Late Form 8996 is treated as timely for opportunity fund status

Plain-English summary

A limited liability company taxed as a partnership was formed to invest in qualified opportunity zone property through a single operating business. Its manager sought legal and tax assistance but did not discuss forming a qualified opportunity fund and mistakenly believed no federal return was required for the formation year because the company had no activity. The company therefore missed the deadline for its return and Form 8996 self-certification. After discovering the omission, its adviser filed both documents and the company requested discretionary relief. The IRS found that the company acted reasonably and in good faith and that treating the election as timely would not prejudice the government. It ruled that the already filed Form 8996 was timely, while expressing no opinion on whether the investments or the company otherwise satisfied the substantive opportunity-zone requirements.

Ruling snapshot

• Question: Could the company's late-filed Form 8996 be treated as timely so qualified opportunity fund status began in its formation month?
• Outcome: Approved, the filed Form 8996 is considered timely
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(a)-1, 1.1400Z2(d)-1, 301.9100-1, and 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202140012                                             Third Party Communication: None
 Release Date: 10/8/2021                                       Date of Communication: Not Applicable
 Index Number: 1400Z.02-00
                                                               Person To Contact:
 --------------------                                          ---------------------, ID No. -----------------
 -----------------------------------                           Telephone Number:
 ----------------------------------                            ---------------------
                                                               Refer Reply To:
 In Re: -------------------------------------                  CC:ITA:B05
                                                               PLR-106237-21
                                                               Date:
                                                               July 12, 2021




Legend

Taxpayer                  =        ---------------------------------------------------------------
Entity                    =        -------------------------------------------------------
Date 1                    =        ---------------------
Date 2                    =        --------------------------
State B                   =        ------------
Lawyer                    =        ----------------
Advisor                   =        ------------------------------
Manager                   =        --------------------
Date 4                    =        -------------------------
Year 1                    =        -------


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

This ruling responds to Taxpayer’s request for a letter ruling dated Date 1. Specifically,
Taxpayer requests an extension under section 301.9100-1 and section 301.9100-3 of
the Income Tax Regulations to (1) make a timely election under section 1.1400Z2(a)-
1(a)(2)(i) to be certified as a qualified opportunity fund (QOF), as defined in section
1400Z-2(d) of the Internal Revenue Code; and (2) for the taxpayer to be treated as a
QOF, effective as of the month the taxpayer was formed in Year 1, as provided under
section 1400Z-2(d) of the Code and section 1.1400Z2(d)-1(a) of the Income Tax
Regulations.

                                                    FACTS

Taxpayer is a limited liability company, organized under the laws of State B on Date 2.
Taxpayer is treated as a partnership for Federal income tax purposes. Taxpayer is an
accrual method taxpayer with a tax year end December 31. Taxpayer was organized
for the purpose of investing in qualified opportunity zone property as defined in section
PLR-106237-21                                2

1400Z-2(d)(2) of the Internal Revenue Code. Taxpayer’s sole investment is in Entity.
Taxpayer represents that Entity is a qualified opportunity zone business, as defined in
section 1.1400Z2(d)-1(d)(1) of the Income Tax Regulations. In connection with the
formation of Taxpayer, Manager employed Lawyer to provide legal services and sought
Advisor’s assistance by asking specific tax questions. Manager represents that they
have significant experience within the real estate industry and are well-versed in matters
of real estate taxation. According to the affidavits and additional information provided to
us, Manager and Lawyer never discussed forming a QOF. Manager was unaware of the
requirement to file Form 8996, Qualified Opportunity Fund with the Taxpayer’s timely
filed Year 1 Federal income tax return for Taxpayer to self-certify QOF status and be
treated as a QOF as of the month Taxpayer was formed. Manager mistakenly believed
that Taxpayer was not required to file a Federal income tax return for Year 1, as
Taxpayer had no activity. As a result, Taxpayer failed to file its Federal income tax
return and Form 8996 by the due date. Upon discovering that the election had not been
timely filed, Advisor was enlisted by Taxpayer to file its Federal income tax return and
pursue relief under sections 301.9100-1 and 301.9100-3. On Date 4, Advisor filed
Taxpayer’s Year 1 Federal income tax return and Form 8996.

                                  LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for rules for the
certification of QOFs. Section 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations
provides that the self-certification of a QOF must be timely-filed and effectuated
annually 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
Federal income tax return (including extensions). The information provided indicates
that Taxpayer did not file its Form 8996 by the due date of its Federal income tax return
(including extensions) due to Advisor's failure to file the income tax return.

Section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for electing to be a QOF
and electing to self-certify as a QOF. As such, these elections are regulatory elections,
as defined in section 301.9100-1(b). According to section 301.9100- 3(a), requests for
extensions of time for regulatory elections that do not meet the requirements of section
301.9100-2 (automatic extensions) must be made under the rules of section 301.9100-

3. Additionally, requests for relief subject to section 301.9100-3 will be granted when
the taxpayer provides evidence to establish that the taxpayer acted reasonably and in
good faith, and that the granting 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, failed to make the election, because after
PLR-106237-21                                 3

exercising reasonable diligence (taking into account the taxpayer’ s experience and the
complexity of the return or issue), the taxpayer was unaware of the necessity for the
election, 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 interest 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 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 of the regulations for the granting of relief and
Taxpayer's Form 8996, filed on Date 4, 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 all appropriate parties.
This office has not verified any of the material submitted in support of the request for a
PLR-106237-21                                  4

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 the taxpayer are qualifying investments as defined
in section 1.1400Z2(a)-1(b)(34) or whether the 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.
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 the 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,



                                           Shareen S. Pflanz
                                           Chief, Branch 5
                                           Office of Associate Chief Counsel
                                           (Income Tax and Accounting)




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