Incomplete accounting-method application could be corrected

Plain-English summary

A consolidated group acquired several engineering and architectural services companies that had used the cash method as qualified personal service corporations. Its accounting firm advised changing the subsidiaries to the accrual method and using the deferral method for eligible advance payments. The firm filed Form 3115 with the consolidated return and included the section 481(a) adjustment in income, but the attached original omitted required statements and the firm failed to send a signed duplicate to the IRS office in Ogden. The IRS found unusual and compelling circumstances, the higher standard that applies to late accounting-method elections. It granted 60 days to file an amended return containing a complete Form 3115 and a signed duplicate with the Ogden office, while prohibiting any other return revision. The IRS did not decide whether the changes qualified for automatic consent or whether the proposed methods were permissible.

Ruling snapshot

• Question: May the consolidated group replace an incomplete Form 3115 and file the missing signed duplicate for its subsidiaries' accounting-method changes?
• Outcome: Approved, with corrected filings due within 60 days
• Key authorities: IRC §§ 446(e), 451(c)(2), 481(a); Treas. Reg. §§ 1.451-8(c), 301.9100-1, 301.9100-3(c)(2); Rev. Proc. 2015-13

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202350003                                            Third Party Communication: None
Release Date: 12/15/2023                                     Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                             Person To Contact:
----------------------------------                           ----------------, ID No. -----------------
------------------------------------------                   Telephone Number:
---------------------------                                  --------------------
                                                             Refer Reply To:
--------------------------------------------------           CC:ITA:B02
                                                             PLR-105918-23
-------------------------                                    Date:
                                                             September 18, 2023




Legend

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

Date A                        = ---------------------

Date B                        = --------------------------

Subsidiary A                  = --------------------------------------------------------

Date C                        = ----------------

Subsidiary B                  = ------------------------------------------------------

Subsidiary C                  = --------------------------------------------------------

Date D                        = ------------------

Subsidiary D                  = ------------------------------------------------------------

Date E                        = ------------------

Date F                        = -----------------------

Accounting Firm               = --------------------
PLR-105918-23                                         2




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

This letter is in response to a request for a private letter ruling (“Request”) submitted
Date A by Taxpayer for an extension of time, pursuant to §§ 301.9100-1 and 301.9100-
3 of the Procedure and Administration Regulations, to make elections on behalf of its
subsidiaries to change the subsidiaries’ overall method of accounting from the cash
method to the accrual method and to change to the deferral method for advance
payments under § 451(c)(2) of the Internal Revenue Code and § 1.451-8(c) of the
Income Tax Regulations for the taxable year ending on Date B. This Request is being
issued electronically as permissible under §§ 7.02(5) and 9.04(3) of Revenue Procedure
2023-1, 2023-1 I.R.B. 1, 35, 49-50.

FACTS AND REPRESENTATIONS

Taxpayer represents the following:

Taxpayer is the parent of a consolidated group that files a federal income tax return.
Taxpayer has acquired entities in the business of engineering and architectural
services. Taxpayer files its consolidated return on the basis of a calendar year and uses
an overall accrual method of accounting for federal income tax purposes.

Taxpayer acquired Subsidiary A on Date C. On Date C, Taxpayer also acquired the two
subsidiaries wholly-owned by Subsidiary A, Subsidiary B and Subsidiary C. Prior to
Taxpayer’s acquisition of Subsidiary A, Subsidiary A was the parent of a consolidated
group that reported taxable income on a consolidated income tax return that included
both Subsidiary B and Subsidiary C. On Date D, taxpayer acquired Subsidiary D.

Taxpayer filed this Request on behalf of itself and its subsidiaries, Subsidiary A,
Subsidiary B, Subsidiary C, and Subsidiary D (the “Subsidiaries”).

Taxpayer retained the services of Accounting Firm to prepare its consolidated income
tax return for the taxable year ending Date B. In Date E, Accounting Firm advised
Taxpayer that it was required to file a Form 3115 to change the overall method of
accounting for Subsidiary A, Subsidiary B, Subsidiary C, and Subsidiary D from the
cash method to the accrual method. 1

Also in Date E, Accounting Firm and Taxpayer held further consultations and Taxpayer
decided that it would request the Service’s permission to change the Subsidiaries’
method of accounting to defer recognition of eligible advance payments related to
1
 Prior to Taxpayer’s acquisition of the Subsidiaries, the Subsidiaries were qualified personal service
corporations that used the cash method pursuant to § 448(b)(2).
PLR-105918-23                                     3

certain services in accordance with the deferral method as described in § 451(c)(2) and
Treas. Reg. § 1.451-8(c). Accounting Firm prepared the Form 3115 to make both
changes using the automatic consent procedures set forth in Rev. Proc. 2015-13, 2015-
5 I.R.B. 419.2

Accounting Firm also prepared Taxpayer’s consolidated federal income tax return (Form
1120) for the taxable year ending Date B. On Date F, after receiving Taxpayer’s
approval, Accounting Firm electronically filed the Form 3115 with Taxpayer’s
consolidated Form 1120, which included in income a positive adjustment under § 481(a)
with regard to the Form 3115 attached to the return. 3 However, Accounting Firm failed
to submit a signed copy of Taxpayer’s Form 3115 to the IRS Office in Ogden, Utah, as
required by § 6.03(1)(a)(i) of Rev. Proc. 2015-13. Moreover, Taxpayer represents that
the original Form 3115 that was attached to its consolidated Form 1120 was missing
some required statements. Taxpayer represents that it was unaware of this failure.

