Amended Form 8996 treated as timely for a qualified opportunity fund

Plain-English summary

A partnership formed to invest in qualified opportunity zone property intended to self-certify as a qualified opportunity fund, but its return preparer did not attach Form 8996 to the first-year return. The preparer knew an election was required but did not know the form had to accompany the return, and the tax software provided no QOF warning or prompt. The mistake came to light when several nonmanaging members received IRS notices stating that the partnership's identification number was not associated with a certified QOF. The partnership filed an amended return with Form 8996 and requested relief. The IRS found reasonable reliance on a qualified tax professional, treated the amended Form 8996 as timely, and did not decide whether the partnership or its investments otherwise met the QOF requirements.

Ruling snapshot

• Question: Could the partnership's Form 8996 attached to an amended first-year return be treated as timely?
• Outcome: Approved
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202324006                                             Third Party Communication: None
Release Date: 6/16/2023                                       Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                              Person To Contact:
------------------------------------                          ----------------------, ID No. -----------------
-----------------------------------------                     Telephone Number:
-----------------------------------                           --------------------
-------------------------                                     Refer Reply To:
Attn: --------------------------------------                  CC:ITA:B05
                                                              PLR-118328-22
                                                              Date:
                                                              March 24, 2023




                TY: -------

Taxpayer            = -------------------------------------------------------------------------------------------
                      -------------
Individual          = ------------------------
Manager
Individual          = ------------------
Preparer
Attorney            =   ----------------
LLC 2               =   -----------------------
LLC 3               =   --------------------------
LLC 4               =   ------------------------------------
LLC 5               =   -------------------------------------------
Law Firm            =   ----------------------------------
Law Firm 2          =   ----------------------------
State               =   -------------
Address 1           =   -------------------------------------------
Address 2           =   -----------------------------------------------------
Year 1              =   -------
Year 2              =   -------
Year 3              =   -------
Year 4              =   -------
Month 1             =   ------
Date 1              =   ---------------------------
Date 2              =   -----------------
Date 3              =   ------------------
Date 4              =   ----------------
Class 1             =   --
Class 2             =   --
N1                  =   ---
N2                  =   -----
PLR-118328-22                                 2

 N3                = ------
 N4                = ---
 N5                = ---

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

This responds to Taxpayer’s request dated Date 1 for relief under § 301.9100-3 of the
Procedure and Administration Regulations in regard to the Form 8996, Qualified
Opportunity Fund, Taxpayer filed with an amended return for Year 1. Specifically,
Taxpayer requests that the Internal Revenue Service (Service): (1) grant to Taxpayer an
extension under § 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to make a timely election under § 1400Z-2 of the Internal Revenue Code
(Code) and § 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations to self-certify as a
Qualified Opportunity Fund (QOF), as defined in § 1400Z-2(d) of the Code; and (2) treat
Taxpayer as a QOF, effective as of Date 2.

                                          FACTS

The information and affidavits submitted reflect the following facts.

Taxpayer, a limited liability company formed pursuant to the laws of State, is treated as
a partnership for federal income tax purposes. Taxpayer uses the accrual method of
accounting and reports income on a calendar year basis. Taxpayer has N1 Class 1
non-managing members and N2 Class 2 members. LLC 2 is a Class 2 member.
Individual Manager is the managing partner of LLC 2 and also served as a managing
partner during Year 1 and Year 2. LLC 2 through LLC 3, serves as the manager of
Taxpayer.

Taxpayer’s operating agreement states that Taxpayer’s purpose is to be a QOF that
invests in qualified opportunity zone property either directly or indirectly through the
ownership of qualified opportunity zone partnership interests, within the meaning of
§ 1400Z-2(d) of the Code. Taxpayer’s qualified opportunity zone property is comprised
of membership interests, which are qualified opportunity zone partnership interests as
defined by § 1400Z-2(d)(2)(C) of the Code, in LLC 4. LLC 4 intends to own, develop,
improve, sell, exchange and otherwise manage the properties at Address 1 and
Address 2, upon which LLC 4 intends to construct a N3-story apartment building.

Individual Manager met several times with Law Firm and their discussions centered on
ensuring that Taxpayer would be structured as a QOF. Individual Manager
communicated that Taxpayer intended to report its activities as a QOF and was aware
that Taxpayer was required to elect to self-certify itself as a QOF for Year 1. Individual
Manager, though, was not informed of the requirement to file a Form 8996 with
Taxpayer’s Form 1065, U.S. Return of Partnership Income for Year 1 in order to make
the election.
PLR-118328-22                                 3

Taxpayer retained LLC 5, an affiliate of LLC 2, to prepare and file Taxpayer’s Form
1065 for Year 1. LLC 5 receives a management fee annually from Taxpayer to manage
Taxpayer’s assets and oversee tax filing obligations. Individual Manager believed that
LLC 5 was qualified to inform Taxpayer of the forms required to be filed with the Service
in order for Taxpayer to be a QOF for Year 1, and Taxpayer relied upon LLC 5 to
prepare all of the required forms for such purpose.

