Late tax-exempt controlled entity election treated as timely

Plain-English summary

A taxable corporation wholly owned by a section 501(c)(3) organization invested in a partnership that developed rental real estate. Because the corporation was a tax-exempt controlled entity, it needed an election under section 168(h)(6)(F)(ii) to avoid treatment as a tax-exempt entity for depreciation purposes. Its partnership agreement required the election, but the corporation inadvertently failed to make it with the return for the relevant year. The affidavits showed that it intended to elect from the outset, sought relief promptly, and was not using hindsight. The IRS granted relief and treated the election as timely, subject to attaching the election and ruling information to the corporation's next return, later relevant returns, and the exempt shareholder's return.

Ruling snapshot

• Question: Could the tax-exempt controlled corporation make a late election under section 168(h)(6)(F)(ii)?
• Outcome: approved
• Key authorities: IRC §§ 167, 168(h)(6); 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: 201750012                                        Third Party Communication: None
Release Date: 12/15/2017                                 Date of Communication: Not Applicable
Index Numbers: 9100.04-00, 168.00-00
                                                         Person To Contact:
-------------------------                                -------------------------, ID No. -----------------
--------------                                           -----------------------------------------------------
------------------------------------                     Telephone Number:
---------------------------------------------            ----------------------
-----------------------------                            Refer Reply To:
                                                         CC:ITA:4
                                                         PLR-110660-17
                                                         Date: September 20, 2017




Legend

Taxpayer = ------------------------------------
EIN = -----------------
Exempt Organization = -------------------------------------------------------------------
State = ---------
x = ----
Investee = --------------------------------------------------------
Project = --------------------------------------------------
Tax Year = -------


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

This letter responds to your letter, dated March 16, 2017, 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 is a corporation organized for profit under the laws of State. It is in the
business of investing in and managing rental real estate. Taxpayer is a subchapter C
corporation for federal income tax purposes. Taxpayer uses the cash 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).

PLR-110660-17                                2

Taxpayer is the general partner as well as the tax matters partner of Investee and owns
x% of Investee. Investee was organized for the purpose of acquiring, constructing,
owning, improving, financing, leasing, managing, and operating the Project. Investee is
a partnership for federal income tax purposes. Investee uses the accrual method of
accounting, and its taxable year is the calendar year.

The rental units in the Project were placed in service in Tax Year. Investee’s
partnership agreement obligated Taxpayer to make a timely election under
§ 168(h)(6)(F)(ii), so that no part of the Project would be treated as tax-exempt use
property. Taxpayer failed to make the § 168(h)(6)(F)(ii) election on a timely filed return
for Tax Year. However, the affidavits and other information submitted support the
conclusion that Taxpayer at all times intended to make a timely § 168(h)(6)(F)(ii)
election. Upon discovering this failure, Taxpayer promptly sought an extension of time in
which to file the election.

APPLICABLE LAW

Section 167(a) of the 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 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) provides generally that any tax-exempt controlled entity is 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 can 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.

PLR-110660-17                                 3

Section 301.9100-3(a) provides that requests for extensions of time for regulatory
elections (other than 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;

(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.

PLR-110660-17                                  4

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 timely filed
return 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.

CONCLUSION

Based solely 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) election with the tax return it filed for Tax Year,
provided that Taxpayer attaches a copy of this letter to the next tax return it files.
Taxpayer also must attach the § 168(h)(6) election and the information set forth in
§ 301.9100-7T(a)(3) to its next return. 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 ruling. In addition, the letter ruling (or statement) should be
attached for all subsequent returns (and amended returns) for all taxable years to which
this ruling is relevant.

Pursuant to § 301.9100-7T(a)(3)(ii), a copy of this letter and the § 168(h)(6) election
also should be attached to the federal income tax return of the tax-exempt shareholder
of Taxpayer.

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.

PLR-110660-17                                  5


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

                                       Sincerely,



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

Enclosure