Simplified Relief Procedures Available in Lieu of the Private Letter Ruling Process

Transcription

1 Simplified Relief Procedures Available in Lieu of the Private Letter Ruling Process Authored by Tara Ferris and Niki Wilkinson, PricewaterhouseCoopers LLP 1. Rev. Proc , Relief from Untimely Entity Classifications a. If an eligible entity needs to file a classification election to be classified differently than it would be classified under the default rules or to change its classification, Form 8832, Entity Classification Election, must be filed with the Service Center designated on the form not more than 12 months before or 75 days after the desired effective date of the classification election. b. Rev. Proc : provides guidance for an eligible entity that requests relief for a late classification election filed within 3 years and 75 days of the requested effective date of the election. i. To be eligible for relief under Rev. Proc , the entity must show that it meets the following requirements: (1) either: (a) the entity failed to obtain its requested classification as of the date of its formation or upon the entity's classification becoming relevant under Treas. Reg (d) solely because Form 8832 was not filed timely under Treas. Reg (c)(1)(iii); or (b) the entity failed to obtain its requested change in classification solely because Form 8832 was not filed timely under Treas. Reg (c)(1)(iii); (2) the eligible entity has not filed a federal tax or information return for the first year in which the election was intended because the due date has not passed for such return; or has timely filed all required federal tax and information returns consistent with its requested classification for all of the years it intended the requested election to be effective and no inconsistent tax or information returns have been filed by or with respect to it during any of the taxable years; (3) reasonable cause exists for its failure to timely make the entity classification election; and (4) 3 years and 75 days from the requested effective date of the classification election have not passed. ii. Form 8832, revised January 2011, Part II, allows taxpayers requesting relief under Rev. Proc to provide an explanation as to why the entity failed to timely make its entity classification rather than attach a separate statement. 2. Rev. Proc , Relief from Failure to Timely File IRC 1445 FIRPTA Certifications a. Generally, the disposition of a U.S. real property interest by a foreign person (the transferor or seller) is subject to income tax withholding by the transferee (the buyer) at the rate of 10 percent of the total amount realized. i. Under certain circumstances, described in IRC 1445(b) and Treas. Reg (d), no withholding is required. These circumstances include but are not limited to: (1) the corporation furnishes to the transferee a certification pursuant to Treas. Reg (h) stating under penalty of perjury that the interest in the domestic corporation is not a U.S. real property interest (i.e., the corporation has not been a U.S. real property holding corporation during the shorter of the period after June 18, 1980 during which the interest was held or the 5-year period ending on the date of disposition); and (2) if the transferor 1 Rev. Proc supersedes Rev. Proc and extends late entity classification relief to both initial classification elections and changes in classification elections.

