IRS Grants Relief for Late Election to Change Taxable Year Due to Majority Owner's Death

IRS Grants Relief for Late Tax Year Election After Majority Owner's Death

The IRS granted discretionary relief under Section 301.9100-3 of the Procedure and Administration Regulations to a taxpayer who sought to make a late election to change its taxable year via Form 1128. The taxpayer requested an extension of time to file Form 1128 to adopt a taxable year ending on Date 2, effective for Year 1, after its majority owner died and its tax advisor erroneously failed to file the election. The IRS ruled in the taxpayer’s favor, signaling that unforeseen events—such as a majority owner’s death combined with professional error—may justify relief for late regulatory elections. This decision underscores that taxpayers facing similar circumstances could petition the IRS for discretionary relief under Section 301.9100-3, provided they demonstrate reasonable cause and other mitigating factors.

The Taxpayer's Request: A Late Election to Align with the Estate's Tax Year

The taxpayer, a partnership, had historically filed its federal tax returns on a taxable year ending Date 3, a calendar year. Its majority owner, who held more than 50% of the partnership’s capital and profits interests, died on Date 4. The majority owner’s estate subsequently filed its own federal tax return, selecting a taxable year ending Date 5, a fiscal year. Under Section 706(b)(1)(B)(i), which requires partnerships to adopt the taxable year of the majority interest unless an exception applies, the taxpayer was statutorily obligated to align its taxable year with that of the estate.

The taxpayer’s tax advisor, a qualified professional retained to prepare its federal tax return for Year 1, became aware of this requirement only shortly after the original due date for the taxpayer’s Year 1 return (Date 6). The advisor did not file the taxpayer’s Year 1 return or the required Form 1128 to elect a taxable year ending Date 2 by the statutory deadline (Date 5), nor did the advisor request a filing extension. The advisor’s failure was not due to any lack of diligence or prompt action by the taxpayer itself. Upon realizing the oversight during its own review, the taxpayer promptly filed a request for relief with the IRS on Date 1, which occurred less than 90 days after the missed deadline for Form 1128.

IRS Ruling: Relief Granted Under § 301.9100-3

The IRS granted discretionary relief under § 301.9100-3, which allows the Commissioner to extend the time to make a regulatory election when the taxpayer acted reasonably and in good faith and the grant of relief would not prejudice the government’s interests. This section applies to late elections that do not qualify for automatic relief under § 301.9100-2, such as changes to a partnership’s required taxable year under § 706(b).

The IRS concluded the taxpayer met the two-pronged test in § 301.9100-3(a): first, that the taxpayer acted reasonably and in good faith, and second, that granting relief would not prejudice the interests of the Government. The agency emphasized that the taxpayer’s reliance on a qualified tax advisor who failed to file the required Form 1128 by the statutory deadline satisfied the “reasonable and in good faith” standard. The IRS noted that the advisor’s omission was not due to any lack of diligence by the taxpayer itself, and the taxpayer promptly sought relief upon discovering the oversight—further evidence of good faith conduct.

The IRS also determined that granting relief would not prejudice the government’s interests under § 301.9100-3(c)(1). The agency applied the anti-prejudice standard in § 301.9100-3(c)(1)(i), which prohibits relief if it would result in affected taxpayers having a lower aggregate tax liability than if the election had been timely made. Here, the IRS found no such prejudice because the requested change to the partnership’s taxable year did not alter the timing or amount of tax owed in prior or future periods. Additionally, the IRS applied § 301.9100-3(c)(1)(ii), which bars relief if the tax year at issue is closed by the statute of limitations. The taxpayer’s request was filed well within the statute of limitations for all relevant years, eliminating any risk of prejudice from untimely assessment.

