IRS excuses a late Qualified Opportunity Fund self-certification

Plain-English summary

A limited liability company was formed to operate as a Qualified Opportunity Fund and invested in a business expected to qualify as a qualified opportunity zone business. Its manager hired accountants to prepare the federal return and Form 8996 but misunderstood the filing deadline, primarily because of confusion and disruption during the emerging COVID-19 pandemic. When the accountants explained the correct deadline, the company had already missed it. The manager immediately sought legal advice, and the company filed its return with a completed Form 8996 electing Qualified Opportunity Fund status from its formation month. The IRS found that the company acted reasonably and in good faith and that relief would not prejudice the government. It therefore treated the Form 8996 self-certification and effective-month election as timely filed under Treasury Regulation § 301.9100-3.

Ruling snapshot

• Question: Should the company receive an extension to self-certify as a Qualified Opportunity Fund and elect QOF status beginning in its formation month?
• Outcome: Approved: the filed Form 8996 was treated as timely.
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1(a), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202123005 Third Party Communication: None
Release Date: 6/11/2021 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------------------ ----------------------, ID No. ------------
--------------------------- Telephone Number:
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----- ------------------------------- Refer Reply To:
CC:ITA:B05
PLR-121016-20
Via E-fax Date:
March 15, 2021

Legend

Taxpayer = [redacted]

Business = [redacted]

Manager = [redacted]

Accountants = [redacted]

State = [redacted]

Date 1 = [redacted]

Date 2 = [redacted]

Date 3 = [redacted]

Date 4 = [redacted]

Date 5 = [redacted]

Date 6 = [redacted]

Date 7 = [redacted]

Year 1 = [redacted]

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

This ruling responds to Taxpayer’s request dated Date 1. Specifically, Taxpayer
requests relief under § 301.9100-3 of the Income Tax Regulations for Taxpayer’s Form
8996, Qualified Opportunity Fund, as filed on Date 2, to be treated as timely for
purposes of the election: (1) to self-certify Taxpayer as a Qualified Opportunity Fund
(QOF), as defined in section 1400Z-2(d) of the Internal Revenue Code (Code); and (2)
for Taxpayer to be treated as a QOF, effective as of the month Taxpayer was formed,
as provided under section 1400Z-2 and Treasury Regulation 1.1400Z2(d)-1(a).

                                      FACTS

The information and affidavits submitted reflect the following facts.

Taxpayer, a limited liability company formed under the laws of State on Date 3, was
created for the purpose of serving as a QOF as defined by section 1400Z-2(d)(1) of the
Code, and was formed for the purpose of investing in qualified opportunity zone
property.

Specifically, Taxpayer used a portion of the funds contributed by investors to acquire an
interest in Business. Business is expected to qualify as a qualified opportunity zone
business, as defined in section 1400Z-2(d)(3).

Manager was appointed as Taxpayer’s manager under the limited liability company
agreement of Taxpayer. Manager’s responsibilities include ensuring all required tax
returns for Taxpayer are prepared and timely filed, including annually certifying
Taxpayer’s status as a QOF pursuant to section 1.1400Z2(d)-1(a)(2) of the Income Tax
Regulations.

Consistent with his past practices, Manager retained Accountants to prepare Taxpayer’s
Year 1 Federal tax return. Manager intended that the Accountants prepare the Form
8996, Qualified Opportunity Fund, as part of the Federal income tax return. Manager,
however, erroneously believed that the due date for Taxpayer’s Year 1 return was Date

4. Manager’s error stemmed primarily from the confusion and dislocation from the
   emerging impact of the Covid-19 virus and pandemic.

On Date 5, Manager began providing Accountants with documents related to the
preparation of Taxpayer’s return. Manager was aware that the IRS extended the due
date for filing Year 1 returns that would have otherwise been required to be filed by Date

4. Manager accordingly believed that the deadline for filing Taxpayer’s Year 1 tax
   return was extended.

On Date 6, Manager received an email from Accountants indicating that the due date for
Taxpayer’s Year 1 Federal income tax return was actually Date 7. Because of
Manager’s erroneous belief respecting the due date for Taxpayer’s Year 1 tax return,
Taxpayer failed to timely file such return with an attached Form 8996 self-certifying as a
QOF.

