IRS Grants Extension to Exclude Income from Discharge of Indebtedness.
(Parker Tax Publishing December 18, 2014)

Taxpayer's accountant failed to discuss the possibility of an election to exclude cancellation of debt income prior to filing Form 1040; in a private ruling the IRS granted an extension of time to file the election. PLR 201447011.

Background

The taxpayer owns an interest in LLC, a limited liability company that is treated as a partnership for federal income tax purposes. The taxpayer entered into a Final Forbearance Agreement that resulted in cancellation of indebtedness income (COD). In Year 1, the taxpayer received a Schedule K-1 from LLC that showed COD attributable to the taxpayer based on his ownership interest in LLC.

The taxpayer represented that as a partner of LLC, he was eligible to exclude COD income pursuant to Code Sec. 108(c), which relates to qualified real property business indebtedness. This exclusion required the taxpayer to make an election pursuant to Code Sec. 108(c)(3)(C) and Reg. Sec. 1.108-5(b) on a timely filed Year 1 Form 1040.

The taxpayer's Year 1 Form 1040 was prepared by Firm, a qualified tax professional with many years of experience. However, due to an oversight, Firm did not discuss the election with the taxpayer nor did Firm make the election on the taxpayer's behalf to reduce the basis of depreciable real property and to exclude income resulting from the discharge of qualified real property business indebtedness.

In Year 2, it was discovered that the taxpayer had been eligible to make the election relating to COD income in Year 1. After realizing Firm's oversight in not including the Form 982 required to make the Code Sec. 108(c)(3)(C) election on the taxpayer's Year 1 Form 1040, the taxpayer requested a ruling granting an extension of time to make the election.

Analysis

Code Sec. 108(a)(1)(D) provides that gross income does not include any amount would be includible in gross income by reason of the discharge of indebtedness if, in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness. Code Sec. 108(c)(3)(C) requires a taxpayer to make an election to exclude COD income under Code Sec. 108(a)(1)(D).

Pursuant to Reg. Sec. 1.108-5(b), this election is made on a completed Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Reg. Sec. 301.9100-3(a) provides that requests for extension of time for regulatory elections will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government. Under Reg. Sec. 301.9100-3(b) a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional and the tax professional failed to make, or advise the taxpayer to make, the election.

Based on the taxpayer's representations, the IRS concluded that the taxpayer met the criteria of Reg. Sec. 301.9100-3 and granted an extension of 45 days from the date of the PLR for the taxpayer to file an amended return to make the election under Code Sec. 108(c)(3)(C) and Reg. Sec. 1.108-5(b).

For a discussion of cancellation of debt income, see Parker Tax ¶72,300. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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