Sec. 9100 relief: new proposed and temporary regulations.

In June 1996, the IRS issued proposed and temporary regulations with respect to the standards the Service will use to grant extensions of time for making certain elections. Regs. Sec. 301.9100-1 provides that the IRS, in its discretion, on a showing of good cause, may grant a reasonable extension of the time fixed by regulations or by a revenue ruling, a revenue procedure, a notice or an announcement published in the Internal Revenue Bulletin to make an election under the Code, provided that: * The time for making the election is not expressly prescribed by statute; * The request is filed with the Service within such time as it may consider reasonable under the circumstances, and * It is shown to the IRS's satisfaction that the granting of the extension will not jeopardize the interests of the government.

Rev. Proc. 92-85 revised the standards used by the Service to grant relief under Regs. Sec. 301.9100. The temporary regulations, which were effective June 27, 1996, incorporate and expand the standards set forth in Rev. Proc. 92-85.

Automatic Extensions

As did Rev. Proc. 92-85, the temporary regulations provide an automatic 12-month extension for certain regulatory elections. These include the election to adjust basis on partnership transfer and distributions under Sec. 754; the election to use other than the required tax year under Sec. 444 and the election to use LIFO under Sec. 472. The regulations also include an automatic six-month extension from a returns due date (excluding extensions) to make regulatory or statutory elections whose deadlines are prescribed as the return's due date or its due date including extensions, if the taxpayer timely filed its return for the year the election should have been made.

To take advantage of these automatic extensions, the taxpayer must file an original or amended return for the year the election should have been made, attaching the appropriate form or statement to the return making the election. Across the top of such a return, the taxpayer must write "Filed pursuant to [section] 301.9100-2T."

Other Extensions

Requests for relief that do not qualify for the automatic procedure must be made under Temp. Regs. Sec. 301.9100-3T. Such requests will be granted if the taxpayer provides evidence to establish that it acted reasonably and in good faith and that granting relief will not prejudice the government's interests.

A taxpayer is deemed to have acted reasonably and in good faith if it: - requests relief before the failure to make the election is discovered by the IRS; - inadvertently failed to make the election because of intervening events beyond the taxpayer's control, - failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election; - reasonably relied on the written advice of the Service; or - reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election. (Note: A taxpayer will not be considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was either not competent or not aware of all of the relevant facts of the case.)

A taxpayer is deemed not to have acted reasonably and in good faith if it seeks to alter a position for which an accuracy-related penalty has been or could be imposed, the taxpayer was fully informed of the required election and related tax consequences, but chose not to file the election, or the taxpayer uses hindsight in requesting relief.

Under the regulations, the government's interests are considered prejudiced if extending the time for making the election may result in the affected taxpayer for taxpayers, if more than one taxpayer is affected by the election) having a lower tax liability in the aggregate than if the election had been timely made. The interests of the government are also ordinarily considered prejudiced if the tax year in which the election should have been made for any tax year that would have been affected by the election had it been timely made) is closed by the statute of limitations on assessment. However, the regulations provide that the IRS may condition a grant of relief on a showing by the taxpayer, certified by an independent auditor, that the taxpayer will not have a lower tax liability in the aggregate if an election is allowed.

Accounting Method and Period

Elections

Rev. Proc. 92-85 provided limited relief for requests to change accounting methods. The temporary regulations provide relief for all accounting method regulatory elections. Thus, for example, relief may now be granted for elections under Secs. 197 (amortization of goodwill and certain other intangibles) and 468A (certain nuclear decommissioning costs). The temporary regulations provide special rules governing the granting of Regs. Sec. 301.9100 relief for accounting method regulatory elections.

The regulations provide that the interests of the government are deemed prejudiced (and thus relief will not be granted) except in unusual and compelling circumstances, if:

The election requires the Service's advance written consent and the request for relief under Temp. Regs. Sec. 301.9100 is filed more than 90 days after the deadline for filing the Form 3115 or 1128; * The election requires an adjustment under Sec. 481(a) * The taxpayer is under examination, requests relief to change from an impermissible method, and granting relief will provide the taxpayer with a more favorable method of accounting or more favorable terms and conditions than it would receive if the change were made as part of the examination, or * The election provides a more favorable method of accounting or more favorable terms and conditions if the election is made by a certain date or tax year.

Procedural Requirements

A request filed pursuant to Regs. Sec. 301.9100 is a request for a letter ruling. Therefore, it should be drafted in letter format and discuss the facts attendant to the situation and any applicable statutory provisions. Attached to the request should be any documentation pertinent to the transaction giving rise to the request, a letter ruling checklist, a penalties of perjury statement, a user fee and a Sec. 6110 deletions statement. In addition, the taxpayer, or the individual who acts on behalf of taxpayer, must submit a detailed affidavit describing the events that led to the failure to make the election. Finally, any accountants, attorneys or tax return preparers with knowledge of the events that to the failure to make a valid election must also submit affidavits.

Conclusion

Given the large volume of possible elections a taxpayer must consider each year, it seems only reasonable that some kind of relief be available to taxpayers who inadvertently miss an election deadline. Those that submit requests for Regs. Sec. 301.9100 relief, however, should be aware that the Service will not grant relief unless it determines that the taxpayer is entitled to actually make the election. Thus, those that request Regs. Sec. 301.9100 relief should be prepared for IRS National Office scrutiny to ensure that the taxpayer is, in fact, eligible to make the requested election.