Investor receives relief for a missed qualified opportunity fund deadline

Plain-English summary

An S corporation shareholder sold company stock in a transaction subject to a section 338(h)(10) election and intended to reinvest eligible gain in qualified opportunity funds. His tax attorney advised him to wait for the 180-day period applicable to section 1231 gains, assuming most of the deemed asset-sale gain would fall in that category. Only after the earlier investment period expired did the buyer's allocation schedule show that substantially all of the price was assigned to goodwill and other intangibles producing section 1221 gain. The taxpayer promptly sought relief. The IRS found reasonable reliance on a qualified professional, no hindsight, and no prejudice to the government, and treated investments made during the later 180-day period as timely, subject to a proper deferral election and the substantive opportunity-zone rules.

Ruling snapshot

• Question: May the taxpayer receive relief for missing the qualified opportunity fund investment period because counsel reasonably but incorrectly expected section 1231 gain?
• Outcome: approved (investments during the specified later 180-day period were deemed timely)
• Key authorities: IRC § 1400Z-2(a); Treas. Reg. §§ 1.1400Z2(a)-1 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                 Department of the Treasury
                                                          Washington, DC 20224

 Number: 202021009                                        Third Party Communication: None
 Release Date: 5/22/2020                                  Date of Communication: Not Applicable
 Index Number: 1400Z.02-00
                                                          Person To Contact:
 --------------------                                     ------------------, ID No. -----------------
 --------------------------                               Telephone Number:
 -----------------------------------                      --------------------
                                                          Refer Reply To:
                                                          CC:ITA:B04
                                                          PLR-120011-19
                                                          Date:
                                                          February 24, 2020




LEGEND

Taxpayer                               =        ------------------------------------------------
Attorney                               =        ----------------------
Company                                =        ---------------------------------------------------------------
                                       ---------------------
State Z                                =        ---------
Buyer                                  =        ----------------------------------
Expertise                              =         --------------------------------------------------------------
                                       ------------------------------------------------------------------------
                                       --------------------------------------------
                                                ---------------------------------------------------------------
                                                ---------------------------------------
X                                      =        ---
Date 1                                 =        -----------------------
Date 2                                 =        ---------------------
Date 3                                 =        ------------------
Date 4                                 =        --------------------------
Date 5                                 =        -------------
Date 6                                 =        ----------------------




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

This letter responds to Taxpayer’s request dated August 26, 2019. Specifically,
Taxpayer requests relief under Treas. Reg. §§ 301.9100-1 and 301.9100-3 for an
extension of time under Proposed Treas. Reg. § 1.1400Z2(a)-1(c) to contribute “eligible
gains” as defined in Proposed Treas. Reg. § 1.1400Z2(a)-1(b)(2), into a qualified
PLR-120011-19                               2

opportunity fund (QOF), as defined in § 1400Z-2(d) of the Internal Revenue Code
(Code).

                                        FACTS

According to information submitted to us, Taxpayer, a calendar year taxpayer, sold his
stock in Company, a State Z corporation which had an election in effect under
Subchapter S of the Code, to Buyer on Date 1. An election under Code § 338(h)(10)
was made with respect to the sale. Taxpayer intended to invest a portion of the gain
generated from the sale of stock in Company into one or more QOFs.

Taxpayer sought recommendations for lawyers knowledgeable about the opportunity
zone program to assist Taxpayer in making investments in QOFs, and was referred to
Attorney, who had Expertise. Attorney has been engaged in the active practice of law
for over X years with an emphasis on federal income tax matters. Taxpayer engaged
Attorney on Date 2 to assist Taxpayer with investing into one or more QOFs. Taxpayer
provided Attorney with all information requested from Taxpayer regarding the
prospective investments in QOFs.

Attorney advised Taxpayer on the requirements of the opportunity zone program and
assisted in the formation of entities and the preparation of documents. Attorney advised
Taxpayer that pursuant to Code § 1400Z-2(a)(1)(A), the period in which to make an
investment into a QOF is the 180-day period beginning on the date of the sale (statutory
period), Date 1. Thus, the statutory period for taxpayer to invest ended on Date 3.

