Tax-exempt controlled corporation received late-election relief

Plain-English summary

A taxable corporation wholly owned by a section 501(c)(3) organization was a tax-exempt controlled entity for depreciation purposes. It intended to elect under section 168(h)(6)(F)(ii) not to be treated as tax exempt, but inadvertently omitted the election from its timely return. The corporation promptly sought relief before the IRS discovered the omission, and the record showed that it had intended to make the election from the outset. The IRS found that the corporation acted reasonably and in good faith and that relief would not prejudice the government's interests. It treated the election as timely, provided the corporation attached the ruling to its next return and the exempt shareholder attached the election statement to its return.

Ruling snapshot

• Question: May a tax-exempt controlled corporation make a late election not to be treated as a tax-exempt entity under section 168(h)(6)(F)(ii)?
• Outcome: approved, subject to return-attachment requirements
• Key authorities: IRC § 168(h)(6)(F); Treas. Reg. §§ 301.9100-1, 301.9100-3, 301.9100-7T

Full text (IRS public release)

Internal Revenue Service                                 Department of the Treasury
                                                         Washington, DC 20224

Number: 201733007                                        Third Party Communication: None
Release Date: 8/18/2017                                  Date of Communication: Not Applicable
Index Number: 168.00-00, 9100.00-00
                                                         Person To Contact:
-------------------------                                -------------------------, ID No. -----------------
--------------------------------------                   -----------------------------------------------------
----------------------------------                       Telephone Number:
-----------------------------                            ----------------------
-----------------------------------------------          Refer Reply To:
                                                         CC:ITA:4
                                                         PLR-137114-16
                                                         Date:
                                                         May 22, 2017




Legend

Taxpayer = --------------------------------------------------
Exempt Organization = -------------------------------------------------------------------------------------
State = ------------
Transaction = ------------------------
Year 1 = -------

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

This letter responds to your letter, dated November 23, 2016, requesting an extension
of time for Taxpayer to make an election under § 168(h)(6)(F)(ii) of the Internal Revenue
Code (Code).

FACTS

Taxpayer, a State corporation, is a subchapter C corporation for federal income tax
purposes. Taxpayer uses the accrual method of accounting, and its taxable year is the
calendar year.

Taxpayer is wholly owned by Exempt Organization, a tax-exempt entity described in
§ 501(c)(3) of the Code. Because Exempt Organization owns more than 50 percent in
value of the stock of Taxpayer, Taxpayer is a “tax-exempt controlled entity” within the
meaning of § 168(h)(6)(F)(iii).

Taxpayer closed the Transaction in Year 1. The documentation related to the
Transaction required Taxpayer to make an election under § 168(h)(6)(F)(ii) for Year 1.
Taxpayer failed to make the § 168(h)(6)(F)(ii) election on a return timely filed for Year 1.
However, the affidavit and other information submitted support the conclusion that
Taxpayer at all times intended to make a timely § 168(h)(6)(F)(ii) election. Upon
PLR-137114-16                                2

discovering this failure, Taxpayer promptly sought an extension of time in which to file
the election.

APPLICABLE LAW

Section 167(a) of the Code generally provides 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 any property that is not
tax-exempt-use property is owned by a partnership having both a tax-exempt entity and
a nontax-exempt entity as partners and any allocation to the tax-exempt entity 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) generally provides that any tax-exempt controlled entity shall be treated
as a tax-exempt entity for purposes of § 168(h)(5) and (6).

Under § 168(h)(6)(F)(ii), 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. Under § 301.9100-7T(a)(2)(i) of
the Procedure and Administration Regulations, an election under § 168(h)(6)(F)(ii) must
be made by the due date of the tax return for the first taxable year for which the election
is to be effective.

Section 301.9100-3(c) provides that the Commissioner of Internal Revenue has
discretion to grant a reasonable extension of time to make a regulatory election.
Section 301.9100-1(b) defines the term “regulatory election” as including any election
for which a regulation prescribes the due date. The § 168(h)(6)(F)(ii) election is a
regulatory election.

Sections 301.9100-1 through 301.9100-3 provide the standards that the Service will use
to determine whether to grant an extension of time to make a regulatory election.
Section 301.9100-3(a) provides that a request for an extension of time for a regulatory
election (other than one of the automatic changes covered in § 301.9100-2) will be
granted when the taxpayer provides evidence (including affidavits) to establish that the
taxpayer acted reasonably and in good faith, and granting relief will not prejudice the
interests of the government.

Section 301.9100-3(b)(1) provides that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer –

(i) Requests relief before the failure to make the regulatory election is discovered by the
Service;
PLR-137114-16                                  3

(ii) Failed to make the election because of intervening events beyond the taxpayer's
control;

(iii) Failed to make the election because, after exercising due diligence, the taxpayer
was unaware of the necessity for the election;

(iv) Reasonably relied on the written advice of the Service; or

(v) Reasonably relied on a qualified tax professional, and the tax professional failed to
make, or advise the taxpayer to make the election.

Under § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably
and in good faith if the taxpayer --

(i) Seeks to alter a return position for which an accuracy-related penalty could be
imposed under § 6662 at the time the taxpayer requests relief and the new position
requires a regulatory election for which relief is requested;

(ii) Was fully informed of the required election and related tax consequences, but chose
not to file the election; or

(iii) Uses hindsight in requesting relief. If specific facts have changed since the original
deadline that make the election advantageous to a taxpayer, the Service will not
ordinarily grant relief.

Section 301.9100-3(c) provides that the Service will grant a reasonable extension of
time only when the interests of the government will not be prejudiced by the granting of
relief. The interests of the government are prejudiced if granting relief would result in a
taxpayer having a lower tax liability in the aggregate for all taxable years affected by the
election than the taxpayer would have had if the election had been timely made.

ANALYSIS

The facts submitted by Taxpayer indicate that Taxpayer intended from the outset to
make the § 168(h)(6)(F)(ii) election, that its failure to make the election on a return filed
timely was inadvertent, and that Taxpayer is not using hindsight in requesting relief.
Moreover, Taxpayer requested relief before the failure to make the election was
discovered by the Service. Finally, Taxpayer acted reasonably and in good faith, and
the interests of the Government will not be prejudiced by the granting of relief under
§ 301.9100-3.
PLR-137114-16                                  4

CONCLUSION

Based on the facts as represented and the applicable law, we conclude that the request
for relief under § 301.9100-3 should be granted. Accordingly, Taxpayer is treated as if it
had made the § 168(h)(6)(F)(ii) election with the tax return it filed for Year 1, provided
that Taxpayer attaches a copy of this letter to the next tax return it files. In addition,
pursuant to § 301.9100-7T(a)(3)(II), a copy of the election statement should be attached
to the federal income tax return of its tax-exempt shareholder. If Taxpayer files
electronically, it may satisfy this requirement by attaching a statement to the return that
provides the date and control number of this letter.

This ruling is based on information and representations submitted by the taxpayer.
While this office has not verified any of the material submitted in support of this request
for a ruling, it is subject to verification on examination.

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) of the Code
provides that it may not be used or cited as precedent.

Enclosed is a copy of the letter showing the deletions proposed to be made when it is
disclosed under § 6110. If you have any questions concerning this matter, please
contact the individual whose name and telephone number appear at the beginning of
the letter.

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

                                        Sincerely,



                                        Stephen J. Toomey
                                        Senior Counsel, Branch 4
                                        (Income Tax & Accounting)

Enclosure


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