On December 1, 2023, the Internal Revenue Service (IRS) released two private letter rulings (PLRs) that considered taxpayer requests to file an extension of time to make a regulatory election within the meaning of Treas. Reg. §301.9100-1(b). The IRS denied one of the taxpayer’s requests, and granted the other one. This pair of rulings demonstrates the scope of relief available to taxpayers under Treas. Reg. §301.9100-3, and, specifically, the different standards applicable to requests pertaining to general elections and those pertaining to changes in tax accounting methods or periods.
Background on 9100 relief
The IRS may exercise its discretion to grant a reasonable extension of time to take corrective action when a regulatory or statutory election has not been made, and in certain circumstances, when a taxpayer seeks to prospectively reverse an irrevocable election under the rules set forth in Treasury Regulation §§301.9100-1, -2 and -3. These regulations delineate the scope of relief available to taxpayers. The standards for relief vary based on type of election, and the rules are nuanced with many exceptions. Most importantly, relief is at the IRS’s discretion. Thus, a taxpayer must provide the requisite background information to persuade the IRS that relief should be granted.
Under Treas. Reg. § 301.9100-3, the IRS will grant an extension if (1) the taxpayer provides evidence establishing that the taxpayer acted reasonably and in good faith, and (2) the grant of relief will not prejudice the interests of the government.1 With respect to the first requirement, a taxpayer is deemed to have acted reasonably and in good faith if one of the following conditions is satisfied: (1) the taxpayer requests relief before the IRS discovers its failure to make the election; (2) the failure to make the election was based on intervening events beyond the taxpayer’s control; (3) the taxpayer was unaware of the election after exercising reasonable diligence; (4) the taxpayer reasonably relied on the written advice of the IRS; or (5) the taxpayer reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election.2 In Vines v. Commissioner,3 the Tax Court found that any of these criteria are sufficient to show that a taxpayer acted reasonably and in good faith. Although one factor is generally sufficient, demonstrating that other factors exist make relief more likely. Additionally, a taxpayer is not considered to have relied on a qualified tax professional if the taxpayer knew or should have known the tax professional was either not competent or not aware of all of the facts.4
Even if the taxpayer meets one of these good faith scenarios, the taxpayer will be deemed not to have acted reasonably or 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 Section 6662; (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.5
With regard to the second requirement, the interests of the government generally are deemed prejudiced if the grant of an extension would result in the taxpayer having a lower tax liability or if the taxable year in which the election should have been made, or any taxable years that would have been affected by the election were it timely made, are closed by the period of limitations on assessment under Section 6501(a).6
A different standard applies to accounting method and accounting period elections, under which the government’s interests are presumed to be prejudiced except in “unusual and compelling circumstances.”7 The “unusual and compelling” standard is not defined in the regulations and is determined at the Commissioner’s discretion on a case-by-case basis in light of all applicable facts and circumstances.8
Extension granted
In PLR-104942-23,9 a partnership that was formed to invest in qualified opportunity zone property and to serve as a qualified opportunity fund (QOF) requested an extension of time to file its Form 8996 to elect to be certified as a QOF. The taxpayer had hired an accounting firm to prepare and file its income tax return, including Form 8996. However, the accounting firm failed to file the forms due to an administrative oversight, resulting in the taxpayer’s failure to make a timely election to self-certify as a QOF. Upon learning of this failure, the taxpayer retained a second accounting firm to file these forms and to seek a ruling request for an extension of time. The taxpayer represented under penalties of perjury that granting this relief would not result in a lower tax liability for the impacted year.
The IRS determined, based on the taxpayer’s facts and representations, that the taxpayer had acted reasonably and in good faith, and that the grant of relief would not prejudice the government’s interests. Consequently, the taxpayer’s Form 8996 was considered timely filed.
Extension denied
In PLR-105325-23,10 an S Corporation requested an extension of time to file its original and duplicate Forms 3115 related to requests to change its methods of accounting under Sections 263A and 472 using the automatic procedures prescribed in Rev. Proc. 2015-13. Due to multiple events, including confusion caused by COVID-19, the taxpayer’s failure to provide its accounting firm with a Form 8879, and a key manager’s departure from the accounting firm prior to the filing deadline, the taxpayer failed to timely file its tax return, as well as the original and duplicate copies of the Forms 3115. When the taxpayer discovered this failure, it filed its tax return and the Forms 3115, but waited nearly a year to submit its request for an extension of time to file the Forms 3115.
Because the taxpayer’s request pertained to an extension of time to file an accounting method change, the taxpayer was required to demonstrate “unusual and compelling” circumstances to avoid deemed prejudice to the government. Weighing the taxpayer’s request for an extension of time against the government’s policy of promoting efficient tax administration, the IRS considered the taxpayer’s desire to correct the mistake, the need to provide a limited period of time for perfecting accounting methods, and the reasons for the taxpayer’s mistake. This analysis resulted in a determination that the taxpayer failed to show unusual and compelling circumstances. Therefore, it was deemed an extension of time would prejudice the government’s interests, and the IRS denied the extension request. Had the taxpayer timely filed its federal income tax return, or included the required Form 3115 with its return, or sought relief upon discovery of its mistake, relief may have been granted.
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1 Treas. Reg. §301.9100-3(a).
2 Treas. Reg. §301.9100-3(b)(1).
3 126 T.C. 279 (2006), in which the Tax Court permitted a late election, finding that neither the taxpayer nor his CPA were aware of the mark-to-market election as of the date it was required to be made and the taxpayer made no securities trades between the due date and date of late-filed election, and for this reason, gained no advantage or benefit of hindsight from delayed election.
4 Treas. Reg. §301.9100-3(b)(2).
5 Treas. Reg. § 301.9100-3(b)(3).
6 Treas. Reg. § 301.9100-3(c)(1).
7 Treas. Reg. § 301.9100-3(c)(2).
8 T.D. 8742, 1998-1 C.B. 388 (Feb. 2, 1998).
9 I.R.S. P.L.R.104942-23 (Dec. 1, 2023).
10 I.R.S. P.L.R. 105325-23 (Dec. 1, 2023); see also I.R.S. P.L.R. 202324001(2023) (denying a taxpayer’s request for an extension of time to elect the safe harbor under Rev. Proc. 2011-29 to deduct 70% of a success-based fee because (i) the taxpayer was informed of the election and its consequences in all material aspects but chose not to make the election and the taxpayer had the benefit of hindsight)
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