Late tax-exempt controlled entity election received 60-day relief

Plain-English summary

A corporation wholly owned by a tax-exempt entity was a general partner in a partnership that owned low-income housing. The corporation intended to elect under section 168(h)(6)(F)(ii) not to be treated as tax exempt for depreciation purposes, but its tax preparer did not know that an affirmative election had to accompany the return. Later returns were filed as though the election had been made. The IRS found that the taxpayer acted reasonably and in good faith because it relied on a qualified tax professional, and that relief would not prejudice the government. It granted 60 days to file an amended return with the election and required related tax-exempt shareholders to attach copies of the election statement to their returns.

Ruling snapshot

• Question: Could the taxpayer make a late section 168(h)(6)(F)(ii) election after its preparer failed to attach it?
• Outcome: Yes, with a 60-day extension from the ruling date.
• Key authorities: IRC § 168(h)(6)(F); Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201609002                                             Third Party Communication: None
Release Date: 2/26/2016                                       Date of Communication: Not Applicable
Index Number: 9100.04-00, 168.00-00
                                                              Person To Contact:
-----------------------------                                 ------------------------, ID No. --------------
------------------------------------------                    Telephone Number:
------------------------------                                ----------------------
----------------------------                                  Refer Reply To:
                                                              CC:ITA:B05
                                                              PLR-117721-15
                                                              Date:
                                                              November 16, 2015

Legend:

Taxpayer          =   ---------------------------------------------------
Corporation       =   ----------------------------------------------------------------
Partnership       =   ---------------------------------------------------------
Tax Year          =   -------


Dear ---------------:

This is in response to your letter of April 28, 2015, requesting an extension of time
under §§ 301.9100-1 and 301.9100-3 of the Regulations on Procedure and
Administration for Taxpayer to file an election under § 168(h)(6)(F)(ii) of the Internal
Revenue Code.

FACTS

Taxpayer, a corporation, is wholly-owned by Corporation, a tax-exempt entity.
Taxpayer is a general partner of Partnership, a limited partnership. Partnership placed
in service a low-income housing project in Tax Year.

Since Taxpayer is wholly-owned by Corporation, Taxpayer is a “tax-exempt controlled
entity” within the meaning of § 168(h)(6)(F)(iii), and a portion of Partnership’s
depreciable property is “tax-exempt use property.” A designation of tax-exempt use
property affects the depreciation that Partnership can take for its depreciable property.
Taxpayer may elect, under § 168(h)(6)(F)(ii), not to be treated as a tax-exempt entity for
purposes of § 168(h)(6). This election must comply with the requirements of
§ 301.9100-7T of the temporary Regulations of Procedure and Administration.

Taxpayer engaged a qualified tax preparer to prepare its tax returns each year since its
inception. Taxpayer intended to make the § 168(h)(6)(F)(ii) election for Tax Year.
However, Taxpayer’s tax preparer was unaware that an affirmative election was
PLR-117721-15                                 2

required to be attached to the Federal tax return for Tax Year and neither prepared nor
attached the necessary form to the return.

At a later date, the limited partner of the Partnership requested supporting
documentation related to Taxpayer’s election. In reviewing the filed tax returns, tax
preparer discovered and informed Taxpayer that the § 168(h)(6)(F)(ii) election had not
been made in Tax Year, and that all of the subsequent Taxpayer’s returns were filed as
if a valid election had been made in Tax Year. Taxpayer filed the request for an
extension of time to file an election under §§ 301.9100-1 and 301.9100-3 of the
Regulations on Procedure and Administration § 9100 shortly thereafter.

LAW

Section 168(h)(6)(A) provides that, for purposes of § 168(h), if (1) any property which is
not “tax-exempt use property” is owned by a partnership which has both a tax-exempt
entity and a person who is not a tax-exempt entity as partners, and (2) any allocation to
the tax-exempt entity of partnership items is not a qualified allocation, then an amount
equal to such tax-exempt entity's proportionate share of such property shall be treated
as “tax-exempt use property.”

Section 168(h)(6)(F)(i) provides that, for purposes of § 168(h)(6), any “tax-exempt
controlled entity” shall be treated as a tax-exempt entity.

Section 168(h)(6)(F)(ii) provides that, for purposes of § 168(h)(6), a “tax-exempt
controlled entity” may elect not to be treated as a tax-exempt entity. Such an election is
irrevocable and will bind all tax-exempt entities holding an interest in the “tax-exempt
controlled entity.”

Section 301.9100-7T(a)(2)(i) requires elections under § 168(h)(6)(F)(ii) to be made by
the due date of the tax return (including extensions) for the first taxable year for which
the election is to be effective.

Under § 301.9100-1(c) and § 301.9100-3(a) and (b), the Commissioner has discretion
to grant a reasonable extension of time to make a regulatory election under all subtitles
of the Internal Revenue Code, except subtitles E, G, H, and I, provided the taxpayer
demonstrates to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith, and that granting relief will not prejudice the interests of
the government. Under § 301.9100-3(b)(1)(v), a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer reasonably relied on a qualified tax
professional, including a tax professional employed by the taxpayer, and the tax
professional failed to make, or advise the taxpayer to make, the election.

Based on all of the facts and information submitted and the representations made,
Taxpayer relied on a qualified tax professional to make the election under
PLR-117721-15                                3

§ 168(h)(6)(F)(ii). That tax professional failed to make a timely election. We therefore
conclude that Taxpayer has acted reasonably and in good faith as described in
§ 301.9100-3(b)(1), and granting the requested relief will not prejudice the interests of
the government.

Taxpayer is granted an extension of time of 60 days from the date of this letter ruling to
file an amended return for Tax Year making the election under § 168(h)(6)(F)(ii).
Taxpayer must attach the aforementioned election and the information set forth in
§ 301.9100-7T(a)(3) to the amended return. Taxpayer also must attach a copy of this
letter to the amended return. Pursuant to § 301.9100-7T(a)(3)(ii), a copy of the election
statement also should be attached to the federal income tax returns of each of the tax-
exempt shareholders of Taxpayer.

CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. In particular, we express no opinion as to whether Taxpayer qualifies to
make the election set forth in § 168(h)(6)(F)(ii).

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
appropriate parties. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.



                                      Sincerely,



                                      Amy Pfalzgraf
                                      Senior Counsel, Branch 5
                                      Office of Chief Counsel
                                      (Income Tax & Accounting)



Enclosure (1)
      Copy for section 6110 purposes