IRS grants a tax-exempt controlled entity 60 days to make a late Section 168(h)(6)(F)(ii) election to protect a rehabilitation credit

Plain-English summary

Two limited liability companies that each elected to be taxed as a corporation, and that are each wholly owned by a 501(c)(3) charity, are "tax-exempt controlled entities" under section 168(h). Together they own most of a partnership (Landlord) that rehabilitated a commercial office building and claimed the rehabilitation credit under section 47, passing it through to the tenant partnership under section 50(d). To keep the tax-exempt-use-property rules from cutting back that credit, the entities were required to elect under section 168(h)(6)(F)(ii) not to be treated as tax-exempt entities. Their return preparers wrongly assumed the entities were disregarded single-member LLCs and never filed Forms 1120, so the required elections were missed; an internal audit later caught the error. This letter, one of a tandem pair and addressed to Taxpayer 2, grants relief under Treasury Regulation section 301.9100-3. Finding that the failure was inadvertent, that the entity relied on its advisors, that it sought relief before the IRS discovered the error, and that the government is not prejudiced, the IRS granted 60 days to file the election statement, effective as of the original date.

Ruling snapshot

• Question: Will the IRS extend the deadline for a tax-exempt controlled entity to make a late election under section 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity?
• Outcome: Approved (60 days from the letter to file the election statement, effective as of the original date)
• Key authorities: IRC § 168(h)(6)(F)(ii), (iii); IRC § 168(h)(6)(A); IRC § 47; IRC § 50(d); Treas. Reg. § 301.9100-7T; Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202145022 Third Party Communication: None
Release Date: 11/12/2021 Date of Communication: Not Applicable
Index Number: 9100.04-00
Person To Contact:
----------------------------- ---------------------------, ID No. ---------------
------------------------------ Telephone Number:
----------------------------------------- ---------------------
----------------------------- Refer Reply To:
------------------------- CC:ITA:B05
PLR-106466-21
Date:
August 17, 2021

             TY: -------

Legend

Taxpayer 1 = -------------------------
------------------------
Taxpayer 2 = -----------------------------------------
------------------------
Corporation 1 = -----------------------------------------------------
------------------------
Corporation 2 = ----------------------------------------
------------------------
Bank 1 = --------------
Bank 2 = -----------
Landlord = --------------------------------------------
-------------------------
Property = ------------------------------------------------------------------------
--------------------------------------------------
Tenant = -------------------------------------
------------------------
Managing Member = ---------------------------------------
------------------------
Date 1 = ---------------------
Date 2 = --------------------------
Date 3 = ----------------
Date 4 = --------------------------

State = --------
a percent = --------------
b percent = --------------
c percent = --------------
d percent = ------------
e percent = --------------
Return Preparer 1 = -------------------
Return Preparer 2 = ----------------------------------------
Tax Year = -------
Individual = ---------------
Law Firm = ---------------------------------------- ------------
Representative = -------------------------

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

This is in response to your Request for a Private Letter Ruling dated March 17, 2021,
filed by your authorized representative on behalf of Taxpayer 2. Our office notes that
your requested rulings letter was filed in tandem with a substantially identical Request
for a Private Letter Ruling letter submitted by the same authorized representative on
behalf of Taxpayer 1. The rulings requested are substantially identical with respect to
both Taxpayer 1 and Taxpayer 2 (collectively, “Taxpayers”), two entities with a common
member, sponsor, or parent, or for multiple members of a common entity or
consolidated group, or parties engaged together in the same transaction affecting all
requesting taxpayers.

Specifically, each Taxpayer is requesting that the Internal Revenue Service exercise its
authority under § 301.9100-3 of the Procedure and Administration Regulations
(Regulations) to grant an extension of time within which to file an election to not be
treated as a tax-exempt controlled entity for purposes of the tax-exempt use property
rules (the "election") under § 168(h)(6)(F) of the Internal Revenue Code (“Code”).

FACTS

Taxpayer 1 is a domestic corporation. Taxpayer 1 was formed as a limited liability
company under the laws of State on Date 2. Taxpayer 1 uses the calendar year as its
annual accounting period and the accrual method as its overall method of accounting.
Taxpayer 1 is wholly owned by Corporation 1, a § 501(c)(3) tax- exempt organization.
Corporation 1 uses the calendar year as its annual accounting period and the accrual
method as its overall method of accounting. Accordingly, Taxpayer 1 is a tax-exempt
controlled entity under § 168(h)(6)(F)(iii) of the Code.

Taxpayer 2 is a domestic corporation. Taxpayer 2 was formed as a limited liability
company under the laws of State on Date 3. Taxpayer 2 uses the calendar year as its
annual accounting period and the accrual method as its overall method of accounting.
Taxpayer 2 is wholly owned by Corporation 2, a § 501(c)(3) tax- exempt organization.

