Property owner receives relief for a late rehabilitation-credit passthrough election

Plain-English summary

A property owner rehabilitated a leased property and agreed to pass its qualified rehabilitation expenditures through to the tenant. The owner inadvertently missed the deadline to elect under Treasury Regulation § 1.48-4, and neither party had claimed the related rehabilitation credit. The IRS concluded that the owner satisfied the requirements for discretionary relief and granted 120 days to file the election statement, along with an amended return containing the required summary statement. The ruling did not decide whether the rehabilitation expenditures qualified under IRC § 47, whether the other election conditions were met, or whether the entities and lease had the asserted federal tax status.

Ruling snapshot

• Question: May the property owner make a late election to treat its tenant as having acquired the rehabilitated property for investment-credit purposes?
• Outcome: Approved. The owner received 120 days to file the election statement and the required amended return.
• Key authorities: IRC §§ 38, 46, 47, 48, 50(d)(5), 6110(k)(3); Treas. Reg. §§ 1.48-4, 1.48-12(b)(2)(v), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201725001 Third Party Communication: None
Release Date: 6/23/2017 Date of Communication: Not Applicable
Index Number: 9100.33-00, 47.00-00, 50.00-
00 Person To Contact:
---------------------------, ID No. ---------------
------------------------ ----------------
------------------------------------ Telephone Number:
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--------------------------------- Refer Reply To:
------------------------------- CC:PSI:B05
PLR-101619-17
In Re: Date:
----------------------------------- March 27, 2017

LEGEND

Taxpayer = -------------------------------------------------------------------------------------------------
---------------------------------
Tenant = -------------------------------------------------------------------------------------------------
---------------------------------
Year X = ------------------------------------------------------
State = -------------
Property = -----------------------------------------------------

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

  This letter responds to a letter, dated December 30, 2016, and subsequent

correspondence, submitted on behalf of Taxpayer, requesting an extension of time
pursuant to § 301.9100-3 of the Procedure and Administration Regulations for Taxpayer
to make an election under § 1.48-4 of the Income Tax Regulations for Year X.

                                             FACTS

   According to the information submitted and representations made, Taxpayer, a

limited liability company organized under the laws of State, owns the Property.
Taxpayer rehabilitated the Property in a manner that qualified for the rehabilitation credit
under § 47 of the Internal Revenue Code. Tenant, a limited liability company organized
under the laws of State, leases the Property from Taxpayer.

    Taxpayer and Tenant entered into an agreement to pass through Taxpayer’s

qualified rehabilitation expenditures (QREs) relating to the Property to Tenant. The
agreement required Taxpayer to file an election under § 1.48-4 on or before the due

PLR-101619-17 2

date (including extensions) of Tenant’s return for the year in which the QREs are placed
in service. Taxpayer placed in service a phase of the rehabilitated Property in Year X.
However, Taxpayer failed to timely make the election for Year X, due to inadvertence.

  Neither Taxpayer nor Tenant claimed the rehabilitation credit based on the QREs

placed in service in Year X. Further, Taxpayer has not made an election under
§ 47(d)(5).

                              LAW AND ANAYLYSIS

    Section 38(a) allows a credit for the taxable year in an amount equal to the sum

of: (1) the business credit carryforwards carried to the taxable year, (2) the amount of
the current year business credit, plus (3) the business credit carrybacks carried to the
taxable year.

   Under § 38(b)(1), the amount of the current year business credit includes the

investment credit under § 46. Under § 46(1), the investment credit includes the
rehabilitation credit under § 47.

    Section 47(a) provides that the rehabilitation credit for any taxable year is the

sum of: (1) 10 percent of the qualified rehabilitation expenditures with respect to any
qualified rehabilitated building other than a certified historic structure, and (2) 20 percent
of the qualified rehabilitation expenditures with respect to any certified historic structure.

    Under § 47(b)(1), qualified rehabilitation expenditures with respect to any

qualified rehabilitated building shall be taken into account for the taxable year in which
the qualified rehabilitated building is placed in service.

   Section 47(c)(1)(C)(i) provides that a building shall be treated as having been

substantially rehabilitated only if the qualified rehabilitation expenditures during the
24-month measuring period selected by the taxpayer ending with or within the taxable
year exceed the greater of (I) the adjusted basis of the building as of the beginning of
the 24-month period; or (II) $5,000.

   Section 47(c)(1)(C)(ii) provides that, in the case of any rehabilitation that may

reasonably be expected to be completed in phases set forth in architectural plans and
specifications completed before the physical work on the rehabilitation begins, a 60-
month measuring period shall be substituted for a 24-month measuring period.

  Section 1.48-12(b)(2)(v) provides, in part, that a rehabilitation may reasonably be

expected to be completed in phases if it consists of two or more distinct stages of
development. The determination of whether a rehabilitation consists of distinct stages
and therefore may reasonably be expected to be completed in phases shall be made on

PLR-101619-17 3

the basis of all the relevant facts and circumstances in existence before physical work
on the rehabilitation begins.

