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
------------------------------------------------ ---------------------------, ID No. ------------
--------------------------------------- Telephone Number:
------------------------ --------------------
Refer Reply To:
----------------------------------------- CC:ITA:B06
PLR-127075-20
Date:
April 30, 2021

Legend

P: -------------------------------------------------

S1: ------------------------------------------------------

S2: ------------------------------------------------------

S3: --------------------------------------------------

Tax Advisor: ------------------------------------

Accounting Firm: ---------------------------

Date 1: --------

Date 2: --------------------------

Date 3: --------

Date 4: -------

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

This letter responds to a private letter ruling, submitted by P on behalf of itself and its
subsidiaries S1,S2, and S3 requesting an extension of time under §§ 301.9100-1
and 301.9100-3 of the of the Procedure and Administration Regulations to make an
election under § 448(d)(4)(C) of the Internal Revenue Code to treat all members of P’s
affiliated group as a single taxpayer for purposes of the ownership test in § 448(d)(2)(B),
PLR-127075-20 2

effective for the taxable year Date 1. This 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 P.
FACTS
P is the common parent of an affiliated group of corporations that is comprised of P and
its wholly-owned subsidiaries S1, S2, and S3.
Prior to Date 1, S1 elected to be taxed as a stand-alone C corporation. At that time, S1
was 100% owned by individual medical physicians who were also employed by S1 to
provide physician medical services. S1 believed it met the requirements to be treated
as a qualified personal service corporation for purposes of § 448(d)(2) and filed its
returns as a qualified personal service corporation using the overall cash method of
accounting.
During Date 1, the management of S1 modified its entity ownership structure to include
additional entities. The following three new entities were formed: (1) P, which elected to
be taxed as a C corporation, was formed by the contribution of 100% of the shares of
S1 stock to P; (2) S2, which elected to be taxed as a C corporation and was intended to
be operated as a medical services provider entity; and (3) S3 which elected to be taxed
as a C corporation and was intended to be operated as a medical services provider
entity. After the restructuring, P owned S1, S2, and S3.
As a result of the restructuring, substantially all of the activities performed by each of
S1, S2, and S3 involved the performance of services in healthcare. Additionally, 100%
of P’s stock was held directly (or indirectly) by employees performing services in
healthcare for S1, S2, and S3.
P informed Tax Advisor that it intended to continue to be treated as a qualified personal
service corporation for Federal tax purposes after the restructuring in order to continue
to use the cash method of accounting. P relied on Tax Advisor to provide advice
regarding the preparation and filing of the Federal income returns, including any
statements that were required to be attached to the return to reflect P’s intent to
continue to be treated as a qualified personal service corporation and be eligible to
continue to use the overall cash method of accounting.
For the Date 1 tax year, Tax Advisor prepared separate Forms 1120, U.S. Corporation
Income Tax Return, for P, S1, S2 and S3. The Forms 1120 reflected that each of the
entities were qualified personal service corporations using the overall cash method of
accounting.
For the Date 2 tax years, Tax Advisor prepared a consolidated Form 1120 for P, S1, S2,
and S3 reflecting which reflected that the entities were qualified personal service
corporations using the overall cash method of accounting.
During Date 4, prior to Tax Advisor filing a consolidated Form 1120 for Date 3 tax year,
Tax Advisor informed P that the Tax Advisor failed to attach an election statement on
PLR-127075-20 3