2 notifies the transferee that the transferor is not required to recognize any gain or loss on the transfer by reason of the operation of a nonrecognition provision in the IRC or a U.S. treaty. b. Rev. Proc provides relief for a late filing related to establishing that a corporation is not a U.S. real property holding corporation or that a nonrecognition provision under the IRC or a U.S. treaty applies to the transfer, thereby negating any withholding tax liability. i. To request relief, the taxpayer must file the applicable completed statement or notice with the IRS as soon as the taxpayer becomes aware of the failure to file and include an additional statement explaining that reasonable cause exists for the failure to timely file. The package must be sent to the Ogden FIRPTA Unit. Upon receipt of a completed application, the IRS will determine whether the requirements for granting additional time have been satisfied. The taxpayer will be notified within 120 days of filing the request if the IRS determines that the failure to comply was not due to reasonable cause or if the IRS needs additional time to make the determination. 3. Treas. Reg (d)-1(c)(1), Relief from failure to File Dual Consolidated Loss Annual Certification and Domestic Use Election and Agreement a. A dual consolidated loss (DCL) is a net operating loss (NOL) of a domestic corporation that is subject to income tax in the U.S. and a foreign country. The DCL rules prevent a U.S. corporation from using an NOL to offset income both in the U.S. and in a foreign country. The domestic use limitation does not apply if the taxpayer can demonstrate that there is no possibility of foreign use and if the taxpayer files a detailed statement with the IRS demonstrating that no foreign use occurred in the year the loss was incurred and that no foreign use can occur in any year by any means. The election statement and the agreement must be attached to, and filed by the due date (including extensions) of, the taxpayer s U.S. income tax return for the taxable year in which the dual consolidated loss is incurred. Further, each year that a taxpayer has a domestic use agreement in place, the taxpayer must file a certification with its U.S. income tax return. b. For DCLs incurred in years beginning on or after April 18, , Treas. Reg (d)-8(a) requires the election statement and the agreement must be attached to, and filed by the due date (including extensions) of, the taxpayer s U.S. income tax return for the taxable year in which the dual consolidated loss is incurred and must be signed under penalties of perjury. Additionally, for years beginning on or after April 17, , under Treas. Reg (d)-6(g), taxpayers are required to annually certify that there has been no foreign use of the dual consolidated loss. c. Treas. Reg (d)-1(c)(2)(i) provides that a taxpayer may request reasonable cause relief to file the missed DCL election, agreement, statement, rebuttal, computation or other information. i. Treas. Reg (d)-8(b)(3) provides the relief procedure for all untimely DCL filings, including those filed with respect to DCLs incurred in taxable years beginning before the application date of the new DCL regulations. In general, the taxpayer must file the Domestic Use Election, Agreement and/or Annual Certifications along with a statement requesting reasonable cause relief with an amended federal income tax return. This package must be sent to the Area Director, Field Examination, Small Business/Self Employed or the Director of Field Operations, Large and Mid-Size Business (Director) having jurisdiction of the taxpayer's income tax return for the taxable year. 2 For DCLs incurred in years before April 18, 2007, Treas. Reg (g)(2)(i) is applicable and requires slightly different information on the election statement. 3 For DCLs incurred in years before April 18, 2007, Treas. Reg (g)(2)(vi)(B) sets forth the requirements for an annual certification.

3 4. Rev. Proc , Relief from Untimely IRC 338(g) or 338(h)(10) Election a. An IRC 338(g) or 338(h)(10) election must be made on or before the 15th day of the ninth month beginning after the month in which the acquisition date occurs. The election is made by filing Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases, with the Service Center where the federal income tax return that includes the deemed sale gain is filed. i. In the case of a 338(g) election, the election is made by the purchasing corporation. In the case of a 338(h)(10) election, the election is made jointly by the purchasing corporation and the selling group. Once made, the election is irrevocable. b. Rev. Proc permits taxpayer to request an automatic 12-month extension of time to file an election under IRC 338(g) or 338(h)(10). i. To be eligible for relief under Rev. Proc , the required filer(s) must file Form 8023 no later than 12 months after the discovery of the failure to file. In addition, the filer(s) must attach the following to Form 8023: (1) a statement signed under penalties of perjury that all filers meet the requirements for relief as outline by the Rev. Proc.; (2) an affidavit and a declaration from the individual(s) who act on behalf of the required filer(s) regarding tax matters and describing the events that led to the failure to make a valid election and to the discovery of the failure; and (3) an affidavit and a declaration from the individuals having knowledge or information about the events that led to the failure to make a valid election and to the discovery of the failure. 5. Rev. Proc , Relief from Untimely S Corporation Election a. A corporation desiring to be classified as an S corporation must make an election by filing a completed Form 2553, Election by a Small Business Corporation, at any time during the preceding taxable year or at any time during the taxable year and on or before the 15th day of the 3rd month of the taxable year. See IRC 1362(b)(1) and Treas. Reg (a)(2). b. Rev. Proc provides an additional simplified method for taxpayers to request relief for late S corporation elections, supplementing Rev. Proc i. To be eligible for relief under Rev. Proc , the entity must satisfy the following requirements: (1) entity failed to qualify for its intended status as an S corporation on the first day that status was desired because of a failure to timely file a Form 2553; (2) the entity has reasonable cause for the failure to timely file Form 2553; (3) the entity has not filed a tax return for the first taxable year for which the S corporation election was intended; (4) the application for relief is filed no more than 6 months after the due date of the entity's tax return (excluding extensions) for the first taxable year for which the S corporation election was intended; and (5) all affected persons have not reported inconsistently with the S corporation election having been made for the year the S corporation election was intended. c. Rev. Proc also provides a simplified method for taxpayers to request relief for a late S corporation election and a late corporate classification election intended to be effective on the same date that the S corporation election was intended to be effective, supplementing Rev. Proc See Treas. Reg (a)(2)(i); (c)(1)(v)(C) (eligible entity filing a timely S Corporation election is deemed to have made an election under the check-the-box regulations to be classified as an association if the entity meets the requirements to qualify as a small business corporation). i. In addition to the requirements described above, an entity requesting relief for a late S corporation election and a late corporate classification election must also show the following: (1) the entity is an eligible entity; (2) the entity intended to be classified as a

