During 2017, the IRS released two separate private letter rulings regarding Regulated Investment Companies (RICs) requesting relief under Internal Revenue Code (IRC) Section 301.9100-1 and 301.9100-3 — also known as “9100 relief” — for not making a timely election under IRC Section 853. The letters show that, if certain facts and circumstances apply, the IRS can be flexible and extend the election deadline.
Understanding 9100 Relief and Section 853
Specifically, 9100 relief is the mechanism through which the IRS may grant an extension of time to make certain elections, if the taxpayer acted reasonably and in good faith and where the interests of the government are not prejudiced. In both letter rulings mentioned above, the RICs failed to make the appropriate tax election by the specified due date, and requested that the IRS grant 9100 relief so that the elections could be made.
IRC Section 853 allows a RIC that paid foreign taxes during the RIC’s fiscal year to pass through those taxes in the form of a foreign tax credit to the RIC’s shareholders, as opposed to deducting them in the calculation of investment company taxable income. This information is reported to investors via Form 1099-DIV reporting. The election is available to a RIC with more than 50% of the value of its total assets at the close of the year consisting of stocks or securities in foreign corporations. The election is also available for RIC fund of funds.
If the RIC chooses to make the election, the RIC will not deduct the foreign taxes in computing its investment company taxable income. The section 853 election must be made by the due date of the RIC’s income tax return, including extensions. This election is made by filing a statement of election as part of the RIC’s income tax return for the taxable year, which provides required information such as the total amount of taxable income received from foreign countries to which the election applies.
Recent Private Letter Rulings
The two private letter rulings from the IRS (201705005 and 20173401) have similar circumstances. In both, the IRS granted the requested 9100 relief to RICs that failed to make a Section 853 election in previous years. Due to a lack of appropriate communication between taxpayers and tax preparers, the RIC failed to make the election for the past four and three years, respectively. The IRS required affidavits from all involved parties, including the tax preparers, advisors and independent auditors to support the ruling. The RICs also were required to make the following representations:
- The request for relief was filed by taxpayers before the failure to make the regulatory elections was discovered by the IRS,
- Taxpayers did not seek to alter a tax return position for which an accuracy-related penalty had been or could have been imposed at the time the taxpayers requested relief, and the new tax return position required a regulatory election for which relief was requested,
- Being fully informed of the required regulatory elections and related tax consequences, taxpayers did not choose to not file the elections,
- Granting the relief did not result in the RIC’s shareholders having a lower tax liability in the aggregate for all years to which the elections applied than the RIC’s shareholders would have had if the elections had been timely made, and
- The RICs did not use hindsight in requesting relief, because no specific facts changed since the election deadline that would have made the elections more advantageous to the RIC’s shareholders.
Based on the information submitted and the representations made, both RICs were granted 9100 relief for the years in which they failed to make the Section 853 election. The IRS allowed 90 days from the date of the private letter ruling for the RICs to make the election.
Passing through foreign tax credits using Section 853 can create substantial benefits to RIC shareholders. To be eligible for this treatment, a RIC must appropriately make the election on its timely filed tax return. While not an ideal situation, these private letter rulings continue to show the willingness of the IRS to provide relief in certain circumstances. If your fund qualifies to pass through foreign tax credits to shareholders, talk with your advisors about properly making the election, or, if necessary, requesting relief from the IRS.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.