IRS grants 60 days for two late consent-dividend elections

Plain-English summary

A corporation sought to make consent-dividend elections for two prior tax years. A consent dividend is a hypothetical distribution that consenting shareholders treat as an actual dividend and that the corporation includes in its dividends-paid deduction. The corporation’s original accountant prepared its returns but did not advise it about the election or the related Forms 972 and 973. A later accountant identified the omission while reviewing earlier returns. The IRS found reasonable reliance on a tax professional, no hindsight, no attempt to change a penalty-sensitive return position, and no prejudice to the government. It granted 60 days to file the forms needed to make the IRC § 565 elections for both years.

Ruling snapshot

• Question: May the corporation make consent-dividend elections after the regulatory filing deadline for two prior years?
• Outcome: Approved (60-day extension granted).
• Key authorities: IRC §§ 561 and 565; Treas. Reg. §§ 1.565-1 and 301.9100-1 through 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202136003 Third Party Communication: None
Release Date: 9/10/2021 Date of Communication: Not Applicable
Index Number: 565.00-00, 9100.00-00
Person To Contact:
--------------------------------- --------------------, ID No. -----------------
------------------------------------- Telephone Number:
---------------------------- --------------------
--------------------------- Refer Reply To:
CC:ITA:B01
PLR-128320-20
In Re: ---------------------------------------------------- Date:
------------------------------------------------------------ June 11, 2021

Taxpayer = ------------------------------------------------------------------------------
State = ------------------
Date1 = ---------------------
Date2 = ---------------------
Date3 = ---------------------
Date4 = --------------
Date5 = ---------------------
A = ---
B = ---
C = ---
D = --------------------
E = ----------------------
F = -----------------------------------------------------
G = ------------------
H = ----------------
Accountant1 = ------------------------------
Accountant2 = ------------------------

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

This letter responds to your letter, dated December 4, 2020 and supplemental
correspondence, requesting an extension of time under §§ 301.9100-1 and 301.9100-3
of the Procedure and Administration Regulations for Taxpayer to make a late consent
dividend election pursuant to § 565 of the Internal Revenue Code.

                                                    FACTS

Taxpayer represents the facts as follows:
PLR-128320-20 2

Taxpayer, a corporation, is organized and incorporated in State. For the taxable year
ending Date1, Taxpayer was owned A% each by D and E, and for the taxable year
ending Date2, Taxpayer was owned B% each by D and E and C% by F. Taxpayer
timely filed its income tax returns on Form 1120 for the taxable years ending Date1 and
Date2.

Taxpayer hired Accountant1 to advise on all tax matters, prepare the corporate and
individual income tax returns, and ensure its compliance with Federal tax filing
obligations. Accordingly, Accountant1 prepared and filed Taxpayer’s income tax returns
for the taxable years ending Date1 and Date2 with assistance from G, the former CFO
of Taxpayer. In the course of preparing the tax returns at issue, Accountant1 did not
consider or consult with any member of Taxpayer about the use of a consent dividend
under § 565 as an alternative means for reducing accumulated taxable income as
defined under § 533 due to the fact that Taxpayer’s income tax liability was already
properly deducted by allowable business expenses. Taxpayer achieved the same tax
liability result as the tax liability result that would have occurred if the consent dividend
election was timely filed. Further, no member of Taxpayer, including G, had any
knowledge regarding an option of a consent dividend and the related impact on the
accumulated earnings tax and relied upon Accountant1, who failed to advise Taxpayer
to make the consent dividend election.

In Date3, Taxpayer hired a new CFO, H. In Date4, H hired Accountant2 to assist in the
preparation of Taxpayer’s tax return for the taxable year ended Date5. In the course of
preparing this tax return, Accountant2 reviewed the prior year Federal income tax
returns of Taxpayer, and concluded that Taxpayer should have declared a consent
dividend under § 565 along with filing Forms 972, Consent of Shareholder to Include
Specific Amount in Gross Income and Forms 973, Corporation Claim for Deduction for
Consent Dividends, on those prior year tax returns. Accordingly, after Accountant2
discussed this with H, H recommended to D and E that Taxpayer should request an
extension of time to make a consent dividend election for the taxable years ending
Date1 and Date2. Taxpayer represents that upon the granting of this request, Taxpayer
will file the applicable amended Federal income tax returns for Taxpayer, including
Forms 972, Consent of Shareholder to Include Specific Amount in Gross Income and
Forms 973, Corporation Claim for Deduction for Consent Dividends for the taxable
years ending Date1 and Date2.