4 corporation as of the intended effective date of the S corporation election; and (3) the entity failed to qualify as a corporation because Form 8832 was not timely filed under Treas. Reg (c)(1)(i) or was not deemed to have been filed under Treas. Reg (c)(1)(v)(C); and () the entity has reasonable cause for the failure to timely file Form d. Procedurally, to request relief under Rev. Proc , the entity must file a properly completed Form 2553 with a Form 1120-S for the first taxable year the entity intended to be an S corporation; the forms must be filed together no later than 6 months after the due date of the tax return (excluding extensions) of the entity for the first taxable year in which the S corporation election was intended; and Form 2553 must include a statement establishing reasonable cause for the failure to timely file the S corporation election and a statement explaining the reason for the failure to file the entity classification election timely in the case of late S corporation election and a late corporate classification election. 6. Rev. Proc , Relief for Foreign Eligible Entities from Improper Entity Classification Elections a. Rev. Proc provides relief for certain foreign eligible entities that timely filed Form 8832 to be classified as a partnership or a disregarded entity but it was later determined that the entity was not eligible to elect such status because of the entity's number of owners for federal income tax purposes. i. For example, an entity filed an otherwise valid Form 8832 electing to be classified as a partnership but later determines it had only one owner for federal income tax purposes on the effective date of the election. Alternatively, an entity filed an otherwise valid Form 8832 electing to be classified as a disregarded entity but later determines it had more than one owner for federal income tax purposes on the effective date of the election. ii. If relief is granted under Rev. Proc , the entity will be treated as having made an election to be treated as a either partnership or disregarded entity (as appropriate) on the effective date requested on the originally filed Form 8832 rather than being treated as an association taxable as a corporation. b. To be eligible for relief, the foreign eligible entity must be a qualified entity. A business entity is a qualified entity if all of the following conditions apply: (1) the business entity is an eligible entity under Treas. Reg (a) (i.e., not a per se corporation); (2) the business entity is foreign under Treas. Reg (a); (3) the business entity's classification either by default under Treas. Reg (b)(2)(i)(B) for a newly formed or newly relevant eligible entity or by election under Treas. Reg (c) for an existing relevant entity would be or was an association taxable as a corporation; (4) the business entity filed an otherwise valid Form 8832 electing to be treated for federal income tax purposes as a partnership or as a as a disregarded entity based on the reasonable assumption that it had two or more or owners or that it had a single owner, respectively, as of the effective date of the election; (5) for federal income tax purposes, either: (a) the business entity and its actual and purported owner(s) has treated the entity consistently with the election made on the otherwise valid Form 8832 and on all filed information and tax returns; or (b) no information or tax returns were required to be filed since the effective date of the election made on the otherwise valid Form 8832; and (6) the period of limitations on assessments of IRC 6501(a) has not expired for any taxable year of the business entity or its actual and purported owner(s) affected by the election made on the otherwise valid Form c. Procedurally, the entity and its actual owners must file any original or amended returns including information returns consistent with the requested treatment of the entity for any taxable year that would have been affected; all required information and amended returns must be filed before the close of the period of limitations on assessments of IRC 6501(a) for the relevant taxable year; and a corrected Form 8832 must be filed with the appropriate Service Center with the statement Filed Pursuant To Revenue Procedure included on the top of the corrected

