Closed-year tax-exempt controlled entity election received relief

Plain-English summary

A corporation owned by a section 501(c)(3) organization was treated as a tax-exempt controlled entity and served as general partner of a low-income housing partnership. The taxpayer intended to elect out of that treatment so the partnership could use accelerated depreciation, but its tax professional failed to make or recommend the election. The taxpayer and partnership consistently filed as though the election had been made, and the IRS had not discovered the omission. Although the first affected year was closed, an independent auditor certified that late relief would not reduce aggregate tax liabilities. The IRS granted 75 days to amend the closed-year return and make the election.

Ruling snapshot

• Question: Could the taxpayer make a late election not to be treated as a tax-exempt controlled entity for a closed year?
• Outcome: Approved, with 75 days to file the amended return and election.
• Key authorities: IRC § 168(h)(6)(F)(ii); Treas. Reg. §§ 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: 201906001 Third Party Communication: None
Release Date: 2/8/2019 Date of Communication: Not Applicable
Index Number: 168.00-00, 9100.00-00,
9100.04-00 Person To Contact:
-------------------------, ID No. -----------------
----------------------------------------------------- -----------------------------------------------------
------------------------------- Telephone Number:
---------------------------------------------- ----------------------
--------------------------------- Refer Reply To:
CC:ITA:B05
PLR-112905-18
Date: November 8, 2018

Legend

Taxpayer = -------------------------------

Parent = ----------------------------------------

Partnership = -------------------------

State = -------------

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

Date 1 = --------------------

Date 2 = ----------------------

Date 3 = ------------------

Date 4 = --------------------

Date 5 = ------------------------
PLR-112905-18 2

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

This letter responds to a request for a private letter ruling dated Date 1, amended Date
2 by Taxpayer, requesting that the Internal Revenue Service grant Taxpayer an
extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations to make an election, under § 168(h)(6)(F)(ii) of the Internal
Revenue Code, not to be treated as a tax-exempt controlled entity for Year 1, a closed
year.

Facts

According to the information submitted and representations made, Taxpayer was
formed as a limited liability company organized on Date 3 under the laws of State.
Taxpayer is wholly-owned by Parent, a tax exempt organization under § 501(c)(3). As
such, Taxpayer is a disregarded entity for tax purposes and treated as a tax-exempt
controlled entity for purposes of § 168(h)(6)(F)(iii).

On Date 3, Taxpayer formed Partnership for the purpose of owning, holding,
developing, and operating a multi-family residential rental property, funded in part by
low income housing credits. The property was placed in service on Date 4. Taxpayer is
the general partner of Partnership. The limited partners in Partnership are not tax-
exempt entities.

Taxpayer filed a Form 8832, Entity Classification Election, electing to be classified as an
association taxable as a corporation, effective in Year 1. Taxpayer did not file a tax
return in Year 1 as it did not have any income or expenses to report, and did not think it
was necessary to make a § 168(h)(6) election. Partnership, however, filed a return in
Year 1, providing Taxpayer with a K-1 which reported a miniscule loss for Year 1.
Partnership began depreciating the Partnership assets in Year 1 as if the Partnership
had no tax-exempt use property (i.e., as if Taxpayer had made, or was going to make,
the § 168(h)(6)(F)(ii) election).

Taxpayer relied on a qualified tax professional (Firm) to timely file its Form 1120, U.S.
Corporation Income Tax Return, for Year 2. Firm, however, failed to make the
§ 168(h)(6)(F)(ii) election, and failed to advise Taxpayer that it needed to make the
§ 168(h)(6)(F)(ii) election.

Taxpayer filed its Form 1120 for Year 3 and Year 4, consistent with its Year 2 return,
relying on Partnership K-1’s, which used accelerated depreciation rates. On Date 5, a
limited partner in Partnership discovered that the § 168(h)(6)(F)(ii) election was not
properly made and advised Taxpayer. Taxpayer promptly filed a request for a private
letter ruling to allow Taxpayer to file amended returns to make the § 168(h)(6)(F)(ii)
election. Taxpayer filed an amended request for a letter ruling on Date 2. Federal tax
PLR-112905-18 3

returns for Years 2, 3 and 4 have been filed consistent with a § 168(h)(6)(F)(ii) election
being timely made.

Taxpayer represents that Taxpayer’s failure to make the § 168(h)(6)(F)(ii) elections for
Tax Years 1, 2, 3, and 4 have not been discovered by the Internal Revenue Service.
Taxpayer also represents that it will not have a lower tax liability for all tax years
affected by the election, than they would have had if the election had been timely made.

Because Year 1 is a closed year, Taxpayer provided an affidavit from an independent
auditor, as defined in § 301.9100-3(c)(1)(ii), certifying that the interests of the
Government are not prejudiced under the standards of § 301.9100-3(c)(1)(i). The
independent auditor certified that granting relief in this ruling will not result in Taxpayer
having a lower tax liability in the aggregate for all taxable years affected by the election
than Taxpayer would have had if the election had been timely made, including the time
value of money. Further, the independent auditor certified that granting relief in this
ruling will not result in affected taxpayers, in the aggregate, having a lower tax liability
than if the election had been timely made.