Attorney advised Taxpayer that a proposed treasury regulation provided another 180-
day period for a shareholder in an S corporation to invest in a QOF. Specifically,
Proposed Treas. Reg. § 1.1400Z2(a)-1(c) (issued October 29, 2018) provided that if an
S corporation has an “eligible gain,” as defined in Proposed Treas. Reg. § 1.1400Z2(a)-
1(b)(2), but does not invest such gain into a QOF, then the shareholders of the S
corporation can invest such gain during the 180-day period beginning with the last day
of the S corporation’s taxable year. Attorney advised Taxpayer that the taxable year of
Company ended on the closing date of the sale, also Date 1, in accordance with the
requirements of the Code § 338(h)(10) election. Therefore, the 180-day investment
period for Taxpayer, as a shareholder in an S corporation was the same as the statutory
period, from Date 1 to Date 3. According to the affidavits and additional information
provided, Taxpayer was prepared and intended to fund one or more QOF’s by Date 3.

In May 2019, a second set of proposed regulations concerning the qualified opportunity
zone program was released. Attorney advised Taxpayer that the second set of
proposed regulations provided a separate 180-day period to invest gains derived from
the sale of Code § 1231 property. Specifically, Proposed Treas. Reg. § 1.1400Z2(a)-
1(b)(2)(iii) (issued May 1, 2019) provided that the 180-day period for Code § 1231 gains
began on the last day of the taxable year in which Taxpayer would have recognized the
gain, Date 4.
PLR-120011-19                                3


According to the affidavits and additional information provided, Attorney assumed that a
majority of the eligible gains from the sale of the Company stock due to the allocation of
the purchase price to company assets from the Code § 338(h)(10) election were Code
§ 1231 gains. Attorney was not engaged to assist with the sale of the Company stock,
the preparation of the Code § 338(h)(10) election, or the preparation of the schedule of
the allocation of the purchase price from the sale of the Company stock. On Date 5,
prior to the expiration of Date 3, Attorney advised Taxpayer to wait until Date 4, the last
day of Taxpayer’s taxable year, to invest in a QOF. Taxpayer complied with Attorney’s
advice and did not invest in a QOF during the 180-day investment period that ended on
Date 3.

On Date 6, after the expiration of the 180-day investment period that ended on Date 3,
Taxpayer received from Buyer a schedule of the allocation of purchase price from the
sale of Company stock pursuant to the Code § 338(h)(10) election. The schedule
allocated substantially all of the purchase price to goodwill and other intangibles, the
sale of which would result in Code § 1221 gains, not Code § 1231 gains. Taxpayer’s
representatives contacted Attorney upon receipt of the schedule and this ruling request
was filed shortly thereafter.

                          APPLICABLE LAW AND ANALYSIS

Code § 1400Z-2(a)(1)(A) provides that in the case of gain from the sale to, or exchange
with, an unrelated person of any property held by the taxpayer, at the election of the
taxpayer, gross income for the taxable year shall not include so much of such gain as
does not exceed the aggregate amount invested by the taxpayer in a qualified
opportunity fund during the 180-day period beginning on the date of such sale or
exchange.

Treas. Reg. § 1.1400Z2(a)-1(c)(9)(i) provides that if an S corporation realizes an eligible
gain, then rules analogous to the rules for partnerships apply to that entity and to its
shareholders. Treas. Reg. § 1.1400Z2(a)-1(c)(8)(iii) provides rules for the 180-day
period for a partner in a partnership electing deferral by investing in a qualified
opportunity fund. In general, if a partner’s distributive share includes an eligible gain,
the 180-day period to invest in a qualified opportunity fund with respect to the partner’s
eligible gains in the partner’s distributive share generally begins on the last day of the
partnership’s taxable year in which the partner’s distributive share of the partnership’s
eligible gain is taken into account under Code § 706(a). A partner may however, elect
to treat the partner’s own 180-day period with respect to the partner’s distributive share
of that gain as being the same as the partnership’s 180-day period or the 180-day
period beginning on the due date for the partnership’s tax return, without extensions, for
the taxable year in which the partnership realized the eligible gain.