The IRS also considered the 90-day filing window in § 301.9100-3(c)(3), which deems prejudice to exist if a request for an accounting period regulatory election is filed more than 90 days after the due date for Form 1128. The taxpayer’s request was submitted within 90 days of the missed deadline, avoiding the rebuttable presumption of prejudice under this subsection. The IRS did not find any “unusual and compelling circumstances” that would override the 90-day rule, but the timely filing of the relief request weighed in favor of granting relief.

The IRS’s analysis incorporated Rev. Proc. 2006-46, which governs automatic accounting period changes, and confirmed that the taxpayer’s request did not qualify for automatic relief under that revenue procedure. However, the IRS proceeded to evaluate the taxpayer’s request under the discretionary standards of § 301.9100-3, finding that all conditions were satisfied. The agency also noted that the taxpayer’s Form 1128, once approved, would be processed by the Ogden Service Center in Utah, as the partnership’s returns are filed there. The IRS directed all future communications regarding the matter to the Ogden Service Center, as the application for relief had been forwarded for final processing.

Why the IRS Granted Relief: Key Facts That Swung the Decision

The IRS granted discretionary relief under § 301.9100-3, which permits the Service to grant relief for late regulatory elections when the taxpayer acted reasonably and in good faith and the granting of relief would not prejudice the government. The agency’s decision hinged on five discrete facts that aligned precisely with the regulatory standards.

First, the majority owner’s death created an unforeseen disruption in the partnership’s governance, preventing timely compliance with the tax year election deadline. The IRS has consistently recognized that death of a key decision-maker constitutes an extraordinary and uncontrollable event that may warrant relief under § 301.9100-3, as it disrupts normal business operations and tax compliance processes.

Second, the taxpayer’s qualified tax advisor committed an error in advising on the election deadline, and the advisor acted promptly to correct the mistake once discovered. The IRS has emphasized in prior rulings that professional reliance, particularly when coupled with corrective action, supports a finding of reasonable cause under § 301.9100-3. The advisor’s involvement demonstrated that the taxpayer did not act negligently or intentionally disregard the filing requirement.

Third, the taxpayer relied on the advice of a qualified tax professional, a factor the IRS has repeatedly cited as evidence of good faith. In prior PLRs, the Service has granted relief where taxpayers demonstrated that they sought and followed professional guidance, even when the guidance proved erroneous. This reliance mitigates concerns about willful neglect or disregard of filing obligations.

Fourth, the request for relief was filed within 90 days of the missed deadline, a timing factor that the IRS views favorably under § 301.9100-3. While the regulation does not impose a strict deadline for discretionary relief, prompt corrective action—especially within the first 90 days—signals a good-faith effort to remedy the omission and reduces the risk of prejudice to the government.

Fifth, the IRS determined that granting relief would not prejudice the government’s interests. The agency confirmed that no lower tax liability resulted from the late election and that the statute of limitations remained open for all relevant tax years. The absence of financial detriment to the Treasury is a critical factor under § 301.9100-3, as the regulation explicitly requires that relief not undermine the government’s ability to assess or collect tax.

These facts collectively satisfied the IRS’s discretionary standards, leading the Service to conclude that the taxpayer had acted reasonably and in good faith and that the late election should be permitted. The agency’s approval of the Form 1128, once processed by the Ogden Service Center, formalized the relief under Rev. Proc. 2006-46, ensuring the partnership’s tax year change would be recognized prospectively.

Implications for Taxpayers: When Can Relief Be Granted for Late Elections?

The IRS’s decision in this PLR underscores that discretionary relief under Section 301.9100-3—which governs late regulatory elections—remains a highly fact-specific inquiry, but one where taxpayers may still prevail when they demonstrate reasonable cause and good faith. This ruling provides practical guidance for practitioners navigating late elections, particularly for partnerships and estates where taxable year alignment is critical.

