Late IC-DISC Election Salvaged Despite Missing Shareholder Consents

IRS Grants Relief for Incomplete IC-DISC Election

In a recent private letter ruling, the IRS granted an extension to a taxpayer to perfect its election to be treated as an Interest Charge Domestic International Sales Corporation (IC-DISC). The taxpayer had filed Form 4876-A, "Election To Be Treated as an Interest Charge DISC," on time but the form was incomplete because required shareholder consents were missing. The IRS granted relief under Treasury Regulation § 301.9100-3, allowing the election to be treated as timely for the taxpayer's first taxable year.

The Error: Signatures Missing on Part II

The taxpayer, seeking to operate as an Interest Charge Domestic International Sales Corporation (IC-DISC) under Internal Revenue Code Sections 991 through 997, formed the entity on the advice of an accounting firm. The accounting firm prepared Form 4876-A, "Election To Be Treated as an Interest Charge DISC," for the taxpayer's officer to execute. The officer signed Part I of the form, which represents the corporation's formal election. However, the officer was unaware—and the accounting firm did not advise—that Part II, the "Shareholders' Consent Statement," required signatures from all shareholders. Consequently, the Form 4876-A was filed with the IRS incomplete. Subsequently, the IRS rejected the taxpayer's initial return, Form 1120-IC-DISC ("Interest Charge Domestic International Sales Corporation Return"), because the IRS lacked a valid Form 4876-A on file. The taxpayer then requested relief under Treasury Regulation § 301.9100-3, which provides an extension of time for regulatory elections when the taxpayer acted reasonably and in good faith.

Regulatory Analysis: Reasonable Reliance

The taxpayer requested relief under Treasury Regulation § 301.9100-3, which provides an extension of time for regulatory elections when the taxpayer acted reasonably and in good faith.

Treasury Regulation § 301.9100-3(a) states that extensions of time for regulatory elections that do not qualify for automatic extensions must be made under its rules. Relief is granted when the taxpayer proves they acted reasonably and in good faith and that granting relief won't harm the government's interests.

According to Treasury Regulation § 301.9100-3(b)(1)(v), a taxpayer is generally considered to have acted reasonably and in good faith if they reasonably relied on a qualified tax professional who failed to make, or advise the taxpayer to make, the election. In this case, the IRS determined that the taxpayer did reasonably rely on a qualified tax professional. That professional was responsible for ensuring the IC-DISC election, via Form 4876-A, included ... required signatures from all shareholders. Consequently, the Form 4876-A was filed with the IRS incomplete. Subsequently, the IRS rejected the taxpayer's initial return, Form 1120-IC-DISC ("Interest Charge Domestic International Sales Corporation Return"), because the IRS lacked a valid Form 4876-A on file. The taxpayer then requested relief under Treasury Regulation § 301.9100-3, which provides an extension of time for regulatory elections when the taxpayer acted reasonably and in good faith.

Warning on Treaty Claims and Deemed Distributions

While granting the extension for the IC-DISC election, the IRS explicitly cautioned the taxpayer regarding Section 996(g) of the Internal Revenue Code. Section 996(g), concerning distributions to foreign shareholders, treats all DISC distributions to a nonresident alien or foreign corporation as effectively connected income (ECI) attributable to a permanent establishment (PE) in the United States. Consequently, the IRS warned the taxpayer against accepting any income tax treaty claims for reduced withholding under Sections 1441 and 1442, which govern withholding on payments to foreign persons, with respect to distributions (deemed or otherwise) of accumulated DISC income. This is because Section 996(g) effectively overrides typical treaty benefits by "deeming" a PE to exist, preventing foreign shareholders from claiming reduced withholding rates on DISC dividends. This ruling is directed only to the taxpayer requesting it and, under Section 6110(k)(3), cannot be used or cited as precedent.