Corporation 2 uses the calendar year as its annual accounting period and the accrual
method as its overall method of accounting. Accordingly, Taxpayer 2 is a tax-exempt
controlled entity under § 168(h)(6)(F)(iii) of the Code.

Landlord is a domestic partnership that uses the calendar year as its annual accounting
period and the accrual method as its overall method of accounting. Taxpayer 1 owns a
percent of Landlord; Taxpayer 2 owns b percent of Landlord; Tenant owns c percent of
Landlord; and Bank 1 owns d percent of Landlord. Landlord is the landlord of the
Property.

Tenant is a domestic partnership that uses the calendar year as its annual accounting
period and the accrual method as its overall method of accounting. Tenant is the tenant
of the Property. Managing Member owns d percent of Tenant, and Bank 2 owns e
percent of Tenant. Managing Member is a domestic corporation that uses the calendar
year as its annual accounting period and the accrual method as its overall method of
accounting.

Landlord was organized to develop, finance, rehabilitate, construct, own, operate,
maintain, lease and sell or otherwise dispose of the Property. Landlord qualified the
property for the rehabilitation credit under § 47 of the Code, and it elected to pass the
credit through to Tenant under § 50(d). Tenant was organized to lease, hold, and
maintain the Property as a commercial office building and related facilities. Tenant is a
managing member of Landlord with a c percent ownership interest. Managing Member
is Tenant's managing member.

Landlord and Tenant executed an agreement on Date 4, which stated that neither
Landlord nor any of its members constitute a "tax-exempt controlled entity' within the
meaning of § 168(h)(6)(F)(iii) of the Code. Further, under Landlord's operating
agreement, Taxpayers were required to make an election under § 168(h)(6) of the Code
so that the rehabilitation credit would not be limited as a result of a portion of the
property being treated as tax-exempt use property.

Corporation 1 hired Return Preparer 1 to prepare returns for Taxpayer 1. Corporation 2
hired Return Preparer 2 to prepare returns for Taxpayer 2. The tax return preparers
mistakenly failed to prepare Forms 1120, U.S. Corporation Income Tax Return, for the
Taxpayers due to the tax return preparers' assumption that the Taxpayers were single
member LLCs disregarded for federal income tax purposes. As a result, the federal
income tax returns for Tax Year for Taxpayers were not timely filed and the
§ 168(h)(6)(F)(ii) elections were not timely made.

In the summer of 2020, while conducting an internal audit between Corporation 2's legal
and accounting departments, it was discovered that Taxpayer 2 had not filed Forms
1120, U.S. Corporation Income Tax Return. Corporation 2 then confirmed with
Taxpayer 1 that Forms 1120 were also not filed for Taxpayer 1. Without properly made
§ 168(h)(6)(F)(ii) elections, the tax returns related to the Property were incorrectly filed.

The Taxpayers requested that Individual of the Law Firm conduct a due diligence
investigation. Individual confirmed that Taxpayer 1 had filed Form 8832, Entity
Classification Election electing to be treated as a C corporation; he was informed that
Taxpayer 2 had filed Form 8832, Entity Classification Election, electing to be treated as
a C corporation, but that the Taxpayers had not filed returns or made the
§ 168(h)(6)(F)(ii) elections. The Taxpayers then commissioned Representative to file
this Private Letter Ruling request.

The Taxpayers represent that the federal income tax returns of Landlord, Tenant, Bank
1, and Bank 2 were filed as if the § 168(h)(6)(F)(ii) elections were timely made.

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

Accordingly, the Taxpayers request an extension of time within which to make section
168(h)(6)(F)(ii) elections for the Taxpayers and to allow the Taxpayers' elections to be
effective as of Date 1.

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 Corporation 2 owns more than 50 percent in value of
Taxpayer 2'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
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
Internal Revenue 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 Internal Revenue 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 Internal Revenue
Service will not ordinarily grant relief.

Section 301.9100-3(c) of the Regulations provides that the Internal Revenue 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 2's failure to make the
election on its original return for Tax Year was inadvertent, and that Taxpayer 2 is not
using hindsight in requesting relief. Moreover, Taxpayer 2 requested relief before the
failure to make the election was discovered by the Internal Revenue Service. Finally,
Taxpayer 2 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. 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 2 is granted an extension of 60
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) for the
election to be effective on Date 1. Taxpayer 2 must attach a copy of this letter to the
election statement. Further, the letter ruling should be attached for all subsequent
returns (and amended returns) for all taxable years to which this ruling is relevant. In
addition, pursuant to § 301.9100-7T(a)(3)(ii), a copy of the election statement should be
attached to the Federal tax returns of the tax-exempt shareholders of Taxpayer 2.

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.

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,



                                   Erika C. Reigle
                                   Senior Technician Reviewer, Branch 5
                                   Office of Chief Counsel
                                   (Income Tax & Accounting)

Enclosure (1)

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