A Code § 338(h)(10) election is an irrevocable joint election, made by the purchaser and
seller of an S corporation, on Form 8023 in accordance with the instructions to the form.
PLR-120011-19                                 4

The effect of a Code § 338(h)(10) election for federal income tax purposes is that the
corporation is deemed to sell its assets and then to have distributed the sales proceeds
and liquidated at the end of the closing day.

Treas. Reg. § 301.9100-1(a) provides that the Commissioner of Internal Revenue has
discretion to grant a reasonable extension of time to make a regulatory election. Treas.
Reg. § 301.9100-1(b) defines the term “regulatory election” as including any election the
due date for which is prescribed by a regulation published in the Federal Register.
Eligible gain that a shareholder in an S corporation receives is subject to the 180-day
investment period described in Treas. Reg. § 1.1400Z2(a)-1(c)(9)(i). Therefore, the
election under Code § 1400Z-2(a)(1) to invest into a qualified opportunity fund by a
shareholder in an S corporation that receives eligible gain is a regulatory election
eligible for relief under Treas. Reg. § 301.9100-3.

Treas. Reg. §§ 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. Treas. Reg. § 301.9100-3(a) provides that requests for extensions of time for
regulatory elections (other than automatic changes covered in Treas. Reg. § 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.

Treas. Reg. § 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 Treas. Reg. § 301.9100-3(b)(2) a taxpayer will not be considered to have
reasonably relied on a qualified tax professional if the taxpayer knew or should have
known that the professional was not –

(i) competent to render advice on the regulatory election; or
PLR-120011-19                                  5

(ii) Aware of all relevant facts.

Under Treas. Reg. § 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.

Treas. Reg. § 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 on the material submitted, we conclude that Taxpayer’s failure to make the
election to invest eligible gain into a qualified opportunity fund within the 180-day
investment period described in Treas. Reg. § 1.1400Z2(a)-1(c)(9)(i) for shareholders in
an S corporation was due to Taxpayer’s reliance on the advice given by Attorney, a
qualified tax professional employed by Taxpayer for the purpose of providing advice on
investing into qualified opportunity funds. Taxpayer’s reliance was reasonable since
Attorney was competent to render advice on investing in qualified opportunity funds,
Taxpayer provided Attorney with all information requested, and Taxpayer did not know
that Attorney was not aware of all relevant facts.

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 Treas. Reg. § 301.9100-3. Accordingly,
Taxpayer’s investment of eligible gains as defined in Treas. Reg. § 1.1400Z2(a)-
1(b)(11) from the sale of the Company stock into one or more qualified opportunity
funds during the 180-day period beginning on Date 4 is deemed timely and may be a
qualifying investment as defined in Treas. Reg. § 1.1400Z2(a)-1(b)(34) provided a
proper deferral election is made by Taxpayer in accordance with Code § 1400Z-2 and
the regulations thereunder.
PLR-120011-19                                 6


A copy of this letter must be attached to any income tax return to which it is relevant.
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.

This ruling is based upon information and representations submitted by the Taxpayer
and Attorney and accompanied by a penalty of perjury statement signed by an
appropriate party. Although this office has not verified any of the material submitted in
support of the request for 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. Specifically, we have no opinion, either express or implied, concerning
whether any gain generated from the sale of Company is an eligible gain as defined in
Treas. Reg. § 1.1400Z2(a)-1(b)(11) or whether investments made by Taxpayer into
funds are qualifying investments as defined in Treas. Reg. § 1.1400Z2(a)-1(b)(34).

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

In accordance with the provisions of a power of attorney on file with this office, a copy of
this letter is being sent to Taxpayer's authorized representative.

                                           Sincerely,




                                           Ronald J. Goldstein
                                           Senior Technician Reviewer, Branch 4
                                           Office of Associate Chief Counsel
                                           (Income Tax and Accounting)



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