Law and Analysis

Section 167(a) 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) defines tax-exempt use property. Under § 168(h)(6)(A), property may be
tax-exempt use property if it is held by a tax-exempt entity in a partnership that has tax-
exempt and non-tax-exempt partners and if the partnership allocations are not qualified
allocations as defined by § 168(h)(6)(B).

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)(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.

Section 168(h)(6)(F)(iii) describes a tax-exempt controlled entity as any corporation,
which would not otherwise be considered tax-exempt entity, where 50 percent or more
of the stock is owned by one or more tax-exempt entities.

Section 301.9100-1(b) of the Procedures and Administration Regulations defines the
term "regulatory election" as including any election the due date for which is prescribed
by a regulation. Section 301.9100-7T(a)(2)(i) requires an election under
PLR-112905-18 4

§ 168(h)(6)(F)(ii) to be made by the due date of the tax return for the first taxable year
for which the election is to be effective. Section 301.9100-7T(a)(3) provides the manner
in which the § 168(h)(6)(F)(ii) election is made. Thus, the § 168(h)(6)(F)(ii) election is a
regulatory election.

Section 301.9100-1(c) provides that the Commissioner of Internal Revenue has
discretion to grant a reasonable extension of time under the rules set forth in
§§ 301.9100-2 and 301.9100-3 to make a regulatory election.

Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3 will be
granted when the taxpayer provides 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, and the grant of relief will not prejudice the interests
of the Government.

Section 301.9100-3(b)(1) provides that a taxpayer is 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 is considered to have not acted reasonably and in
good faith if the taxpayer (i) seeks to alter a return position for which an accuracy-
related penalty has been or could be imposed under § 6662 at the time the taxpayer
requests relief, and the new position requires or permits 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.

Section 301.9100-3(c)(1) states 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. Section 301.9100-3(c)(1)(i) provides that 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.

Under § 301.9100-3(c)(1)(ii), the interests of the Government are ordinarily prejudiced if
the taxable year in which the regulatory election should have been made, or any taxable
years affected by the election had it been timely made, are closed by the period of
limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling
granting relief under this section. However, if an independent auditor certifies that the
PLR-112905-18 5

interests of the Government are not prejudiced under the standard of § 301.9100-
3(c)(1)(i), the Service may provide a grant of relief for a closed year.

Taxpayer represents that it intended to timely make the § 168(h)(6)(F)(ii) election and
relied on a qualified tax professional when filing its Year 2 return to make the election.
Taxpayer also represents that the qualified tax professional did not make the
§ 168(h)(6)(F)(ii) election nor did it advise the Taxpayer to make the § 168(h)(6)(F)(ii)
election. In addition, Taxpayer represents that it has requested relief before the failure
to make the election was discovered by the Service.

Based on that representation, Taxpayer is deemed to have acted reasonably and in
good faith within the meaning of § 301.9100-3(b)(1). Furthermore, Taxpayer represents
that it has consistently filed its Federal income tax returns as if the election had been
timely made, and that no relevant facts have changed since the due date for the
election that make the election more advantageous for the Taxpayer. Based on this
representation, we conclude that Taxpayer is not using hindsight in requesting
permission to make a late election.

Finally, although the interests of the Government are ordinarily prejudiced if the taxable
year in which the regulatory election should have been made are closed by the period of
limitations on assessment under § 301.9100-3(c)(1)(ii), Taxpayer submitted an affidavit
from an independent auditor certifying that the interests of the Government are not
prejudiced under the standards of § 301.9100-3(c)(1)(i), and further certifying that
granting relief in this ruling will not result in Taxpayer having a lower tax liability in the
aggregate for all taxable years affected by the election than Taxpayer would have had if
the election had been timely made, permitting the Service to grant an extension under
§ 301.9100-3.

Conclusion

Based solely on the information submitted and the representations made, we conclude
that the requirements of § 301.9100-3 have been satisfied with respect to Taxpayer’s
failure to make the election under § 168(h)(6)(F)(ii) for Year 1, when the property was
placed in service. Accordingly, Taxpayer is granted an extension of time of 75 days
from the date of this letter to file an amended return for Year 1 making the election
under § 168(h)(6)(F)(ii). Taxpayer should attach a copy of this letter to its return. In
addition, the letter ruling should be attached for all subsequent returns (and amended
returns) for all taxable year to which this ruling is relevant.

This office has not verified any of the material submitted in support of the request for a
ruling. However, as part of an examination process, the Service may verify the factual
information, representations, and other data submitted.
PLR-112905-18 6

This ruling addresses the granting of § 301.9100-3 relief only. We express no opinion
regarding the tax treatment of the instant transaction under the provisions of any other
sections of the Code or regulations that may be applicable, or regarding the tax
treatment of any conditions existing at the time of, or effects resulting from, the instant
transaction.

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. Enclosed is a copy of the letter ruling
showing the deletions proposed to be made when it is disclosed under § 6110.

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

                                   Sincerely,



                                   Shareen S. Pflanz
                                   Senior Technician Reviewer, Branch 5
                                   Office of Associate Chief Counsel
                                   (Income Tax & Accounting)

Enclosures: Copy of this letter
Copy of this letter for section 6110 purposes