Relief under Section 301.9100-3 is not a blanket remedy but is most likely to be granted in situations where the taxpayer’s delay stems from unforeseen events, reliance on a tax professional, or administrative oversight—provided the taxpayer acts promptly to seek relief. The IRS emphasized in its ruling that the taxpayer’s timely request for a PLR and the absence of prejudice to the government’s ability to assess or collect tax were pivotal factors. This suggests that taxpayers who file for relief as soon as the issue is discovered—rather than waiting for an audit or examination—stand a better chance of success. The IRS’s willingness to grant relief in this case hinged on the specific facts: the majority owner’s death created a unique and unforeseen circumstance that disrupted the partnership’s ability to comply with the original deadline. Taxpayers in similar situations—such as those facing natural disasters, sudden incapacitation, or errors by a tax advisor—may find this ruling instructive, but they must document the cause of the delay meticulously and file for relief without undue delay.

Crucially, this PLR does not set a precedent and cannot be cited as authority under Section 6110(k)(3), which explicitly prohibits the use of PLRs as legal precedent. Taxpayers and practitioners must therefore treat this ruling as illustrative rather than binding. The IRS’s caveat—that it expresses "no opinion concerning the federal income tax consequences" beyond the specific facts presented—reinforces the need for individualized advice. A taxpayer in a different factual scenario, even one seemingly similar, may not receive the same outcome. This underscores the importance of consulting a tax advisor before relying on this PLR for strategy. The advisor’s role is not just to file the PLR request but to assess the strength of the taxpayer’s position, gather supporting documentation, and ensure the request is filed before the IRS raises the issue in an examination.

Industries and taxpayers most likely to benefit from this ruling include partnerships and estates, where taxable year elections are common and often hinge on majority interest rules under Section 706(b). For partnerships, the majority interest taxable year is the default unless an exception applies, such as a Section 444 election for a fiscal year. Estates, meanwhile, frequently grapple with elections like the QTIP marital deduction under Section 2056(b)(7), where late filings can result in loss of tax benefits. The IRS’s willingness to grant relief in this case—despite the late filing—suggests that estates and partnerships with unique circumstances (e.g., sudden death of a partner, administrative errors in estate administration) may have a pathway to relief, provided they meet the reasonable cause and good faith standards.

The ruling also highlights the practical mechanics of securing relief, particularly the role of Form 1128 and Revenue Procedure 2006-46. Taxpayers seeking to change their taxable year must file Form 1128 with the Ogden Service Center, and the IRS’s approval formalizes the change prospectively. This process is distinct from automatic relief under Section 301.9100-2, which applies to specific elections filed within a 6–12 month window. For partnerships and estates, Form 1128 is the gateway to compliance, and the IRS’s approval ensures the change is recognized by the Service. Practitioners should note that electronic filing of Form 1128 is now mandatory for partnerships and S corporations as of 2024, per IRS Announcement 2023-12, which streamlines the process but also tightens compliance deadlines.

The implications of this PLR extend beyond the immediate facts. Taxpayers and advisors should view it as a cautionary tale about the risks of late elections and the narrow window for discretionary relief. The IRS’s decision to grant relief in this case was driven by exceptional circumstances, but the broader lesson is clear: proactive compliance is the best defense. Taxpayers who miss deadlines—whether for a Section 754 step-up election, a QTIP election, or a Section 444 fiscal year election—face significant risks, including disallowed deductions, penalties, and loss of tax benefits. The IRS’s recent enforcement trends, as reflected in Chief Counsel Memoranda and Tax Court cases, show a growing intolerance for late elections, particularly where no reasonable cause exists.

In summary, this PLR serves as a roadmap for taxpayers seeking relief for late elections, but it is not a guarantee of success. The key takeaways are act promptly, document thoroughly, and consult a tax advisor early. For partnerships and estates, where taxable year elections are common, this ruling offers a glimmer of hope in otherwise rigid compliance regimes—but only if the taxpayer can demonstrate reasonable cause and good faith. The IRS’s decision to grant relief in this case was driven by specific, verifiable facts, and taxpayers in similar situations must ensure their own circumstances meet the same high bar.