LLC owned by a charity gets 120 days to make two missed elections so a rehab project isn't stuck with slower depreciation as tax-exempt use property

Plain-English summary

When property is owned (through partnerships) by a tax-exempt entity, part of it can be treated
as "tax-exempt use property," which forces slower depreciation and can undercut credits. The
Code offers an escape: an entity controlled by a tax-exempt owner can elect under Section
168(h)(6)(F)(ii) not to be treated as a tax-exempt entity, but to do so it usually first has to be a
corporation for tax purposes. Here, an LLC wholly owned by a 501(c)(3) charity held a stake in
the entity that managed a mixed-use rehabilitation project (some costs intended to be qualified
rehabilitation expenditures under Section 47). Under the project's operating agreement, the LLC
was supposed to (1) elect via Form 8832 to be taxed as a corporation (a "check-the-box"
election under Section 301.7701-3(c)) and (2) make the Section 168(h)(6)(F)(ii) election to opt
out of tax-exempt treatment. Due to intervening events beyond its control, it filed neither, and
the charity discovered the omission while preparing a later return. The IRS found the LLC acted
reasonably and in good faith and granted a 120-day extension to file both elections (the
corporate classification effective the intended date and the 168(h) election on an amended
return), conditioned on filing all consistent returns for open years. The IRS cautioned that
granting extra time is not a ruling that the taxpayer actually qualifies to make the elections.

Ruling snapshot

• Question: May an LLC owned by a tax-exempt entity get extensions of time to make a late check-the-box election (to be taxed as a corporation) and a late § 168(h)(6)(F)(ii) election (not to be treated as a tax-exempt entity)?
• Outcome: approved (120-day extension for both elections, conditioned on consistent filings for open years)
• Key authorities: IRC § 168(h)(6)(F)(ii), (A); § 47; Treas. Reg. §§ 301.7701-3(c), 301.9100-7T, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                               Department of the Treasury
                                                        Washington, DC 20224

 Number: 202309004                                      Third Party Communication: None
 Release Date: 3/3/2023                                 Date of Communication: Not Applicable
 Index Number: 168.00-00
                                                        Person To Contact:
 ---------------------------                            ----------------, ID No. -----------------
 -----------------------------------                    Telephone Number:
 ----------------------------                           --------------------
                                                        Refer Reply To:
                                                        CC:ITA:B04
                                                        PLR-111054-22
                                                        Date:
                                                        December 02, 2022




 Taxpayer                              =   -----------------------------------------------------
 Member 1                              =   -------------------------------------------------------------------
                                           -------------------------------------------------------------------
                                           -----------
 Managing Entity                       =   -------------------------------------
 Project Owner                         =   ------------------------------------
 State                                 =   ----------
 Y                                     =   ---
 Date 1                                =   -----------------------
 Date 2                                =   ------------------
 Date 3                                =   ----------------------
 Date 4                                =   ---------------------------
 Year 1                                =   -------


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

This letter responds to Taxpayer's request, dated June 1, 2022, requesting an extension
of time under §§ 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations to make elections under § 301.7701-3(c) and § 168(h)(6)(F)(ii) of the
Internal Revenue Code (Code).

                                             FACTS

Taxpayer is a limited liability company formed under the laws of State on Date 1. The
sole member of Taxpayer is Member 1, an entity exempt from taxation under
§ 501(c)(3) of the Code.

Taxpayer owns a Y% membership interest in Managing Entity, which is the managing
member of Project Owner. Project Owner operates and leases a mixed-use project in
State. The financial closing of the project, and the adoption of Project Owner's
operating agreement occurred on Date 2. Some of the costs incurred by Project Owner
in rehabilitating the project were intended to be qualified rehabilitation expenditures
under § 47. Pursuant to Project Owner's operating agreement, Taxpayer, as a member
of Managing Entity, was required to elect to change its classification to be classified as
an association taxable as a corporation for federal tax purposes in order to file an
election under § 168(h)(6)(F)(ii) to not be treated as a tax-exempt controlled entity.

Prior to Date 3, Taxpayer was disregarded as an entity separate from its owner for
federal tax purposes. Taxpayer represents that it intended to elect to change its
classification to be classified as an association taxable as a corporation for federal tax
purposes effective Date 3. To make such an election, Taxpayer was required to file an
election pursuant to § 301.7701-3(c). However, due to intervening events beyond its
control, Taxpayer failed to file a Form 8832, Entity Classification Election, electing to
classify Taxpayer as an association taxable as a corporation effective Date 3. Taxpayer
also failed to make the election under § 168(h)(6)(F)(ii) for Year 1. While preparing its
tax return for the tax year ending on Date 4, Member 1 discovered Taxpayer's failure to
make the elections under § 301.7701-3(c) and § 168(h)(6)(F)(ii).

                                    APPLICABLE LAW

Section 301.7701-3(a) provides that a business entity that is not classified as a
corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can
elect its classification for federal tax purposes. An eligible entity with a single owner can
elect to be classified as an association or to be disregarded as an entity separate from
its owner.

Section 301.7701-3(b)(1) provides that except as provided in § 301.7701-3(b)(3), unless
the entity elects otherwise, a domestic eligible entity is (i) a partnership if it has two or
more members; or (ii) disregarded as an entity separate from its owner if it has a single
owner.

Section 301.7701-3(c)(1)(i) provides, in part, that an eligible entity may elect to be
classified other than as provided under § 301.7701-3(b), or to change its classification,
by filing Form 8832 with the service center designated on Form 8832.

