Fund gets 60 more days to self-certify as a Qualified Opportunity Fund after its accountant left off Form 8996

Plain-English summary

An LLC taxed as a partnership was set up to be a Qualified Opportunity Fund
(QOF), the kind of investment vehicle created by the 2017 tax law that lets
investors defer capital gains by reinvesting them in low-income "opportunity
zones." To become a QOF, an entity must self-certify each year by attaching Form
8996 to its timely filed return under section 1400Z-2. The fund's accountant
prepared its partnership return but never included Form 8996, so the fund failed
to self-certify for its first year. After its advisors caught the omission, the
fund asked the IRS for more time under the section 301.9100 relief rules. The
IRS found the fund acted reasonably and in good faith: it was unaware of the
self-certification requirement and reasonably relied on a qualified tax
professional who dropped the ball, and granting relief would not prejudice the
government. The IRS gave the fund 60 days to file an amended return with a
completed Form 8996. It expressed no opinion on whether the fund actually
qualifies as a QOF or whether the investments qualify.

Ruling snapshot

• Question: Should the fund get more time to file the Form 8996 election to self-certify as a Qualified Opportunity Fund after its accountant omitted it?
• Outcome: Approved (60-day extension granted)
• Key authorities: IRC § 1400Z-2; Treas. Reg. § 1.1400Z2(d)-1(a)(2); Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202330007                                              Third Party Communication: None
 Release Date: 7/28/2023                                        Date of Communication: Not Applicable
 Index Number: 9100.00-00
                                                                Person To Contact:
 -----------------------------------                            ----------------------, ID No. -----------------
 ---------------------                                          Telephone Number:
 ----------------------------------------                       --------------------
 --------------------------------------                         Refer Reply To:
                                                                CC:IT:B05
                                                                PLR-120734-22
                                                                Date:
                                                                April 21, 2023




                 TY:-------


 Taxpayer                =    ------------------------------------------------------------
 LLC A                   =    ---------------------
 Accounting Firm         =    ------------------------------
 Tax Advisors            =    ----------------------------
 Accountant              =    ----------------------
 Member X                =    -----------------------
 Member Y                =    ------------------------
 Abbreviation            =    ------------
 State                   =    ----------
 N1                      =    -----------
 N2                      =    -------------
 Year 1                  =    -------
 Date 1                  =    -----------------------
 Date 2                  =    ---------------------
 Date 3                  =    ------------------
 Date 4                  =    ---------------------------
 Date 5                  =    ---------------------------
 Date 6                  =    -------------------


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 a Form 8996, Qualified
Opportunity Fund. Specifically, Taxpayer requests that the Internal Revenue Service
(Service) 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
PLR-120734-22                                 2

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, for Taxpayer’s Year 1.

                                          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 keeps its books and records and reports income on a calendar year
basis.

Taxpayer’s operating agreement, dated Date 2, states that Taxpayer is intended to be a
QOF pursuant to § 1400Z-2(d)(1), organized for the purpose of investing in qualified
opportunity zone property as defined by § 1400Z-2(d)(2). On Date 3, members of
Taxpayer each contributed $N1 of capital gain to Taxpayer. Taxpayer subsequently
contributed $N2 to LLC A, a qualified opportunity business as defined by
§ 1400Z-2(d)(3), in exchange for qualified opportunity zone partnership interests.

In Year 1, Taxpayer retained Accounting Firm, which is located in State, to prepare
Taxpayer’s federal income tax return. Accounting Firm provided accounting services
and certain tax advice and the preparation of state and federal income tax returns for
Taxpayer. Accountant, who has more than two decades of experience with Accounting
Firm, was responsible for filing Taxpayer’s annual return, a Form 1065, U.S. Return of
Partnership Income.

On Date 4, Member X discussed with Accountant the filing of a Year 1 return for
Taxpayer, whose name includes Abbreviation. According to Member X, a copy of
Taxpayer’s operating agreement was dropped off at Accountant’s office around that
time period. When Accountant prepared Taxpayer’s return for Year 1, he did not
prepare or include a Form 8996 with Taxpayer’s Form 1065 for Year 1. Taxpayer filed a
Form 1065 for Year 1 with the Service on Date 5. Because no Form 8996 was
included with Taxpayer’s Form 1065, Taxpayer failed to make the self-certification to be
a QOF, pursuant to § 1.1400Z2(d)-1(a)(2) of the Income Tax Regulations, for Year 1.

Member X and Member Y, who made capital contributions to Taxpayer, indicated that
Accountant worked on the Taxpayer’s account during Year 1. Member X and Member
Y intended that Taxpayer satisfy the Code’s requirements and applicable regulations
governing QOFs for Year 1. Moreover, Member X and Member Y believed Accountant
was qualified to identify and prepare the forms required to be filed with the Service in
order that Taxpayer could meet the requirements to be QOF for Year 1. Member X and
Member Y relied upon Accountant to prepare and file such forms with the Service.
PLR-120734-22                                 3

On Date 6, Tax Advisors to Taxpayer informed members of Taxpayer that no election to
be a QOF was included with Taxpayer’s Year 1 return. The same day Member X and
Member Y confirmed with Accountant that no Form 8996 was filed with Taxpayer’s Year
1 return. After Member X and Member Y learned that no Form 8996 was filed with
Taxpayer’s return for Year 1, Taxpayer’s Tax Advisors informed Taxpayer of the
consequences and potential remedy to the late QOF election.

Member X and Member Y are not aware of an examination by the Service of Taxpayer’s
Form 1065 for Year 1 or the returns of such members. Moreover, to the best
knowledge of Member X and Member Y, apart from this consideration of Taxpayer’s
ruling request by our office, the Service did not discover that Taxpayer failed to make an
election to self-certify itself as a QOF pursuant to § 1.1400Z2(d)-1(a)(2) of the Income
Tax Regulations for Year 1 as of the date Member X and Member Y signed updated
affidavits.

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

                                  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
PLR-120734-22                                 4

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, made a request for relief before the Service discovers that
the taxpayer failed to make the regulatory election. § 301.9100-3(b)(1)(i). Good faith
may also be shown if, after exercising reasonable diligence (taking into account the
taxpayer’s experience and complexity of the return or issue) the taxpayer was unaware
of the necessity for the election. § 301.9100-3(b)(1)(ii). A taxpayer may also
demonstrate having acted reasonably and in good faith if he 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
   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
PLR-120734-22                                  5

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. At the relevant time, Taxpayer
was not informed about and was not aware of the provision in § 1.1400Z2(d)-1(a)(2)
under which a taxpayer is required to self-certify itself as a QOF. Moreover, 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, Taxpayer is afforded a period of sixty (60) days from the date of this
letter to file an amended return for Year 1 and attach to it a completed Form 8996, such
that the Taxpayer can make the election under § 1400Z-2 and § 1.1400Z2(d)-1(a)(2)(i)
to self-certify as a QOF for Year 1. Taxpayer should include a copy of this letter ruling
with the amended return filed at the Service Center where Taxpayer files its returns.

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
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
PLR-120734-22                                6

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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