Tax-exempt controlled corporation receives late depreciation election

Plain-English summary

A corporation wholly owned by a Section 501(c)(3) organization served as co-managing member of a partnership developing affordable housing. The operating agreement required the corporation to elect under Section 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity, but oversight and poor communication caused it to miss the election deadline. The partnership had claimed depreciation on the assumption that the election was in place, and the corporation sought relief promptly after discovering the omission. The IRS found that the failure was inadvertent, the taxpayer was not using hindsight, and relief would not prejudice the government. It treated the election as timely provided the corporation attached the ruling to its next return.

Ruling snapshot

• Question: Could the tax-exempt controlled corporation make a late election not to be treated as tax-exempt for Section 168 purposes?
• Outcome: Approved, subject to attaching the ruling to the next return.
• Key authorities: IRC § 168(h)(6)(F); Treas. Reg. §§ 301.9100-1 through 301.9100-3 and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202119005 Third Party Communication: None
Release Date: 5/14/2021 Date of Communication: Not Applicable
Index Number: 9100.04-00
Person To Contact:
---------------------------------------- ---------------------------, ID No. ---------------
--------------------------- -----------------
---------------- Telephone Number:
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Refer Reply To:
CC:ITA:B05
PLR-119581-20
Date:
February 18, 2021

             TY: -------

Legend

Taxpayer = ---------------------
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Date A = -------------------
State A = -------------
Partnership = -------------------------------
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Tax-Exempt Entity = ------------------------------------------
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Paragraph A = ------------------------------------------------------------------------
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Operating Agreement = ------------------------------------------------------------------------
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x percent = ----------------------
Investor Member = -----------------------------------------------------
y percent = ------------------
Paragraph B = ------------------------------------------------------------------------
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Date B = ---------------------
Date C = ---------------------
Portion = ------------------------
Date D = ----------------------
Tax Year X = -------
Tax Year Y = -------
Individual A = ------------------------------------------------------------------------
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PLR-119581-20 2

Individual B = ------------------------------------------------------------------------
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Dear ------------------:

This letter responds to a request, dated September 3, 2020, for a private letter ruling
granting an extension of time to make an election under § 168(h)(6)(F)(ii) of the Internal
Revenue Code (Code) to Taxpayer, a tax-exempt controlled entity under
§ 168(h)(6)(F)(iii).

FACTS

Taxpayer, a C corporation, uses the calendar year as its annual accounting period and
the cash method as its overall method of accounting. Taxpayer was formed on Date A
as a domestic business corporation in State A to serve as co-managing member of
Partnership. Tax-Exempt Entity uses a fiscal year ending on March 31st as its annual
accounting period, and the accrual method as its overall method of accounting.
Partnership is a State A limited liability company taxed as a partnership. Partnership
uses the calendar year as its annual accounting period and the accrual method as its
overall method of accounting.

Taxpayer is wholly owned by Tax-Exempt Entity, a tax-exempt organization under
§ 501(c)(3). Because Tax-Exempt Entity is the tax-exempt parent of Taxpayer,
Taxpayer is a tax-exempt controlled entity as defined in § 168(h)(6)(F)(iii). Taxpayer is
a co-managing member of Partnership, which was formed to acquire, rehabilitate, own,
lease and manage an affordable housing project so that its owners would qualify for the
low-income housing credit under § 42 of the Code.

Pursuant to Paragraph A of Operating Agreement, Taxpayer owns x percent of
Partnership. Investor Member owns y percent of Partnership. Under Paragraph B of
the Operating Agreement, Taxpayer agreed to make the election described in
§ 168(h)(6)(F)(ii) of the Code to not be treated as a tax-exempt entity.

Partnership acquired land on Date B, and began construction on Date C. After
construction was completed on Portion, that property was placed into service on Date
D.

Taxpayer should have made its election under § 168(h)(6)(F)(ii) on a timely-filed return
for Tax Year X, the year that construction was completed on much of Partnership’s
project. Due to an oversight and lack of communication, Taxpayer inadvertently failed
to make a timely election. On its tax return for Tax Year X, Partnership, however,
claimed depreciation, including the special depreciation allowance on qualified property,
PLR-119581-20 3

on property it placed in service in Tax Year X under the presumption that Taxpayer, the
co-managing member of Partnership, had made the required election under
§ 168(h)(6)(F)(ii). Partnership requested an extension of time to file its partnership
return until September 15th, and timely filed its return accordingly.

Pursuant to Rev. Proc. 2020-23, 2020-I.R.B. 749, the Partnership plans to file an
amended Tax Year X return to claim the low-income housing credits that were
unavailable because Forms 8609 were not issued by the relevant state agency prior to
the extended due date. The amended return will not affect the depreciation claimed or
any other expenses reported on the original Tax Year X return. The Partnership
extended its Tax Year Y return to provide additional time to file. The Partnership plans
to file a Tax Year Y return, on or before the extended due date, to reflect the
§ 168(h)(6)(F)(ii) election being made.

From the materials submitted, including affidavits submitted by Individual A and
Individual B, it is clear the Taxpayer at all times intended to make the election under
§ 168(h)(6)(F)(ii). Upon discovering its failure, Taxpayer promptly sought an extension
of time in which to file the election.

APPLICABLE LAW AND ANALYSIS

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) of the Income Tax Regulations provides generally that any tax-
exempt controlled entity shall be treated as a tax-exempt entity for purposes of
§§ 168(h)(5) and (6). Section 168(h)(6)(F)(iii)(I) provides that a tax-exempt controlled
entity is any corporation if 50 percent or more (in value) of the stock is held by 1 or more
tax-exempt entities. Because Tax-Exempt Entity owns more than 50 percent in value of
Taxpayer's stock, Taxpayer is a tax-exempt controlled entity under that section.

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity may elect to not 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 Procedure and Administration Regulations
(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 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
PLR-119581-20 4

election the due date for which is prescribed by a regulation. The election allowed by
§ 168(h)(6)(F)(ii) election is a regulatory election.

Sections 301.9100-1 through 301.9100-3 of the Regulations provide 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) of the Regulations 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 § 301.9100-3(b)(3) of the Regulations, 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) of the Regulations 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
PLR-119581-20 5

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 on its original return for Tax Year X was inadvertent, and that 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, Taxpayer is treated as if it
made a timely election under § 168(h)(6)(F)(ii), provided it attaches a copy of this letter
to the next return it files.

This ruling is based upon information and representations submitted by the taxpayer
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.

Enclosed is a copy of the letter showing the deletions proposed to be made when it is
disclosed under § 6110 of the Code. If you have any questions concerning this matter,
please contact the individual whose name and telephone number appear at the
beginning of the letter.

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-119581-20 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.

                                            Sincerely,



                                            Christina M. Glendening
                                            Senior Counsel, Branch 5
                                            Office of Chief Counsel
                                            (Income Tax & Accounting)

Enclosure (1)

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