                              LAW AND ANALYSIS

Section 565(a) provides that if any person owns consent stock (as defined in §
565(f)(1)) in a corporation on the last day of the taxable year of such corporation, and
such person agrees, in a consent filed with the return of such corporation in accordance
with the regulations, to treat as a dividend the amount specified in such consent, the
amount so specified shall, except as provided in § 565(b), constitute a consent dividend
for purposes of § 561 (relating to the deduction for dividends paid).
PLR-128320-20 3

Section 1.565-1(a) of the Income Tax Regulations provides that the dividends paid
deduction, as defined in § 561, includes the consent dividends for the taxable year.
A consent dividend is a hypothetical distribution (as distinguished from an actual
distribution) made by certain corporations to any person who owns consent stock on the
last day of the taxable year of such corporation and who agrees to treat the hypothetical
distribution as an actual dividend, subject to specified limitations, by filing a consent at
the time and in the manner specified in § 1.565-1(b). Section 1.565-1(b)(3) provides that
a consent may be filed not later than the due date of the corporation's income tax return
for the taxable year for which the dividends paid deduction is claimed. Under Rev. Rul.
78-296, 1978-2 C.B. 183, the due date for purposes of § 1.565-1(b)(3) includes the
extended due date of a return filed pursuant to an extension of the time to file.

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
regulations 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 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that 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 certain regulatory elections.

Section 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which § 301.9100-2 expressly permits automatic
extensions. 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 that granting relief will not prejudice the interests
of the government.

Section § 301.9100-3(b)(1) states that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer: (1) requests relief before the failure to
make the regulatory election is discovered by the Service, (2) failed to make the election
because of intervening events beyond the taxpayer's control, (3) failed to make the
election because, after exercising due diligence, the taxpayer was unaware of the
necessity for the election, (4) reasonably relied on the written advice of the Service, or
(5) 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.
PLR-128320-20 4

Under § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably
and in good faith if the taxpayer: (1) 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 (taking into account § 1.6664-2(c)(3)) and the new position
requires or permits a regulatory election for which relief is requested, (2) was informed
in all material respects of the required election and related tax consequences, but chose
not to file the election, or (3) 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.

Taxpayer has represented that it is not seeking to alter a return position for which an
accuracy-related penalty has been or could be imposed under § 6662 at the time
Taxpayer requests relief, and was not informed in all material respects of the required
election, and its related tax consequences, but chose not to file the election.
Furthermore, Taxpayer has represented that it is not using hindsight in requesting relief
and that specific facts have not changed since the original deadline that made the
election advantageous to Taxpayer.

Section § 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. Section § 301.9100-3(c)(1)(i) provides, in part, 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). 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 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 these criteria, the interests of the government are not prejudiced in this case.

                                   CONCLUSION

Based solely on the facts and representations submitted, we conclude that Taxpayer
acted reasonably and in good faith, and granting relief will not prejudice the interests of
the government. Accordingly, the consent of the Commissioner is hereby granted for an
extension of time to file the tax forms necessary to make the § 565 consent dividend
election for the taxable years ending Date1 and Date2. This extension shall be for a
period of 60 days from the date of this ruling.

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.
PLR-128320-20 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 ruling should be attached to Taxpayer’s federal tax returns for the tax
years affected. 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.

In accordance with the provisions of the power of attorney currently on file with this
office, a copy of this letter is being sent to your authorized representative. We are also
sending a copy of this letter to the appropriate LB&I Official.

                                   Sincerely,

                                   Alexa T. Dubert

                                   Alexa T. Dubert
                                   Assistant to the Branch Chief, Branch 1
                                   Associate Chief Counsel
                                   (Income Tax & Accounting)

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