IRS Updates Late-Election Procedures

Treasury has estimated that the Code provides approximately 500 elections or election-type actions. The deadlines and procedures for making these elections vary; each election is provided separately by statute, regulation or other public guidance. Because it is sometimes difficult for taxpayers to comply with the election requirements, the IRS provides relief by allowing late statutory and regulatory elections in some circumstances. Regs. Sec. 301.9100-1 sets forth the general conditions for obtaining this relief.

Available Relief

Regs. Sec. 301.9100-1 relief can be divided into three categories. First, Regs. Sec. 301.9100-2(b) allows an automatic six-month extension from a returns due date (excluding extensions), to make regulatory or statutory elections. For example, if a calendar-year nonconsolidated corporation timely filed its return on or before March 15, and that return failed to include a statutory election (such as a Sec. 172(b) election to waive the carryback period), the taxpayer can make such election by September 15 of that same year, under Regs. Sec. 301.9100-2(b) and (c). This relief category essentially treats the taxpayer as if an extension to file had been granted and the election had been filed with that return.

The second category of relief,  under Regs. Sec. 301.9100-2(a), allows an automatic 12-month extension from the returns due date (including valid extensions), to make certain regulatory elections. The election must be filed with the original return (whether timely or not). However, this provision is available only for the specific elections listed in Regs. Sec. 301.9100-2(a)(2)(i)(ix).

The final category is the relief on which taxpayers usually rely to obtain extensions for missed regulatory elections. Regs. Sec. 301.9100-3 provides an extension to make a regulatory election if it is established that the taxpayer has acted reasonably and in good faith and that granting the relief will not prejudice the governments interests. To obtain this relief, taxpayers must follow the procedures for requesting a letter ruling and provide evidence that they have acted reasonably. Usually, such evidence consists of affidavits from taxpayers and other parties having knowledge about the events that led to the failure to make the regulatory election.

In 2002, the IRS issued approximately 500 rulings under Regs. Sec. 301.9100-3. Almost half of these related to check the box entity-classification elections under Regs. Sec. 301.7701-3(c) or Sec. 338 stock purchase elections. Approximately one-fifth of the Regs. Sec. 301.9100-3 rulings related to Secs. 1361 and 1362 for S elections or to Secs. 408 and 408A for recharacterizing the treatment of IRAs. Rulings were also issued for elections under 39 different provisions.

Simplified Procedures

Although Regs. Sec. 301.9100-3 continues to provide taxpayers a means of relief when there has been a failure to make a timely regulatory election, the IRS has attempted to streamline the procedures for obtaining certain types of relief to avoid the necessity for letter rulings in some cases.

Rev. Proc. 2003-33. Most recently, in Rev. Proc. 2003-33, the IRS announced automatic procedures for obtaining extensions to file Sec. 338 elections. The procedure grants taxpayers a 12-month extension from the date of discovering the failure to make a timely Sec. 338 election. It sets forth the specific representations and documents required to be eligible for relief, generally paralleling the representations and other evidence required to submit a letter ruling request under Regs. Sec. 301.9100-3.

Although Rev. Proc. 2003-33 may be viewed as more taxpayer-friendly in that only one submission is required and it is an automatic procedure, it raises some uncertainties and risks. Because the procedure is automatic, the taxpayer will not obtain confirmation from the Service that the submission meets Rev. Proc. 2003-33s requirements; thus, the IRS may determine on examination that the submission did not comply and deem the election invalid. Moreover, because the new procedure is the exclusive remedy available to qualifying taxpayers, it is important to ensure that submissions adequately meet its requirements. If a taxpayer is not eligible for the automatic procedure, the Regs. Sec. 301.9100-3 procedures would remain available for obtaining an extension.

Rev. Proc. 2002-59. Another recently issued procedure allows taxpayers to make late entity-classification elections under Regs. Sec. 301.7701-3(c). Rev. Proc. 2002-59 (modifying and superseding Rev. Proc. 2002-15) provides taxpayers an extension to make initial-classification elections. In Rev. Proc. 2002-59, the Service extended the deadline for making the request, which now has to be filed by the due date of the return (excluding extensions) of the entitys desired classification.

To obtain relief, the taxpayer must attach a reasonable cause statement to Form 8832, Entity Classification Election, in electing its classification. The structure provided by Rev. Proc. 2002-59 parallels the process established in Rev. Proc. 98-55 for late S elections under Secs. 1361 and 1362. However, these procedures are different from those set forth in Rev. Proc. 2003-33 and generally are more taxpayer-favorable. Note: Rev. Proc. 98-55 is superseded by Rev. Proc. 2003-43; see Tax Trends, Revised Procedures for Relief from Late S Elections, p. 440, this issue.

The procedures require only reasonable causea more flexible and simpler standard than for Sec. 338 elections. Reasonable cause can be established by statements, rather than by the detailed representations and affidavits required under Rev. Proc. 2003-33. The Service examines each late check-the-box and S submission and advises the taxpayer on whether it accepts the late election; the Sec. 338 procedure puts the taxpayer at risk in that respect. Finally, the simplified check-the-box and S election procedures are elective; the taxpayer is free to file for Regs. Sec. 301.9100-3 relief in lieu of the simplified procedure or if the IRS rejects the late election due to a lack of reasonable cause.

Relief Eligibility

Also of importance are the types of elections eligible for relief under Regs. Sec. 301.9100-3, as it may not always be clear to taxpayers that such relief is even available. For example, the IRS issued Letter Ruling 200123048its first ruling under Regs. Sec. 301.9100-3 granting a taxpayer an extension to elect under Temp. Regs. Sec. 1.1502-21T to waive the carryback period for a consolidated net operating loss (NOL). The waiver of an NOL is a statutory election not subject to regulatory relief under Regs. Sec. 301.9100-3. However, because the consolidated return regulations provide an additional requirement to make such waiver (i.e., the separate statement required by Temp. Regs. Sec. 1.1502-21T(b)(3)(i)), the Services position was that the waiver in the consolidated return context is a regulatory election and thus eligible for Regs. Sec. 301.9100-3 relief. The effect is that consolidated return filers can obtain relief for the NOL carryback waiver, but nonconsolidated return filers cannot.

Tax advisers should keep informed of the relief available under Regs. Sec. 301.9100-3 and the automatic procedures the IRS periodically announces, as many taxpayers may be in the position of missing a key election. These procedures may provide taxpayers the necessary relief to remedy such situations.

From Dan Wiles, J.D., and Ruth Perez, J.D., Washington, DC