5 Form Additionally, a copy of the corrected Form 8832 must be attached to the owner s amended return for the taxable year during which the original election was made as required under Treas. Reg (c)(1)(ii). 7. Memorandum: Directive on Examination Action With Respect to Certain Gain Recognition Agreements, Relief from Failure to File Gain Recognition Agreement (available at a. Every U.S. transferor that is a 5-percent shareholder in a foreign corporation that transfers domestic or foreign stock or securities to another foreign corporation, must immediately after the transfer enter into a 5-year gain recognition agreement (GRA) with respect to the transferred stock or securities to avoid recognition of the gain realized on the transfer under IRC 367. i. Treas. Reg (a)-8 sets forth the information that must be contained in the GRA and requires that the GRA be attached to and filed by the due date (including extensions) of the taxpayer's timely filed income tax return for the taxable year of the initial transfer or triggering event. See Treas. Reg (a)-8(d)(1)-(2). b. The Directive provides relief for a timely filed document that purports to be a GRA with respect to an initial transfer that fail to satisfy the requirements of Treas. Reg (a)-8(c)(2); and filings required to be made during the term of a timely-filed GRA, including: (1) any new GRA required due to a subsequent triggering event; (2) any required waiver of the period of limitations on assessment; (3) any annual certification; and (4) any other information required by Treas. Reg (a)-8. i. The Directive instructs examiners to treat any failure to correctly or timely file a document subject to the memorandum as satisfying regulation's timeliness requirement if the taxpayer files an amended return for the taxable year for the failure that includes a complete and accurate GRA that should have been included with the original return for the taxable year and includes the statement Filed pursuant to Directive of Examination Action with respect to Certain Gain Recognition Agreement on the first page of the amended return. The amended return must also include a Form 8838, Consent to Extend the Time to Assess Tax under Section 367- Gain Recognition Agreement, extending the period of limitations on assessment to the later of: (a) the close of the eighth full taxable year following the initial transfer; or (b) 3 years from the date the required information is provided to the IRS. The amended return must be filed with the same Service Center that the U.S. transferor filed its original return for the taxable year. ii. iii. If applicable, the taxpayer must also comply with the notice requirements of Treas. Reg (a)-8(p)(2)(ii)(A) and (B). Please note, taxpayers requesting relief under the Directive are not required to provide an explanation of the reasons for the failure to timely file or comply c. For all other relief requests, including any original GRA or document purporting to be an original GRA that was not timely filed, a taxpayer may request relief for reasonable cause under Treas. Reg (a)-8(p).

6 8. Other Administrative Relief Requests 4 : a. Rev. Proc (a simplified method for taxpayers to request relief for late S corporation elections, Electing Small Business Trust elections, Qualified Subchapter S Trust elections and Qualified Subchapter S Subsidiary elections); b. Rev. Proc (a simplified method for taxpayers to request relief for a late S corporation election and a late corporate classification election that was intended to be effective on the same date that the S corporation election was intended to be effective); c. Rev. Proc (a simplified alternate method for certain taxpayers to obtain an extension of time under Treas. Reg to make an allocation of the generationskipping transfer exemption pursuant to IRC 2642(b)(1)); d. Rev. Proc (a simplified alternate method for certain executors and trustees to request relief to make a late reverse qualified terminable interest property election under IRC 2652); e. Rev. Proc (a simplified procedure for a Qualified S Corporation to request relief for a late qualified subchapter S subsidiary election); f. Rev. Proc (extends the time for issuing authorities to make a carryforward election of unused private activity bond volume cap under IRC 146(f)); and g. Rev. Proc (provides relief to issuing authorities that failed to file Form 8328, Carryforward Election of Unused Private Activity Bond Volume Cap, under IRC 146(f) for years before 2003 because it was not filed by someone other than the issuing authority); Please note, if the entity or any affected person fails to qualify for relief under the above Revenue Procedures, the entity or affected person could potentially apply for relief utilizing other methods, such as the letter ruling process (e.g., Treas. Reg and -3). 4 The above list is not exclusive but merely intended to provide information regarding commonly used administrative relief requests that do not require taxpayers to file letter ruling requests under Treasury Regulations and