Individual Preparer, who holds a college degree with a focus on accounting, is the tax
manager of LLC 5 and has worked on tax returns since joining LLC 5 during Year 3. On
Date 3 Individual Preparer was informed of Taxpayer’s intention to meet the
requirements to be a QOF and knew that Taxpayer was required to make an election to
self-certify as a QOF. Individual Preparer, however, was unaware of the requirement to
include a completed Form 8996 with a filed tax return. Additionally, the tax software
used by LLC 5 for the preparation of tax returns, which had been used by LLC 5 for a
N5-year period, did not provide warnings or prompts pertaining to QOFs when Individual
Preparer was preparing Taxpayer’s Year 1 return. Because of these factors, Individual
Preparer did not manually complete a Form 8996 for Taxpayer and thus failed to include
such form with Taxpayer’s 2019 Form 1065.

In Month 1,Year 4 approximately N4 of Taxpayer’s non-managing members sent to LLC
2 copies of notices they received from the Service, which suggested Taxpayer was not
a QOF. The notices informed the receiving members that the employer identification
number reported on the members’ Forms 8997, Initial and Annual Statement of
Qualified Opportunity Fund (QOF) Investments, was not associated with a certified
QOF. Individual Manager thereafter requested that LLC 5 address Taxpayer’s missed
election and then learned that a Form 8996 was required to be attached to Taxpayer’s
timely filed Form 1065 Year 1 in order for Taxpayer to elect to self-certify as a QOF. In
the course of discussions with personnel from LLC 5, Individual Manager learned that
the tax software used by LLC 5 in preparing Taxpayer’s return for Year 1 did not support
the filing of a Form 8996; such form would have been required to be manually
generated.

Taxpayer attempted to rectify its untimely election to self-certify as a QOF by filing with
the Service an amended Form 1065 with an attached Form 8996 on Date 4.

Individual Preparer contacted Attorney from Law Firm 2 about the notices non-
managing members of Taxpayer received from the Service. As a result of discussions
with Law Firm 2, Individual Preparer advised Taxpayer to submit a private letter ruling
request. Individual Manager also communicated with Law Firm 2 in regard to the
method for correcting the Taxpayer’s missed election and was advised to submit a
private letter ruling request to the Service.

Taxpayer represents that it is subject to the centralized partnership audit regime under
Code §§ 6221-35 for Taxpayer’s year ending Year 1.
PLR-118328-22                                 4

                                  LAW AND ANALYSIS

Section 13823(a) of Public Law 115-97, commonly known as the Tax Cuts and Jobs Act
of 2017, added provisions to the Code authorizing taxpayers to defer eligible capital
gain through reinvesting the funds into state-designated population census tracks in
low-income communities, known as Qualified Opportunity Zones. Section
1400Z-2(e)(4)(A) of the Code directs the Secretary to prescribe regulations to carry out
the statute’s purposes, including rules for the certification of QOFs. Section
1.1400Z2(d)-1(a)(2) of the Income Tax 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 forms or
instructions, or in publications or guidance of the Service, 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).

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

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations 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 § 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 § 301.9100-3(b) of the Procedure and Administration Regulations, a taxpayer is
deemed to have acted reasonably and in good faith if, among other circumstances not
relevant here, the taxpayer reasonably relied on a qualified tax professional and the tax
professional failed to make, or advise the taxpayer to make, the election. § 301.9100-
3(b)(1)(v).

A taxpayer is deemed not to have acted reasonably and in good faith pursuant to the
provision in § 301.9100-3(b)(3) of the Procedure and Administration Regulations if the
taxpayer—

  (i) seeks to alter a return position for which an accuracy-related penalty has been or
  could be imposed under § 6662 of the Code at the time the taxpayer requests relief,
  and the new position requires or permits a regulatory election for which relief is
PLR-118328-22                                 5

  requested;

  (ii) was 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) of the Procedure and Administration Regulations 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) of the Procedure and Administration Regulations 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) of the Procedure and Administration Regulations 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 will not prejudice the interests of the Government. Taxpayer reasonably relied on
a qualified tax professional who failed to prepare and include a Form 8996 for filing with
the Taxpayer’s Year 1 Form 1065. 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, the Form 8996
attached to Taxpayer’s amended return for Year 1, filed Date 4, is considered timely
filed, and Taxpayer has thereby made the election under § 1400Z-2 and § 1.1400Z2(d)-
1(a)(2)(i) to self-certify as a QOF for Year 1. Taxpayer should submit a copy of this
letter ruling to the Service Center where Taxpayer files its returns along with a cover
letter requesting that the Service associate this ruling with the Year 1 amended return.

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
§ 1.1400Z2(a)-1(b)(34) of the Income Tax Regulations or whether Taxpayer meets the
PLR-118328-22                                  6

requirements under § 1400Z-2 of the Code 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 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,



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




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