When Taxpayer and Accounting Firm realized that Accounting Firm failed to submit a
copy of the Form 3115 to the IRS Office in Ogden, Utah, and that the Form 3115 filed
with the original return was incomplete, Taxpayer filed this request to obtain from the
Commissioner an extension of time under Treas. Reg. §§ 301.9100-1(c) and 301.9100-
3 to file the Form 3115.

RULING REQUESTED

Taxpayer requests an extension of time under Treas. Reg. §§ 301.9100-1(c) and
301.9100-3 to (i) file an amended federal income tax return for the taxable year ending
Date B, which will include a completed original Form 3115 with all required statements
and (ii) submit a separate signed copy of the completed Form 3115 with the IRS Office
in Ogden, Utah.

LAW AND ANALYSIS

Rev. Proc. 2015-13 provides the procedures by which a taxpayer may obtain automatic
consent to change certain accounting methods. A taxpayer complying with all the
applicable provisions of this revenue procedure has obtained the consent of the
Commissioner to change its method of accounting under § 446(e) and the Income Tax
Regulations thereunder.

Section 6.03(1)(a)(i) of Rev. Proc. 2015-13 provides that a taxpayer changing an
accounting method pursuant to Rev. Proc. 2015-13 must complete a Form 3115 and file

2
  Taxpayer’s application to change the overall method of accounting and the deferral method of
accounting for advance payments were set forth on one Form 3115. See § 6.03(1)(b) of Rev. Proc. 2015-
13 (permitting taxpayers in some cases to submit multiple concurrent automatic changes on one Form
3115).
3
  Taxpayer’s Form 1120, Schedules M-3 set forth the adjustments under § 481(a) attributable to each
Subsidiary.
PLR-105918-23                                 4

that Form 3115 in duplicate. The original must be attached to the taxpayer's timely filed
(including any extensions) original federal income tax return for the year of change, and
a copy (with signature) of the Form 3115 must be filed with the IRS Office in Ogden,
Utah, no earlier than the first day of the requested year of change and no later than
when the original Form 3115 is filed with the federal income tax return for the requested
year of change.

Treas. Reg. § 301.9100-1(c) provides that the Commissioner has the discretion to grant
a reasonable extension of time under the rules set forth in Treas. Reg. §§ 301.9100-2
and 301.9100-3 to make certain regulatory elections. Treas. Reg. § 301.9100-1(b)
defines a regulatory election as an election whose due date is prescribed by regulations
published in the Federal Register, or in a revenue ruling, revenue procedure, notice, or
announcement published in the Internal Revenue Bulletin.

Treas. Reg. § 301.9100-2 provides for automatic extensions of time for making certain
elections. Treas. Reg. § 301.9100-3 provides for extensions of time for making elections
that do not meet the requirements of Treas. Reg. § 301.9100-2.

Requests for relief under Treas. Reg. § 301.9100-3 will be granted when a taxpayer
provides evidence to establish to the satisfaction of the Commissioner (i) that the
taxpayer acted reasonably and in good faith and (ii) that granting relief will not prejudice
the interest of the government. See Treas. Reg. § 301.9100-3(a).

Treas. Reg. § 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 a 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, the
taxpayer was unaware of the necessity of the election;

(iv) reasonably relied on 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.

Treas. Reg. § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted
reasonably and in good faith if the taxpayer:
PLR-105918-23                                  5

(i) 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 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.

Treas. Reg. § 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 tax years affected by the election than the taxpayer would have had if
the election had been timely made. 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.

Treas. Reg. § 301.9100-3(c)(1)(ii) provides, in part, that the interests of the government
are ordinarily prejudiced if the tax year in which the regulatory election should have
been made, or any tax 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.

Treas. Reg. § 301.9100-3(c)(2) imposes special rules for accounting method regulatory
elections. This section provides, in relevant part, that the interests of the Government
are deemed to be prejudiced except in unusual and compelling circumstances when the
accounting method regulatory election for which relief is requested is subject to the
procedure described in Treas. Reg. § 1.446-1(e)(3)(i) or the relief requires an
adjustment under § 481(a) (or would require an adjustment under § 481(a) if the
taxpayer changed to the accounting method for which relief is requested in a taxable
year subsequent to the taxable year the election should have been made).

CONCLUSION

On the basis of Taxpayer's representations, we conclude that there are unusual and
compelling circumstances, and that the requirements of Treas. Reg. §§ 301.9100-1(c)
and 301.9100-3 have been satisfied. Accordingly, we hereby grant an extension of time
for Taxpayer (i) to file an amended federal income tax return for the taxable year ending
Date B (with a complete Form 3115 attached), and (ii) to file a signed copy of that
compete Form 3115 with the IRS Office in Ogden, Utah. No other revision to this return
can be made. This extension shall be for a period of 60 days from the date of this letter
ruling.
PLR-105918-23                                             6

Except as expressly set forth above, we neither express nor imply 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, concerning whether Taxpayer and Subsidiaries are otherwise eligible to file
the Form 3115 under the automatic consent procedures of Rev. Proc. 2015-13 and the
revenue procedure providing the List of Automatic Changes for the year in issue.
Further, no opinion is expressed regarding whether Taxpayer’s proposed methods of
accounting are permissible.

The ruling contained in this letter is based upon information and representations
submitted by 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 this Request for an extension of time to file the required Form 3115, all
material is subject to verification on examination.

This ruling is directed only to Taxpayer and Subsidiary. 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 Taxpayer's authorized representatives.


                                                 Sincerely,


                                                 Robert A. Martin
                                                 Senior Technician Reviewer, Branch 2
                                                 (Income Tax & Accounting)

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