Entity receives 120 days to make two late tax elections

Plain-English summary

A tax-exempt organization's wholly owned limited liability company managed partnerships that owned and rehabilitated low-income housing. The company intended from its inception to elect corporate tax treatment and to elect out of treatment as a tax-exempt controlled entity for depreciation purposes, but it inadvertently missed both deadlines. The IRS found that the company acted reasonably and in good faith, was not using hindsight, and sought relief before the IRS discovered the failures. It also found that granting relief would not prejudice the government's interests. The IRS granted 120 days to make both elections and required the company to file all prior returns consistently with the requested relief.

Ruling snapshot

• Question: May the company receive extra time to elect corporate classification and elect out of tax-exempt-controlled-entity treatment from its inception?
• Outcome: Approved, with 120 days to make both elections and file all required prior returns consistently.
• Key authorities: IRC § 168(h)(6)(F)(ii); Treas. Reg. §§ 301.7701-3, 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: 201808007 Third Party Communication: None
Release Date: 2/23/2018 Date of Communication: Not Applicable
9100.04-00, 7701.00-00

----------------------------- Person To Contact:
-------------------------------------------- ----------------------------, ID No. --------------
------------------------------------------ -----------------
----------------------------------------- Telephone Number:
------------------------------
Refer Reply To:
CC:ITA:B04
PLR-120596-17
Date:
October 31, 2017

LEGEND

Taxpayer = --------------------------------------------------------------
--------------------------------------------------------------
Exempt Organization = --------------------------------
Year 1 = -------
State = --------------
Date 1 = ----------------------
Month 1 = ---------------
Limited Partnership 1 (LP1) = ----------------------------------------------------
Limited Partnership 2 (LP2) = ----------------------------------------------
Project 1 = --------------------------------------------------------------
Project 2 = -------------------
a = ----
b = ----
c = -----
d = ----

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

This letter responds to your letter, dated June 28, 2017, in which Taxpayer requested
an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations (“Regulations”) to make two elections, each effective as of Taxpayer’s
inception in Year 1. The elections are: (1) to file an election under § 301.7701-3(c) to
treat Taxpayer as an association taxable as a corporation for federal tax purposes (“the
Corporation Election”); and (2) to make an election under § 168(h)(6)(F)(ii) of the
Internal Revenue Code (“Code”) for Taxpayer, a tax-exempt controlled entity under

PLR-120596-17 2

§ 168(h)(6)(F)(ii), to not be treated as a tax-exempt controlled entity from its inception
(“the Section 168 Election”).

FACTS

Taxpayer was organized under the laws of State as a limited liability company on Date

1. Taxpayer uses the accrual method of accounting and has the calendar year as its
   taxable year. Taxpayer is wholly owned by Exempt Organization, which has received a
   determination that it is a tax-exempt organization described in § 501(c)(3). 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) of
   the Code.

Taxpayer’s sole business operation is to act as the managing general partner in
Partnerships. “Partnerships” is a collective term used in describing Limited Partner 1
(LP1) and Limited Partner 2 (LP2). LP1 and LP2 were each formed to acquire, own and
rehabilitate low income housing in State. LP1 purchased Project 1 during Month 1,
Year 1. Project 1 is a low income residential apartment complex consisting of a
buildings and b units. LP2 purchased Project 2 during Month 1, Year 1. Project 2 is a
low income residential complex consisting of c buildings and d units. Projects 1 and 2
both have been recently completed.

Taxpayer intended to elect to be treated as an association taxable as a corporation
effective Date 1. However, due to inadvertence, Taxpayer failed to timely file Form
8832, Entity Classification Election. Additionally, Taxpayer intended to make a timely
Section 168 election, but inadvertently failed to do so. Upon discovering its failure to
make the elections, Taxpayer promptly sought an extension of time in which to file the
elections.

LAW AND ANALYSIS

The Corporation Election

Section 301.7701-3(a) of the Regulations provides that a business entity that is not
classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (an
eligible entity) can elect its classification for federal tax purposes as provided in
§ 301.7701-3. An eligible entity with at least two members can elect to be classified as
either an association (and thus a corporation under § 301.7701-2(b)(2)) or a
partnership, and an eligible entity with a single owner can elect to be classified as an
association or to be disregarded as an entity separate from its owner.

