Tax-exempt controlled entity received 45 days for a late election

Plain-English summary

A private foundation wholly owned a taxable corporation that managed a partnership rehabilitating a historic building. Because the foundation owned more than half of the corporation, the corporation was a tax-exempt controlled entity under section 168(h)(6). It intended to elect not to be treated as a tax-exempt entity, but a late engagement and filing-requirement miscommunication prevented a timely election. The IRS found reasonable reliance, good faith, no hindsight, and no prejudice to the government. It gave the corporation 45 days to file the irrevocable election statement required by the temporary regulations.

Ruling snapshot

• Question: May the tax-exempt controlled corporation make a late election not to be treated as a tax-exempt entity under section 168(h)(6)?
• Outcome: approved, with 45 days to file the election statement
• Key authorities: IRC §§ 47 and 168(h)(6)(F); 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: 201935008                                           Third Party Communication: None
Release Date: 8/30/2019                                     Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.04-00,
              9100.22-00, 168.00-00                         Person To Contact:
                                                            ----------------------------
-----------------------------------                         ID No. ------------------
----------------------                                      Telephone Number:
---------------------------------------                     ------------------------------
                                                            Refer Reply To:
--------------------------------------                      CC:ITA:04
                                                            PLR-132397-18
                                                            Date:
-------------------------                                   May 30, 2019




Legend

Date 1                              =     ------------------------
Taxpayer                            =     --------------------------------------------------------------
State                               =     ----------------------------------------------
Date 2                              =     --------------------------
Exempt Organization                 =     ----------------------------
Owner                               =     ---------------------------------------
Building                            =     ------------------------------------------------------------------------
Address                             =     --------------------------------------------------------------
Investor                            =     ----------------------
X                                   =     --------------
Y                                   =     ---------------
Date 3                              =     --------------------
Year 1                              =     -------
Date 4                              =     ---------------------------
PLR-132397-18                                  2


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

This letter responds to a request for a private letter ruling filed on Date 1 on behalf of
Taxpayer, a tax-exempt controlled entity under § 168(h)(6)(F)(iii) of the Internal
Revenue Code (Code), seeking an extension of time to make an election under
§ 168(h)(6)(F)(ii).

Facts

Based on the information submitted and representations made, the relevant facts are as
follows.

On Date 2, Taxpayer was organized under the laws of State as a limited liability
company. Taxpayer, which has elected to be treated as an association taxable as a
corporation for federal income tax purposes, uses the accrual method of accounting and
the calendar year as its taxable year. Taxpayer is wholly owned by Exempt
Organization. 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).

Exempt Organization is a non-profit private foundation organized under the laws of
State and has received a letter determining it to be a § 501(c)(3) organization. Exempt
Organization was formed to preserve Building and to reuse Building for various civic
purposes. Building is located in State at Address.

Exempt Organization formed Taxpayer to act as the managing member of Owner, a
limited liability company taxed as a partnership for federal tax purposes. Owner is
engaged in the rehabilitation of Building, a certified historic structure. The rehabilitation
of Building was intended to qualify for the § 47 rehabilitation tax credit. Owner is owed
X percent by Taxpayer and Y percent by Investor, a taxable entity. Owner began
rehabilitation of Building on Date 3 and placed Building in service in Year 1.

Exempt Organization hired a tax preparer to prepare partnership tax returns for
Taxpayer for the year ending Date 4. The tax preparer was engaged after the original
filing deadline due to a miscommunication and Taxpayer’s unfamiliarity with the filing
requirements. Accordingly, Taxpayer was unable to include a timely filed election under
§ 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity. The affidavits and other
materials submitted state that Taxpayer intended to make the § 168(h)(6)(F)(ii) election.

Upon discovering the miscommunication, Taxpayer submitted a private letter ruling
request seeking an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations (Regulations) to be treated as a tax-exempt controlled entity
under § 168(h)(6)(F)(ii).
PLR-132397-18                                  3


Applicable Law

Under § 47(a)(2), a rehabilitation credit is provided for 20 percent of the qualified
rehabilitation expenditures with respect to any certified historic structure.

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 is 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 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(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
the due date for which is prescribed by a regulation.

Section 301.9100-1 through § 301.9100-3 provides 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 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;
PLR-132397-18                                 4


       (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

Taxpayer’s election is a regulatory election, as defined in § 301.9100-1(b), because the
due date of the election under § 168(h)(6)(F)(ii) is prescribed in the Regulations under
§ 301.9100-7T(a)(2)(i). The Commissioner has the authority under §§ 301.9100-1 and
301.9100-3 to grant an extension of time to file a late regulatory election.

The information provided and representations made by Taxpayer establish that the
Taxpayer acted reasonably and in good faith. The Taxpayer has represented that it
intended to make the § 168(h)(6)(F)(ii) election, that its failure to make the election on a
timely filed original return was inadvertent, and that Taxpayer reasonably relied on tax
professionals. Taxpayer is not seeking to alter a return position for which an accuracy
related penalty has been or could be imposed under § 6662 at the time relief is
requested. Taxpayer did not affirmatively choose not to make the election after having
been informed in all material respects of the required election and related tax
consequences. Taxpayer is not using hindsight in requesting relief.
PLR-132397-18                                  5


Further, based on the information provided and representations made by Taxpayer,
granting an extension will not prejudice the interests of the government. Taxpayer will
not have a lower tax liability in the aggregate for all taxable years to which the election
applies at this time than Taxpayer would have had if the election had been timely made.
In addition, the taxable year in which the regulatory election should have been made
and any taxable years that would have been affected by the election had it been timely
made will not be closed by the period of limitations on assessment under
§ 6501(a) before Taxpayer’s receipt of the ruling granting an extension of time to make
a late election.

Conclusion

Based solely on the facts as represented and the applicable law, we conclude that the
requirements of §§ 301.9100-1 and 301.9100-3 have been met. Taxpayer is granted an
extension of 45 days from the date of this ruling to file the election statement with the
appropriate service center containing the information required in § 301.9100-7T(a)(3).
Taxpayer must attach a copy of this letter to the election statement.

A copy of this ruling should be attached to Taxpayer’s federal tax returns for the tax
years affected. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer, accompanied by a penalty of perjury statements executed by an
appropriate party, and on other affidavits. 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, 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(j)(3) of the Code
provides that it may not be used or cited as precedent.
PLR-132397-18                              6

Pursuant to a power of attorney on file with this office, we are sending a copy of this
letter to Taxpayer’s authorized representative.

                                      Sincerely,



                                      Ronald J. Goldstein
                                      Senior Technical Reviewer, Branch 4
                                      Associate Chief Counsel
                                      (Income Tax & Accounting)




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