Late section 853 foreign-tax pass-through election by a liquidated fund allowed under 9100 relief

Plain-English summary

A mutual fund (a regulated investment company, or RIC) that holds mostly foreign stocks can elect under § 853 to pass the foreign taxes it pays through to its shareholders, who then claim the related foreign tax credit or deduction. The election has to be made on a timely filed return. Here the fund merged into another fund and liquidated, creating a short tax year, and the administrator (partly due to COVID-19 office disruptions) failed to file the extension request, so the return carrying the § 853 election was late. The fund asked the IRS for an extension under the § 301.9100-3 relief rules. The IRS granted relief, treating the late-filed Form 1120-RIC as timely for purposes of the § 853 election, because the fund reasonably relied on its administrator and relief would not prejudice the government. The ruling is limited to the timeliness of the election; it does not decide whether the fund actually qualifies as a RIC or meets the § 853 requirements.

Ruling snapshot

• Question: May the liquidated fund get an extension of time to make a late § 853 foreign-tax pass-through election?
• Outcome: Approved (late return treated as timely for the § 853 election)
• Key authorities: IRC § 853; Treas. Reg. §§ 1.853-4, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202203006 Third Party Communication: None
Release Date: 1/21/2022 Date of Communication: Not Applicable
Index Number: 853.00-00, 853.01-00,
9100.00-00 Person To Contact:
-------------------, ID No. -----------------
--------------------- Telephone Number:
------------- --------------------
-------------------------------- Refer Reply To:
------------------------- CC:FIP:B01
-------------------------------- PLR-110929-21
Date:
November 01, 2021

Legend:

Taxpayer = ---------------------------------------------------------------------------------------
-----------------------
Corporation = --------------------------------
Surviving = ---------------------------------------------------------------------------------------
Fund ---------------------
Manager = ------------------------------------------
Administrator = ---------------------------------------------------
Firm = ---------------
Date 1 = ------------------
Date 2 = ---------------------
Date 3 = ---------------------------
Date 4 = ----------------------
Date 5 = -------------------
State A = -------------
Month A = -------------------

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

   This ruling responds to a letter dated May 12, 2021 submitted on behalf of

Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to make an election under
section 853 of the Internal Revenue Code (the “Code”) for the taxable year ended on
Date 1.
PLR-110929-21 2

                                       FACTS

  Corporation is a State A corporation that is registered as an open-end investment

company under the Investment Company Act of 1940, as amended. Taxpayer was
created as an investment portfolio on Date 2 and elected under section 851(b) of the
Code to be a regulated investment company (“RIC”) beginning with its taxable year that
began on Date 2. Taxpayer uses the calendar year as its taxable year and an accrual
method of accounting for U.S. federal income tax purposes.

   On Date 1, Taxpayer transferred all its assets to Surviving Fund in exchange for

shares in Surviving Fund, which Taxpayer distributed to its shareholders in complete
liquidation of Taxpayer (the “Fund Combination”). As a result, Taxpayer had a short
taxable year ended Date 1.

    For each of its taxable years prior to the taxable year ended on Date 1, Taxpayer

made an election under section 853 to pass through to its shareholders the deduction or
credit for foreign taxes that Taxpayer paid. For its taxable year ended Date 1, Taxpayer
represents that it satisfied the requirements to make an election under section 853.

  Manager managed and advised Taxpayer pursuant to an advisory and

management agreement. Neither Manager nor Taxpayer has an internal tax
department. Administrator is Parent’s accounting agent and custodian for all series of
Parent, including Taxpayer. Taxpayer engaged Firm for U.S. tax advice and relied on
Administrator to prepare and file federal and state income tax returns and extension
requests. For Taxpayer’s taxable year ended Date 1, Administrator was engaged to
prepare Taxpayer’s (1) Form 1120-RIC, U.S. Federal Income Tax Return for Regulated
Investment Companies, and (2) Form 7004, Application for Automatic 6-month
Extension of Time to File Certain Business Income Tax, Information, And Other
Returns. The original due date for Taxpayer’s return was Date 3. Administrator drafted
the Form 7004 before Date 3 and thought that the Form 7004 was timely filed.

   In early Month A, Administrator discovered that the Form 7004 had not been

timely filed during a routine review of all filings for Corporation. There were several
factors that lead to Administrator’s failure to file Form 7004, including (1) the liquidation
of Taxpayer in the Fund Combination, which changed the due date for its return, and
(2) workplace restrictions relating to the COVID-19 emergency, which limited personnel
in the office. Because Form 7004 was not timely filed, the deadline for filing Taxpayer’s
federal income tax return, on which Taxpayer’s section 853 election was to be made,
was not extended from Date 3 to Date 4.

   On Date 5, Administrator filed Taxpayer’s Form 1120-RIC for its taxable year

ended Date 1. Taxpayer represents that the Form 1120-RIC contained, and was
consistent with, a section 853 election. Taxpayer also represents that it has issued the
written statements to its shareholders required by section 853(c) and section 1.853-3.
PLR-110929-21 3

  Taxpayer makes the following additional representations in connection with its

request for an extension of time:

   1. The request for relief was filed before the failure to make the regulatory

election was discovered by the Service.

   2. Granting the relief requested will not result in Taxpayer having a lower U.S.

federal tax liability in the aggregate for all years to which the election applies than
Taxpayer would have had if the election had been timely made (taking into account the
time value of money).

