Married real estate taxpayers receive 120 days to make a late rental-activity grouping election

Plain-English summary

A married couple filed a joint return for a year in which one spouse was engaged in a real property business. They qualified to elect under section 469(c)(7) to treat all rental real estate interests as one activity, but their professional return preparer did not tell them about the election. Their original return omitted the required election statement, although that return and later returns were filed consistently with the intended election. The IRS found that they reasonably relied on a qualified tax professional and satisfied the standards for discretionary relief. It granted 120 days to attach the required statement to an amended return for the original year. The IRS did not decide whether the couple met the substantive real-estate-professional or material-participation requirements.

Ruling snapshot

• Question: May married taxpayers make a late election to treat all rental real estate interests as a single activity when their preparer failed to advise them about it?
• Outcome: approved, with the election due within 120 days
• Key authorities: IRC § 469(c)(7); Treas. Reg. §§ 1.469-9(g)(3), 301.9100-1, and 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                           Department of the Treasury
                                                    Washington, DC 20224

                                                    Third Party Communication: None
Number: 201804007                                   Date of Communication: Not Applicable
Release Date: 1/26/2018
                                                    Person To Contact:
Index Number: 469.00-00, 469.03-03, 469.14- -------------------------, ID No. ------------------
              00, 9100.00-00                -----------------------------------------------------
                                                    Telephone Number:
 -------------------------------------------        ----------------------
 ------------------------------                     Refer Reply To:

 ---------------------------------                  CC:PSI:B03
                                                    PLR-124374-17
                                                    Date:
                                                    October 23, 2017



 Legend

 A        =         --------------------------
 --------------------------------------------

 B        =         --------------------------
 --------------------------------------------

 Year1 =           -------


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

        This responds to a letter dated August 1, 2017, submitted on your behalf by your
 authorized representative requesting an extension of time under § 301.9100-3 of the
 Procedure and Administration Regulations to file an election under § 469(c)(7) of the
 Internal Revenue Code and § 1.469-9(g)(3) of the Income Tax Regulations to treat all
 interests in rental real estate as a single rental real estate activity.

         According to the information submitted, A and B (“Taxpayers”) are married
 individuals who filed a joint tax return in Year1. The information submitted further states
 that, in Year1, A was engaged in a real property business as defined by § 469(c)(7) and
 that Taxpayers were qualified under § 469(c)(7)(B) to make an election to treat all
 interests in rental real estate as a single rental real estate activity. However, Taxpayers
 were not advised by their professional tax return preparer that the election under
 § 469(c)(7) was available to them. It is represented that Taxpayers filed their joint tax
 return for Year1 without the statement required under § 1.469-9(g)(3). In addition, it is
 represented that the joint tax return of Taxpayers for Year1, along with subsequent
 returns, were filed consistent with making this election.

         Under § 469(c)(2), the term “passive activity” generally includes any rental
 activity. Section 469(c)(7) provides a limited exception to this rule for taxpayers in a real

PLR-124374-17                                   2

property trade or business. Specifically, § 469(c)(7)(A) provides that if a taxpayer meets
the requirements of section 469(c)(7)(B), the taxpayer’s rental real estate activity will no
longer be presumptively passive. By its terms, the exception under § 469(c)(7)(A) is to
be applied as if each interest of the taxpayer in rental real estate were a separate
activity. However, under § 469(c)(7)(A) a taxpayer may elect to treat all interests in
rental real estate as a single activity.

        Section 1.469-9(g)(3) provides that a qualifying taxpayer makes the election to
treat all interests in rental real estate as a single rental real estate activity by filing a
statement with the taxpayer’s original income tax return for the taxable year. Section
1.469-9(g)(3) describes the information that must be contained in the statement.

       Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of
time to make a regulatory election, or a statutory election (but no more than 6 months
except in the case of a taxpayer who is abroad), under all subtitles of the Internal
Revenue Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term
“regulatory election” as including an election whose due date is prescribed by a
regulation published in the Internal Revenue Bulletin.

        Sections 301.9100-1 through 301.9100-3 provide the standards the
Commissioner will use to determine whether to grant an extension of time to make the
election. Section 301.9100-2 provides the rules governing automatic extensions of time
for making certain elections. Section 301.9100-3 provides the standards the
Commissioner will use to determine whether to grant an extension of time for regulatory
elections that do not meet the requirements of § 301.9100-2. Under § 301.9100-3, a
request for relief will be granted when the taxpayer provides evidence to establish to the
satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good
faith, and (2) granting relief will not prejudice the interests of the government.

       Section 301.9100-3(b) provides that, except as provided in § 301.9100-3(b)(3)(i)
through (iii), when a 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, the taxpayer will be deemed to have acted
reasonably and in good faith.

        Based solely on the information submitted and the representations made, we
conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied.
As a result, Taxpayers are granted an extension of time of 120 days from the date of
this letter to make an election under § 469(c)(7)(A) to treat all interests in rental real
estate as a single rental real estate activity effective Year1. The election must be in the
form of the statement required by § 1.469-9(g)(3) and attached to an amended return
for Year1. A copy of this letter should be attached to the election.

PLR-124374-17                                3

        Except as specifically set forth above, no opinion is expressed concerning the
federal tax consequences of the facts described above under any other provision of the
Code. Specifically, no opinion is expressed concerning whether Taxpayers satisfy the
requirements under § 469(c)(7)(B) or whether Taxpayers materially participate in any
activity.

       The ruling contained in this letter is based upon information and representations
submitted by Taxpayers 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 a ruling, it is subject to verification on examination.

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

      In accordance with the power of attorney on file with this office, we are sending a
copy of this letter to your authorized representative.

                                         Sincerely,


                                         Acting Associate Chief Counsel
                                         (Passthroughs & Special Industries)


                                         _________________________________
                                         James A. Quinn
                                         Senior Counsel, Branch 3
                                         Office of Associate Chief Counsel
                                         (Passthroughs & Special Industries)



Enclosures (2):
      Copy of this letter
      Copy for § 6110 purpose-s