the Date 1 tax return. Upon realizing the error, P engaged Accounting Firm to request
relief to make a late election.
The taxable year in which the election should have been made is closed by the period
of limitations on assessment under § 6501(a). P represents that the granting of relief
will not result in P having a lower Federal income tax liability in the aggregate than it
would have had if the election had been properly made. P consistently filed its Federal
income tax returns as if the requirements had been met.
RULING REQUESTED
P requests an extension of time pursuant to § 301.9100-3 to make an election under
§ 448(d)(4)(C) to treat all members of its affiliated group as a single taxpayer for
purposes of the ownership test in § 448(d)(2)(B).
LAW AND ANAYLSIS
Section 448(a)(1) generally provides that, in the case of a C corporation, taxable income
shall not be computed under the cash method of accounting. Section 448(b) provides
exceptions to the limitation on the use of the cash method of accounting by a C
corporation. For instance, § 448(b)(2) provides that § 448(a)(1) shall not apply to
qualified personal service corporations.
Section 448(d)(2) defines the term “qualified personal service corporation” to mean any
corporation (A) substantially all the activities of which involve the performance of
services in the fields of health, law, engineering, architecture, accounting, actuarial
science, performing arts, or consulting, and (B) substantially all the stock of which (by
value) meets certain employee-ownership requirements.
Section 1.448-1T(e)(3) of the Income Tax Regulations provides that the term “qualified
personal service corporation” means any corporation that meets the function test of
§ 1.448-1T(e)(4), and the ownership test of § 1.448-1T(e)(5).
Section 1.448-1T(e)(4)(i) provides that a corporation meets the function test if
substantially all the corporation’s activities for a taxable year involve the performance of
services in health, law, engineering, architecture, accounting, actuarial science,
performing arts, or consulting. Substantially all of the activities of a corporation are
involved in the performance of services in a qualifying field only if 95% or more of the
time spent by employees of the corporation, serving in their capacity as such, is devoted
to the performance of services in a qualifying field.
Section 1.448-1T(e)(5)(i) provides that a corporation meets the ownership test if at all
times during the taxable year, substantially all the corporation’s stock, by value, is held,
directly or indirectly, by (A) employees performing services for such corporation in
connection with activities involving a field described in § 1.448-1T(e)(4); (B) retired
employees who had performed such services for such corporation; (C) the estate of any
individual described in § 1.448-1T(e)(5)(i)(A) or (B); or (D) any other person who
acquired such stock by reason of the death of an individual described in § 1.448-
1T(e)(5)(i)(A) or (B), but only for the 2-year period beginning on the date of the death of
PLR-127075-20 4

such individual. For purposes of the ownership test, “substantially all” means an
amount equal to or greater than 95%.
Section 448(d)(4)(C) provides that at the election of the common parent of an affiliated
group (within the meaning of § 1504(a)), all members of such group may be treated as 1
taxpayer for purposes of § 448(d)(2)(B) if 90% or more of the activities of such group
involve the performance of services in the same field described in § 448(d)(2)(A).
Section 301.9100-7T(a)(2)(i)(A) provides, in relevant part, that the election
under § 448(d)(4)(C) must be made by the due date (taking extensions into account) of
the tax return for the first taxable year for which the election is to be effective.

Section 301.9100-7T(a)(3) provides that the election under § 448(d)(4)(C) shall be
made by attaching a statement to the tax return for the taxable year for which the
election is to be effective. The statement shall (A) contain the name, address and
taxpayer identification number of the electing taxpayer, (B) identify the election, (C)
indicate the section of the Code under which the election is made, (D) specify, as
applicable, the period for which the election is being made and/or the property or other
items to which the election is to apply, and (E) provide any information required by the
relevant statutory provisions and any information necessary to show that the taxpayer is
entitled to make the election.

Under section 301.9100-1, the Commissioner has discretion to grant a reasonable
extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a
regulatory election.
Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an election. Section
301.9100-2 provides automatic extensions 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.
Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be
granted when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
relief will not prejudice the interests of the government.
CONCLUSION
Based solely on the facts and representations submitted, we conclude that the
requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, P is
granted 60 calendar days from the date of this letter to make the election
under § 448(d)(4)(C) to treat all members of its affiliated group, S1, S2 and S3, as a
single taxpayer for purposes of the ownership test in § 448(d)(2)(B), effective for the
taxable year ended Date1. This election must be made by P filing an amended Federal
income tax return for the taxable year ended Date 1, with the written election statement
required by § 301.9100-7T(a)(3). P should attach a copy of this letter to the amended
Federal income tax return.
PLR-127075-20 5

Except as specifically set forth above, we express no opinion concerning the Federal
tax consequences of the facts described above under any other provisions of the Code
(including other subsections of § 448). Specifically, no opinion is expressed or implied
as to whether P, S1, S2, or S3 are qualified personal service corporations
under § 448(d)(2) and the regulations thereunder, or whether P, S1, S2, or S3 qualify to
make the election under § 448(d)(4)(C). Moreover, no opinion is expressed or implied
as to whether P, S1, S2, or S3 are prohibited from using the cash method of accounting
under § 448 or any other section of the Code or regulations.
The ruling contained in this letter is based upon information and representations
submitted by P and accompanied by a penalty of perjury statement executed by an
appropriate party.
This letter ruling is directed only to the taxpayer requesting 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 each of P’s authorized representative.

                                       Sincerely,



                                       Christina A. Morrison
                                       Senior Technician Reviewer, Branch 6
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)

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