Upon learning that Taxpayer’s Year 1 return and Form 8996 would not be filed timely,
Manager immediately contacted counsel for advice on whether, and how, Taxpayer
could elect QOF status for the month it was formed. On Date 2, Taxpayer filed its Year
1 return and attached a completed Form 8996 electing to be treated as a QOF. The
Taxpayer now seeks relief pursuant to sections 301.9100-1 and 301.9100-3 of the
Regulations.

                            LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) of the Code directs the Secretary to prescribe regulations for
the purposes of carrying out the statute’s purposes, including rules for the certification of
QOFs. Section 1.1400Z2(d)-1(a)(2) of the Regulations provides the rules for an entity
to self-certify as a QOF. Section 1.1400Z2(d)-1(a)(2)(i) provides that the entity electing
to be certified as a QOF must do so annually on a timely filed return in such form and
manner as may be prescribed by the Commissioner of Internal Revenue in the Internal
Revenue Service forms or instructions, or in publications or guidance published in the
Internal Revenue Bulletin.

To self-certify as a QOF, a taxpayer must file Form 8996 with its tax return for the year
to which the certification applies. The Form 8996 must be filed by the due date of the
tax return (including extensions). The information provided indicates that Taxpayer did
not file its Form 8996 by the due date of its Year 1 income tax return (including
extensions) because Manager did not know the correct due date for such return.

Because section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for an entity to
self-certify as a QOF, these elections are regulatory elections, as defined in section
301.9100-1(b).

Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner
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 extensions covered in section 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 the grant of relief will not
prejudice the interests of the Government.

Under section 301.9100-3(b) a taxpayer is deemed to have acted reasonably and in
good faith if the taxpayer requests relief before the failure to make the regulatory
election is discovered by the Service, or reasonably relied on a qualified tax
professional, and the tax professional failed to make, or advise the taxpayer to make,
the election. However, a taxpayer is not considered to have reasonably relied on a
qualified tax professional if the taxpayer knew or should have known that the
professional was not competent to render advice on the regulatory election or was not
aware of all relevant facts.

In addition, section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have
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 in all material respects of the required election and related tax
consequences but chose not to make 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)(1) provides that the Commissioner will grant a reasonable
extension of time to make the regulatory election 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 (taking into account the time value of money).

Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily
prejudiced if the taxable year in which the regulatory election should have been made or
any taxable year that would have been 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.

Based on the facts and information submitted and the representations made, we
conclude that Taxpayer's request for extension of time to elect to be a QOF and to self-
certify as a QOF is a regulatory election governed by § 301.9100-3. Further, we
conclude that Taxpayer has acted reasonably and in good faith, and that the granting of
relief would not prejudice the interests of the Government. Accordingly, based solely on
the facts and information submitted, and the representations made in the ruling request,
Taxpayer has satisfied the requirements for the granting of relief. Consequently,
Taxpayer's Form 8996, certifying Taxpayer as a QOF as of the month Taxpayer was
formed, is considered timely filed.

This ruling is based upon facts and representations submitted by Taxpayer and
accompanied by a penalty of perjury statement executed by an appropriate party. 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.

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 express no opinion, either express or implied, concerning
whether any investments made into Taxpayer are qualifying investments as defined in
section 1.1400Z2 (a)-1(b)(34) or whether Taxpayer meets the requirements under
section 1400Z-2 and the regulations thereunder to be a QOF. 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) 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.

A copy of this letter must be attached to any income tax return to which it is relevant.1
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 rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

                                          Sincerely,



                                          Erika C. Reigle
                                          Assistant to the Branch Chief, Branch 5
                                          Office of Associate Chief Counsel
                                          (Income Tax & Accounting)

cc: --------------------

1 Because Taxpayer has already filed a Year 1 return with an attached completed Form 8996, Taxpayer
should send a cover letter and a copy of this letter ruling to the IRS Service Center where the return was
filed. The cover letter should request that the IRS associate the letter ruling with Taxpayer’s Year 1 return