   3. Taxpayer does not seek to alter a return position for which an accuracy-related

penalty has been or could be imposed under section 6662 of the Code at the time
Taxpayer requested relief and the new position requires or permits the regulatory
election for which relief is requested.

  4. Being fully informed of the required regulatory election and related tax

consequences, Taxpayer did not choose to not file the election.

  5. Taxpayer is not using hindsight in making the decision to seek the relief

requested. No specific facts have changed since the due date for making the election
that make the election advantageous to Taxpayer.

   6. The period of limitations on assessment under section 6501(a) has not expired

for Taxpayer for the taxable year in which the election should have been filed, nor for
any taxable year(s) that would have been affected by the election had the election been
timely filed.

  In addition, affidavits on behalf of Taxpayer, Surviving Fund, Administrator, and

Firm have been provided as required by sections 301.9100-3(e)(2) and (3).

                              LAW AND ANALYSIS

   Section 853(a) provides that a RIC, more than 50 percent of the value (as

defined in section 851(c)(4)) of whose total assets at the close of the taxable year
consist of stock or securities in foreign corporations, and which meets the requirements
of section 852(a) for the taxable year, may elect the application of section 853 for the
taxable year with respect to certain taxes paid by the RIC during the taxable year to
foreign countries and possessions of the United States.

    Section 853(b)(1) provides that the electing RIC (A) is not allowed for the taxable

year any deduction under section 164(a) or any credit under section 901 for these
taxes, and (B) is allowed an addition to its dividends paid deduction for the taxable year
for the amount of these taxes.
PLR-110929-21 4

    Section 853(b)(2) provides that each shareholder of the electing RIC shall

(A) include in gross income and treat as paid by the shareholder its proportionate share
of these taxes, and (B) treat as gross income from sources within the respective foreign
countries and possessions of the United States the sum of the shareholder’s
proportionate share of these taxes and the portion of any dividend paid by the RIC that
represents income derived from sources within foreign countries or possessions of the
United States.

   Section 853(c) provides that the amount to be treated by a shareholder of the

electing RIC as the shareholder’s proportionate share of taxes paid to any foreign
country or possession of the United States, and gross income derived from sources
within any foreign country or possession of the United States, shall not exceed the
amounts so reported by the RIC in a written statement furnished to the shareholder.

   Section 1.853-4(b) of the Income Tax Regulations provides that an election

under section 853 must be made not later than the time prescribed for filing the return
(including extensions). The election, once made, is irrevocable with respect to the
dividend (or portion thereof), and the foreign taxes paid with respect thereto, to which
the election applies

   Section 1.853-4(c) requires that certain information pertinent to the election,

including, among other things, the date, form, and contents of its notice to its
shareholders, shall accompany the RIC' s timely filed federal income tax return for the
taxable year on or with a modified Form 1118.

    Section 301.9100-1(c) provides that the Commissioner has discretion to grant a

reasonable extension of time to make a regulatory election, or a statutory election (but
no more than 6 months except in the case of a taxpayer who is abroad), under all
subtitles of the Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines a
regulatory election as an election whose due date is prescribed by regulations or by a
revenue ruling, a revenue procedure, a notice, or an announcement published in the
Internal Revenue Bulletin.

    Section 301.9100-3(a) through (c)(1) sets forth rules that the Service generally

will use to determine whether, under the particular facts and circumstances of each
situation, the Commissioner will grant an extension of time for regulatory elections that
do not meet the requirements for an automatic extension under section 301.9100-2.
Section 301.9100-3(a) provides that requests for relief subject to section 301.9100-3 will
be granted when the taxpayer provides the evidence (including affidavits described in
section 301.9100-3(e)) 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.

   Section 301.9100-3(b) provides that a taxpayer generally is deemed to have

acted reasonably and in good faith if the taxpayer (i) requests relief under section
PLR-110929-21 5

301.9100-3 before the failure to make the regulatory election is discovered by the
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 (taking into account the taxpayer's experience and the complexity of the return
or issue), 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. A taxpayer will
be deemed to have not acted reasonably and in good faith, however, 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,
but chose not to file the election; or (iii) uses hindsight in requesting relief.

    Section 301.9100-3(c)(1) provides that a reasonable extension of time to make a

regulatory election will be granted 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 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 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 section 6501(a) before the taxpayer's receipt of a ruling granting
relief under section 301.9100-3.

                                   CONCLUSION

   Based on the information submitted and representations made, we conclude that

Taxpayer has satisfied the requirements for granting a reasonable extension of time to
elect under section 853 for the taxable year ended on Date 1. Accordingly, Taxpayer’s
Form 1120 RIC filed on Date 5 will be treated as a timely filed return for purposes of the
election under section 853(a).

    This ruling is limited to the timeliness of the filing of the election in section 853 of

the Code. This ruling's application is limited to the facts, representations, Code sections,
and regulations cited herein. No opinion is expressed with regard to whether Taxpayer
qualifies as a RIC or satisfies the requirements of section 853(a). No opinion is
expressed on the timeliness of Taxpayer’s tax return for any purpose other than the
section 853 election.

  This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.
PLR-110929-21 6

    In accordance with the terms of a power of attorney on file in this office, a copy of

this letter is being sent to your authorized representative.

                                   Sincerely,



                                   _________________________
                                   Steven Harrison
                                   Branch Chief, Branch 1
                                   Office of Associate Chief Counsel
                                   (Financial Institutions and Products)

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