Corporation gets 60 more days to elect out of tax-exempt-controlled-entity status after its firm forgot the election

Plain-English summary

A corporation was majority-owned by a section 501(c)(3) tax-exempt
organization, which made it a "tax-exempt controlled entity" under section
168(h). That status can force slower depreciation (the alternative
depreciation system) on property the corporation uses through a partnership.
Section 168(h)(6)(F)(ii) lets such an entity elect not to be treated as a
tax-exempt entity, which avoids that slower depreciation. Here the corporation
was a general partner in a low-income housing partnership and intended to make
the election, but the firm it hired left the election off its timely filed
return. The omission surfaced only when the partnership's limited partner asked
for a copy. The corporation asked the IRS for extra time under the section
301.9100 relief rules, which let the Commissioner grant more time when a
taxpayer acted reasonably and in good faith, relied on a tax professional who
dropped the ball, and the government is not harmed. The IRS granted 60 days
from the date of the ruling to file an amended return making the election.

Ruling snapshot

• Question: Should the taxpayer get more time to make the section 168(h)(6)(F)(ii) election not to be treated as a tax-exempt controlled entity after its firm omitted it?
• Outcome: Approved (60-day extension granted)
• Key authorities: IRC § 168(h)(6)(F)(ii); Treas. Reg. §§ 301.9100-1, 301.9100-3; Treas. Reg. § 301.9100-7T

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202329008                                              Third Party Communication: None
 Release Date: 7/21/2023                                        Date of Communication: Not Applicable
 Index Number: 168.00-00, 9100.00-00
                                                                Person To Contact:
                                                                ------------------, ID No. -----------------
 -------------------------------------------------------        Telephone Number:
 ----------------------------                                   (202) 317-3467
 ---------------------------                                    Refer Reply To:
                                                                CC:ITA:B04
                                                                PLR-123899-22
                                                                Date:
                                                                April 26, 2023




In re: -------------------------------------------------------
--------------------------------




LEGEND

Taxpayer                            =         -------------------------------------------------------
--------------------------------------------------------------------

State                               =        -------------

Exempt Organization                 =         ------------------------------------------
--------------------------------------------------------------------

Partnership                         =        ------------------------------------------------

x percent                           =        ----------

Firm                                =         -------------------------------------
-------------------------------------------------------------------------------
-----------------------------------------------------------------------

Date 1                              =        -------------

Date 2                              =        ------------

Date 3                              =        -------------

Year                                =        -------------------------------------
PLR-123899-22                                    2



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

    This letter responds to Taxpayer’s request, dated Date 1, requesting an extension of
    time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
    Regulations to make an election under § 168(h)(6)(F)(ii) of the Internal Revenue Code
    (Code) not to be treated as a tax-exempt controlled entity as of Date 2.

                                           FACTS

    Taxpayer is a domestic corporation incorporated under the laws of State. Taxpayer
    uses the calendar year as its annual accounting period and the accrual method of
    accounting. Exempt Organization, a tax-exempt organization under § 501(c)(3) of the
    Code, owns more than 50 percent in value of the stock of Taxpayer. Taxpayer therefore
    is a tax-exempt controlled entity within the meaning of § 168(h)(6)(F)(iii) of the Code.

    Taxpayer is a general partner of Partnership and owns x percent of Partnership.
    Partnership was formed to acquire, construct, operate, lease, and otherwise manage
    residential rental property in a manner that qualifies for the federal low-income housing
    credit. The partnership agreement provides that no portion of the property held by
    Partnership is or will be treated as tax-exempt use property within the meaning of
    § 168(h). On Date 3, Partnership placed in service property that was eligible to be
    depreciated for federal income tax purposes. Once the property was placed in service,
    Partnership consistently has treated the depreciable property as if the § 168(h)(6)(F)(ii)
    election had been timely made for Year.

    Taxpayer relied on Firm to prepare and file the necessary forms and elections for Year.
    Although Firm provided Taxpayer a certificate stating that the §168(h)(6)(F)(ii) election
    will be made with Taxpayer’s return for Year, Firm inadvertently omitted the election
    from Taxpayer’s timely filed return for Year. The missed election was discovered when
    the limited partner in Partnership requested a copy of the election for its files.

                                       APPLICABLE LAW

    Section 167(a) of the Code generally provides for a depreciation deduction for property
    used in a trade or business. Under § 168(g), the alternative depreciation system must
    be used for any tax-exempt use property as defined in § 168(h). Section 168(h)(6)(F)(i)
    provides generally that any 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 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
PLR-123899-22                                     3

    § 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 the § 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. The § 168(h)(6)(F)(ii) election is a
    regulatory election.

    Sections 301.9100-1 through 301.9100-3 provide the standards 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 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 Internal Revenue Service (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:
PLR-123899-22                                      4

  (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 or permits 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.

                                             ANALYSIS

    The facts submitted by Taxpayer indicate that Taxpayer intended at the outset to make
    the § 168(h)(6)(F)(ii) election, that its failure to make the election on a timely-filed return
    was inadvertent, and that Taxpayer is not using hindsight in requesting relief.
    Moreover, Taxpayer requested this relief before failure to make the election 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 facts as represented and the applicable law, we conclude that the
    request for relief under § 301.9100-3 should be granted. Taxpayer is granted an
    extension of 60 days from the date of this letter to file an amended return making the
    election under § 168(h)(6)(F)(ii). 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 based upon information and representations submitted by Taxpayer.
    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 a §168(h)(6)(F)(ii)
    election; however, this ruling does not address whether taxpayer is 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.
PLR-123899-22                                             5

    Pursuant to the Form 2848, Power of Attorney and Declaration of Representative, on
    file, we are sending a copy of this letter to Taxpayer's authorized representative.


                                                              Sincerely,


                                                              /s/ Stephen J. Toomey

                                                              Stephen J. Toomey
                                                              Senior Counsel, Branch 4
                                                              Office of the Associate Chief Counsel
                                                              (Income Tax & Accounting)


    Enclosure
            Copy for § 6110 purposes

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