Tax-exempt controlled entity received late MACRS election relief

Plain-English summary

A corporation indirectly owned by a tax-exempt entity developed residential rental property and intended to elect not to be treated as a tax-exempt controlled entity for depreciation purposes. The election was required by the transaction documents, but unclear advice from the first law firm and assumptions by replacement counsel left accounting staff unaware of the filing requirement. The corporation discovered the omission within a month after timely filing its return. The IRS found that it qualified for discretionary relief under Treas. Reg. § 301.9100-3. The corporation must amend the return, include the election statement and required information, and provide the statement with the returns of its tax-exempt shareholders.

Ruling snapshot

• Question: Could a tax-exempt controlled entity make a late election under IRC § 168(h)(6)(F)(ii) not to be treated as tax-exempt?
• Outcome: approved, subject to filing an amended return and the required election statements
• Key authorities: IRC §§ 167 and 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: 201713005                                          Third Party Communication: None
Release Date: 3/31/2017                                    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-120867-16
                                                           Date:
                                                           December 23, 2016




Legend:


Taxpayer           = ----------------------------------------

Corporation = ---------------------------------------------------------
Parent       = ---------------------------------------------------------------------------------------------------------------
Transactions = --------------------------------------------------------------------------------
               -------------------------
Months       = ------------------------------------------
Year 1       = -------
Year 2       = -------
Year 3       = -------


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

This is in response to your letter of June 17, 2016 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

Corporation was formed in Year 1 and is taxed as a C Corporation for federal income
tax purposes. Corporation’s sole member is Parent, which is a tax-exempt entity under
§ 501. Based on Parent’s ownership interest in and control of Corporation, Corporation
is a “tax-exempt controlled entity” within the meaning of § 168(h)(6)(F)(iii).

Taxpayer is a subsidiary of the Corporation. Taxpayer was formed in Year 2 and is
taxed as C corporation. Taxpayer’s sole member is Corporation, which is a tax-exempt
PLR-120867-16                                2

controlled entity. Taxpayer uses an accrual method of accounting and operates on a
calendar-year basis of accounting.

Taxpayer and Corporation are engaged in the ownership and development of residential
rental property. In Year 3, Taxpayer and Corporation closed Transactions involving
rental buildings. The buildings were placed in service as apartment rental units in
Months. Taxpayer, Corporation, and Parent were required by the transaction documents
and at all times intended to make the § 168(h)(6)(F)(ii) election for Taxpayer to not be
treated as a tax-controlled entity. The law firm that initially represented Corporation and
Taxpayer in the Transactions at first provided unclear advice about the election
requirement but then corrected the advice and offered to assist in making the election.
Subsequently, Corporation and Taxpayer engaged a different law firm for unrelated
reasons. The second law firm did not specifically advise Taxpayer or Corporation
regarding the election requirement, having presumed that the former law firm had done
so. Consequently, neither Taxpayer nor Corporation advised accounting staff of Parent
about the election requirement for Year 3. Taxpayer timely filed its Year 3 return.
Corporation discovered its failure to make a timely § 168(h)(6)(F)(ii) election within a
month after timely filing its return for the relevant tax year.

LAW

Section 167(a) of the Internal Revenue Code provides generally for a depreciation
deduction for property used in a trade or business. Under § 168(g), the alternative
depreciation system must be used for any tax-exempt use property as defined in § 168(h).

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)(E) states that rules similar to subparagraph (A) apply to other entities,
including tiered partnerships.

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.”
PLR-120867-16                                 3

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), 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, we
conclude that Taxpayer is entitled to relief under 301.9100-3(a).

Taxpayer must file an amended return for Year 3 making the election under §
168(h)(6)(F)(ii). Taxpayer must attach the election statement 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.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.
PLR-120867-16                                  4

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer, and by a penalty of perjury statement executed by an
appropriate party. 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.



                                       Sincerely,


                                       John Aramburu
                                       Senior Counsel, Branch 5
                                       Office of Chief Counsel
                                       (Income Tax & Accounting)




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