RELIEF GIVEN FOR LATE ELECTIONS TO COMBINE REAL ESTATE ACTIVITIES
The IRS established a special procedure by which taxpayers can make a late election to treat all their real estate activities as a single activity for purposes of meeting material participation rules.
The guidance, in Revenue Procedure 2011-34, allows eligible taxpayers to avoid applying for a private letter ruling to obtain relief; however, taxpayers who do not qualify under the revenue procedure’s requirements may still seek relief via a letter ruling. The revenue procedure applies to ruling requests received by the IRS after June 13, the date it was published in IRB 2011-24, and to ruling requests pending in the IRS’ national office on that date.
Generally, under IRC § 469(c)(2), rental activities are presumptively treated as passive, restricting taxpayers’ eligibility to recognize certain losses and credits. Section 469(c)(7)(B) provides an exception from the presumption for qualifying rental real estate activities, in the form of thresholds for the amount and type of personal services performed in rental trades or businesses involving real property in which the taxpayer materially participates. Each of the taxpayer’s real estate interests is treated as a separate activity for these tests; however, Treas. Reg. § 1.469-9(g)(1) allows a qualifying taxpayer to elect to instead treat them as a single real estate activity. The election is properly made by filing a statement with the taxpayer’s original income tax return, in a form specified by Treas. Reg. § 1.469-9(g)(3). An extension of up to six months may be sought under the general regulatory election provisions of Treas. Reg. §§ 301.9100-1 through 301.9100-3.
Taxpayers may be eligible for relief under Revenue Procedure 2011-34 if they:
- Failed to make the election solely because they failed to timely meet the requirements in Treas. Reg. § 1.469-9(g) and have reasonable cause for the failure.
- Filed consistently with having made the election on any previous return that would have been affected if they had timely made the election.
- Have filed all required federal income tax returns consistent with the requested aggregation for all the years including and following the year they intend the election to be effective, and no tax returns containing positions inconsistent with the request have been filed by or with respect to the taxpayer during any of those years.
- Have timely filed each return (within six months of its due date, not including extensions) that would have been affected by the election if it had been timely made.
To request relief under the revenue procedure, the taxpayer must attach the statement required by Treas. Reg. § 1.469-9(g)(3) to an amended return for the most recent tax year and mail it to the IRS service center where the taxpayer will file a current-year income tax return. The statement must contain the declaration required by Treas. Reg. § 1.469-9(g)(3); explain the reason for the failure to file a timely election; state that the taxpayer meets the eligibility requirements set out in the revenue procedure; identify the tax year for which the late election is sought; and reference the revenue procedure in a heading. It also must contain the declaration prescribed in the revenue procedure and be dated and signed by the taxpayer.
TWO MORE CIRCUITS SIDE WITH IRS ON EXTENDED LIMITATION PERIOD FOR BASIS OVERSTATEMENT
The courts of appeals for the District of Columbia Circuit in two cases and for the Tenth Circuit in one case held that the IRS may retroactively apply regulations allowing the six-year limitation period of IRC § 6501(e), rather than the general period of three years, for assessing an understatement of gross income arising from an over statement of basis. The cases, which all overruled the Tax Court, are Intermountain Insurance Co. of Vail v. Commissioner (docket no. 10-1204, (D.C. Cir. 6/21/11)), UTAM Ltd. and DDM Management Inc. v. Commissioner (docket no. 10-1262 (D.C. Cir. 6/21/11)) and Salman Ranch Ltd. v. Commissioner (docket no. 09-9015 (10th Cir. 5/31/2011)). For previous Tax Matters coverage of Intermountain, see “Tax Court Refuses to Reconsider Overstatement of Basis Case,” Aug. 2010, page 67, and “Application of Six-Year Statute of Limitations Denied Again,” Nov. 2009, page 70).
The circuits are now widely split on the issue, with the Federal Circuit having reversed its taxpayer-friendly position in Salman (addressing other tax years than those considered by the Tenth Circuit) by granting deference (in Grapevine Imports Ltd. (docket no. 2008-5090)) to Treas. Reg. § 301.6501(e)-1(a)(1), which states that outside the context of sales of goods or services by a trade or business, an overstatement of basis constitutes an omission of income allowing the six-year assessment period. Some other circuits (including now the Tenth and the D.C. circuits) also have upheld the regulations’ validity and/or found that Colony Inc. v. Commissioner (357 U.S. 28 (1958)) does not foreclose the IRS’ position. However, some circuits have followed the Tax Court and, finding Colony controlling, refused to apply the regulations (see “Tax Matters: Circuit Split Deepens on Six-Year Period for Basis Overstatements,” JofA, May 2011, page 58). So, for those who are keeping score:
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