Section 301.7701-3(b)(1)(ii) provides that unless a domestic eligible entity elects
otherwise, the entity is disregarded as an entity separate from its owner if it has a single
owner.

PLR-120596-17 3

Section 301.7701-3(c)(1)(i) provides, in part, that an eligible entity may elect to be
classified other than as provided under § 301.7701-3(b), or to change its classification,
by filing Form 8832 with the service center designated on Form 8832.

Section 301.7701-3(c)(1)(iii) provides that an election made under § 301.7701-3(c)(1)(i)
will be effective on the date specified by the entity on Form 8832 or on the date filed if
no such date is specified on the election form. The effective date specified on Form
8832 cannot be more than 75 days prior to the date on which the election is filed and
cannot be more than 12 months after the date on which the election is filed.

The Section 168 Election

Section 167(a) of the Code provides generally for a depreciation deduction for property
used in a trade or business. Under § 168(g) of the Code, 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 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 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 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 301.9100-1(a) of the Regulations provides that the Commissioner has
discretion to grant a reasonable extension of time to make a regulatory election under
all subtitles of the Internal Revenue Code (Code), except subtitles E, G, H, and I.
Section 301.9100-1(b) defines a regulatory election as an election whose due date is
prescribed by a regulation published in the Federal Register, or a revenue ruling,
revenue procedure, notice or announcement published in the Internal Revenue Bulletin.
The Corporation Election and the Section 168 Election are both regulatory elections.

Section 301.9100-2 provides the rules governing automatic extensions of time for
making certain elections.

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

PLR-120596-17 4

requests for relief subject to § 301.9100-3 will be granted when the taxpayer provides
the evidence (including affidavits described in § 301.9100-3(e)) to establish to the
satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith.
Under § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably
and in good faith if the taxpayer seeks to alter a return position for which an accuracy-
related penalty could be imposed under § 6662 of the Code at the time the taxpayer
seeks relief, or knew of the election and related tax consequences, but chose not to file
the election, or uses hindsight in requesting relief.

Additionally, § 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.

CONCLUSION

Based solely on the information submitted and representations made, we conclude that
Taxpayer has satisfied the requirements of §§ 301.9100-1 and 301.9100-3. Taxpayer
intended from the outset to make both the Corporation Election and the Section 168
Election, its failure to make the elections was inadvertent, and 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.

Accordingly, pursuant to § 301.9100-3, Taxpayer is granted an extension of time of 120
days from the date of this letter ruling to make both the Corporation Election and the
Section 168 Election. This ruling is contingent on Taxpayer filing, within 120 days from
the date of this letter ruling, all required returns for all prior years consistent with the
requested relief. As to the Corporation Election, Taxpayer should file a properly
executed Form 8832 with the appropriate service center electing to be treated as an
association taxable as a corporation effective Date 1. A copy of this letter ruling should
be attached to the Form 8832. As to the Section 168 Election, Taxpayer should make
the election in the manner provided in § 301.9100-7T(a)(3)(ii). Taxpayer should attach
Form 8832, the information provided in § 301.9100-7T(a)(3)(ii), and a copy of this letter
ruling to the first of its required income tax returns.

Although this office has not verified any of the material submitted or facts assumed in
support of the request for ruling, they are subject to verification on examination.

Except as expressly provided herein, we express or imply no opinion concerning the
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. In addition, § 301.9100-1(a) provides that the granting of an

PLR-120596-17 5

extension of time for making an election is not a determination that the taxpayer is
otherwise eligible to make the election.

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 ruling showing the deletions proposed to be made when
it is disclosed under § 6110.

We are also sending a copy of the letter ruling and of the proposed deletions to your
designated representative, pursuant to a Form 2848, Power of Attorney and Declaration
of Representative, on file in this office.

If you have any questions concerning this matter, please contact the individual whose
name and telephone number appear at the beginning of the letter.

                                  Sincerely,




                                  Stephen J. Toomey
                                  Income Tax & Accounting
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

Enclosure: Copy for § 6110 purposes