    Section § 50(d)(5), makes applicable rules similar to the rules of former § 48(d)

(relating to certain leased property). Under former § 48(d)(1), a person (other than a
person referred to in former § 46(e)(1)) who is a lessor of property may (at such time, in
such manner, and subject to such conditions as are provided by regulations prescribed
by the Secretary) elect with respect to any new section 38 property (other than property
described in former § 48(d)(4)) to treat the lessee as having acquired the property.

  Section 1.48-4(a)(1) provides that a lessor of property may elect to treat the

lessee of the property as having purchased the property for purposes of the credit
allowed by § 38, if the conditions specified in § 1.48-4(a)(1)(i) through (v) are satisfied.

  Section 1.48-4(a)(1)(iv) requires a statement of election to treat the lessee as a

purchaser to be filed in the manner and within the time provided in § 1.48-4(f) or (g).

   Section 1.48-4(f)(1) provides that the election of the lessor with respect to a

particular property (or properties) must be made by filing a statement with the lessee,
signed by the lessor and including the written consent of the lessee, containing the
information specified in § 1.48-4(f)(1)(i) through (vii).

    Section 1.48-4(f)(2) provides that the § 1.48-4(f)(1) election statement must be

filed with the lessee on or before the due date (including any extensions of time) of the
lessee’s return for the lessee’s taxable year during which possession of the property is
transferred to the lessee.

    Section 1.48-4(j) provides that the lessor and the lessee must keep as a part of

their records the election statement referred to in § 1.48-4(f)(1) and that the lessor must
attach to its income tax return a summary statement of all property leased during its
taxable year with respect to which an election is made. The summary statement must
contain the following information: (1) the name, address, and taxpayer account number
of the lessor; and (2) in numerical account number order, each lessee’s account
number, name, and address, the estimated useful life category of the property (or, if
applicable, the estimated useful life expressed in years), and the basis or fair market
value of the property, whichever is applicable.

    Section 301.9100-1(a) provides that this section and §§ 301.9100-2 and

301.9100-3 establish the standards the Commissioner will use to determine whether to
grant an extension of time to make a regulatory election. An extension of time is
available for elections that a taxpayer is otherwise eligible to make. However, the
granting of an extension of time is not a determination that the taxpayer is otherwise
eligible to make the election.

PLR-101619-17 4

    Section 301.9100-1(b) provides that the term “election” includes an application

for relief in respect of tax and that the term "regulatory election" includes an election
whose due date is prescribed by a regulation published in the Federal Register.

   Section 301.9100-1(c) provides that the Commissioner may grant a reasonable

extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a
regulatory election, or a statutory election (but no more than six months except in the
case of taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G,
H, and I.

   Section 301.9100-2 provides automatic extensions of time for making certain

elections. Section 301.9100-3 provides extensions of time for making elections that do
not meet the requirements of § 301.9100-2.

   Section 301.9100-3 provides that requests for relief subject to this section will be

granted when the taxpayer provides the evidence (including the affidavits described in
§ 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer
acted reasonably and in good faith, and that the grant of relief will not prejudice the
interests of the government.

                                  CONCLUSION

    Based solely on the information submitted and representations made, we

conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied.
Accordingly, Taxpayer is granted an extension of time of 120 days from the date of this
letter to make an election under § 1.48-4(a) for Year X. For this purpose, Taxpayer
must file a statement of election in accordance with § 1.48-4(f). Further, Taxpayer must
file an amended return for Year X, attaching the summary statement required by
§ 1.48-4(j) and a copy of this letter. A copy of this letter is enclosed for that purpose.

   Except as specifically set forth above, we express no opinion concerning the

federal tax consequences of the facts described above under any provisions of the
Code. In particular, we express no opinion on whether all of the conditions specified in
§ 1.48-4(a)(1) are satisfied, whether Taxpayer’s rehabilitation expenditures with respect
to the Property are qualified rehabilitation expenditures under § 47, whether Taxpayer’s
rehabilitation meets the definition of a phased rehabilitation under § 1.48-12(b)(2)(v), or
whether Taxpayer’s rehabilitation of the Property otherwise meets the requirements
under § 47. Further, we express no opinion on whether any of the limited liability
companies involved are partnerships for federal tax purposes, whether any of the
members of the limited liability companies are partners for federal tax purposes, or
whether the lease at issue is lease for federal tax purposes.

  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-101619-17 5

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to each of your authorized representatives.

  The ruling contained in this letter is based on the information submitted and

representations made by Taxpayer and accompanied 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 ruling, it is subject to verification on examination.

                                         Sincerely,

                                         John P. Moriarty
                                         Acting Associate Chief Counsel
                                         (Passthroughs and Special Industries)




                                   By:
                                         Jian H. Grant
                                         Senior Technician Reviewer, Branch 5
                                         Office of Associate Chief Counsel
                                         (Passthroughs and Special Industries)

Enclosures:
Copy of this letter
Copy for section 6110 purposes