Time may be running out for taxpayers to correct technically deficient gain recognition agreements (GRAs) under the relief procedure contained in the Directive on Examination Action With Respect to Certain Gain Recognition Agreements, LMSB-4-0510-017 (July 26, 2010) (the Directive). Historically, many taxpayers completed their GRAs by indicating that the required fair market value and/or basis information is “available upon request.” The Internal Revenue Service (IRS) views GRAs completed in this manner to be deficient, but in the Directive gave taxpayers relief to correct any previously filed deficient GRAs until further notice. Significantly, Taxpayers seeking relief under the Directive are not required to provide an explanation for their failure to comply. The Treasury Department’s 2013-2014 Priority Guidance Plan includes final regulations under section 367, and Treasury officials recently indicated that 2013 proposed regulations addressing GRAs are in the process of being finalized in substantially similar form. So, taxpayers with GRAs that include “available upon request” should consider taking advantage of the Directive now while relief is still available.
Under the Directive, relief is available to taxpayers that timely filed initial GRAs but failed to satisfy the requirements of Treasury regulation section 1.367(a)-8(c)(2), relating to the inclusion of fair market value and/or basis information for property or shares transferred. The Directive specifically identifies as deficient a GRA in which the taxpayer states that fair market value and/or basis information is “available upon request.” Relief under the Directive is also available for all filings required to be made with respect to a timely filed GRA, including (i) any new GRA required due to a subsequent triggering event, (ii) any required waiver of the period of limitations on assessments of tax, (iii) any annual certification, and (iv) any other information required under Treasury regulation section 1.367-8.
To obtain relief under the Directive, taxpayers are required to file an amended return for the year of the failure (with a legend to indicate the return is being filed pursuant to the Directive), including the complete filing that should have been included with the original tax return and must also comply with all rules relevant to the filing of amended returns. Taxpayers are also required to file a Form 8838 with their amended return, extending the period of limitations on assessment of tax with respect to the gain on the initial transfer to the later of (i) the close of the eighth full taxable year following the year of the initial transfer, or (ii) three years after the date the amended return is filed. Finally, if a taxable year of the taxpayer is under examination, the taxpayer is required to deliver a copy of the amended return to the IRS personnel conducting the examination. If no taxable year of the taxpayer is under examination, the taxpayer is required to deliver a copy of the amended return to the IRS Director with jurisdiction over the return.
Under proposed Treasury regulation section 1.367(a)-8(p), which would apply to requests for relief submitted after the regulations are finalized, taxpayers with GRAs that do not satisfy the regulations are permitted relief if they are able to demonstrate that their failure to comply was not willful. Examples in the proposed regulations make clear, however, that the inclusion of “available upon request” for any of the required information is a willful failure to comply for which relief will not be granted. For a more detailed discussion of the proposed Treasury regulations, see the previous Sutherland Legal Alert One Shade of GRA: Proposed Regulations Foreshadow the End of the GRA Directive and Provide That “Available Upon Request” is a “Willful Failure” (February 5, 2013).