Section 301.7701-3(c)(1)(iii) provides that an election made under § 301.7701- 3(c)(1)(i)
will be effective on the date specified by the entity on Form 8832 or on the date filed if
no such date is specified on the election form. The effective date specified on Form
8832 cannot be more than 75 days prior to the date on which the election is filed and
cannot be more than 12 months after the date on which the election is filed. If an
election specifies an effective date more than 75 days prior to the date on which the
election is filed, it will be effective 75 days prior to the date it was filed.

Section 167(a) of the Code generally provides for a depreciation deduction for property
used in a trade or business. Under § 168(g), an alternative depreciation system must
be used for any tax-exempt use property as defined in § 168(h). Section 168(h)(6)(F)(i)
provides a tax-exempt controlled entity is treated as a tax-exempt entity for purposes of
§ 168(h)(6).

Section 168(h)(6)(A) provides that, for purposes of § 168(h), if any property which 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 is treated as tax-exempt use property. Under
§ 168(h)(6)(F)(iii)(I), a corporation (without regard to that subparagraph and
§ 168(h)(2)(E)) constitutes a "tax-exempt controlled entity" if 50 percent or more (in
value) of the corporation's stock is held by one or more tax-exempt entities (other than a
foreign person or entity). In the case of tiered partnerships and other entities,
§ 168(h)(6)(E) applies similar rules. Under § 168(h)(6)(F)(ii), a tax-exempt controlled
entity can elect not to be treated as a tax-exempt entity. Once made, the 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, a
§ 168(h)(6)(F)(ii) election 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 301.9100-7T(a)(3)(i)
provides that a § 168(h)(6)(F)(ii) election must be made by attaching a statement to the
tax return for the taxable year for which the election is to be effective.

Section 301.9100-1(c) provides that the Commissioner of Internal Revenue has the
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
for which a regulation prescribes the due date.

Sections 301.9100-1 through 301.9100-3 provide the standards 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 a request for an extension of time for a regulatory election
(other than automatic extensions of time 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) provides that a taxpayer is 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), a taxpayer will not be considered to have not 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)(1) provides that the Service will grant a reasonable extension of
time only when doing so will not prejudice the interests of the Government. 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.

Section 301.9100-1(b) provides that the term "regulatory election" includes an election
whose due date is prescribed by a regulation published in the Federal Register.

Section 301.9100-2 provides the standards the Commissioner will use to determine
whether to grant an automatic extension of time for making certain elections.

Section 301.9100-3 provides the guidelines for granting extensions of time for making
elections that do not meet the requirements of § 301.9100-2. Section 301.9100-3(a)
provides that requests for relief subject to § 301.9100-3 will be granted when the
taxpayer provides the evidence (including affidavits described in § 301.9100-3(e)) to
establish to the satisfaction of the Commissioner that the taxpayer acted reasonably
and in good faith, and the grant of relief will not prejudice the interests of the
Government.

                                        ANALYSIS

The facts submitted by Taxpayer indicate that Taxpayer intended at the outset of the
engagement with Project Owner to make both the elections under § 301.7701-3(c) and
§ 168(h)(6)(F)(ii), that its failure to make the elections on a timely-filed return was
inadvertent, and that Taxpayer is not using hindsight in requesting relief. Further,
Taxpayer requested this relief before the failure to make the elections was discovered
by the Service. Finally, Taxpayer acted reasonably in and good faith, and the interests
of the government will not be prejudiced by the granting of relief under § 301.9100-3.

                                      CONCLUSION

Based solely on the information submitted and the representations made, we conclude
that Taxpayer has satisfied the requirements of §§ 301.9100-1 and 301.9100-3. As a
result, we grant Taxpayer an extension of time of one hundred twenty (120) days from
the date of this letter to file Form 8832 with the appropriate service center to elect to be
classified as an association taxable as a corporation for federal tax purposes effective
Date 3. A copy of this letter should be attached to the Form 8832.

Additionally, Taxpayer is granted an extension of one hundred twenty (120) days from
the date of this letter to file an amended return making the election under
§ 168(h)(6)(F)(ii) for Year 1. Taxpayer must attach a copy of this ruling letter to its
amended return. If Taxpayer files its amended return electronically, it may satisfy this
requirement by attaching a statement to its amended return that provides the date and
control number of this letter ruling.

This ruling is contingent on Taxpayer and its owner filing within 120 days from the date
of this letter all required original or amended information and tax returns for all open
years consistent with the requested relief. A copy of this letter should be attached to
any such returns.

This ruling is 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 a
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, this ruling grants an extension of time to make elections under
§ 301.7701-3(c) and § 168(h)(6)(F)(ii). However, § 301.9100-1(a) provides that the
granting of an extension of time for making an election is not a determination that the
taxpayer is otherwise eligible to make the election.

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

Pursuant to the Form 2848, Power of Attorney and Declaration of Representation, on
file, we are sending a copy of this letter to Taxpayer's authorized representatives. This
letter is being issued electronically in accordance with Rev. Proc. 2022-1, 2022-1 I.R.B.

1. A paper copy will not be mailed to Taxpayer.

                                      Sincerely,




                                      Angella L. Warren
                                      Branch Chief, Branch 4
                                      Office of the Associate Chief Counsel
                                      (Income Tax & Accounting)




Enclosure:
      Copy of this letter for § 6110 purposes

cc: