Opportunity fund receives 60 days after its CPA omitted Form 8996

Plain-English summary

A partnership was formed to operate as a qualified opportunity fund, and an investor reported a capital gain deferral based on an investment in it. The partnership's long-time CPA filed Form 1065 but did not attach Form 8996 because neither the CPA nor the investor knew the form was required. After an attorney identified the omission, the partnership promptly sought relief. The IRS found that the partnership reasonably relied on a qualified tax professional, acted in good faith, and would not prejudice the government by receiving relief. It granted 60 days to attach a completed Form 8996 to an amended return or administrative-adjustment request, without deciding whether the partnership or its investments otherwise qualified.

Ruling snapshot

• Question: Could the partnership receive more time to file Form 8996 and self-certify as a qualified opportunity fund?
• Outcome: Approved, with 60 days from the ruling date to file Form 8996
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1(a), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202341005                                             [Third Party Communication:
 Release Date: 10/13/2023                                      Date of Communication: Month DD, YYYY]
  9100.00-00, 1400Z.02-00
                                                               Person To Contact:
 ----------------------                                        -----------------------, ID No. -----------------
 ------------------------------------                          Telephone Number:
 --------------------------------                              --------------------
 ----------------------------                                  Refer Reply To:
                                                               CC:ITA:B05
                                                               PLR-101265-23
                                                               Date:
                                                               July 18, 2023




Legend:
 Taxpayer       =   -----------------------------------------------------------
 Date 1         =   --------------------------
 Date 2         =   ---------------------
 Date 3         =   ------------------
 State          =   ----------
 Investor       =   ----------------------
 Year 1         =   -------
 X%             =   ------
 Y%             =   ----
 CPA            =   ------------------------------
 Year 2         =   -------
 Year 3         -   -------
 Tax Firm       =   --------------


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

This letter responds to Taxpayer’s request for a letter ruling dated Date 1. Taxpayer
requests an extension of time to make an election under §§ 301.9100-1 and 301.9100-3
of the Procedure and Administration Regulations, granting an extension of time to make
a timely election under § 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 Internal
Revenue Code (Code). Taxpayer also requests to be treated as a QOF, effective as of
Date 2, the month Taxpayer intended to become a QOF, as provided under § 1400Z-
2(d) of the Code and § 1.1400Z2(d)-1(a) of the Income Tax Regulations.

This letter is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-
21 I.R.B. 859.
PLR-101265-23                                2


                                         FACTS

Taxpayer is a limited liability company organized under the laws of State on Date 2.
Taxpayer is classified as a partnership for Federal tax purposes. Taxpayer has a
calendar year annual accounting period.

Taxpayer was formed for the purpose of operating as a QOF as defined in § 1.1400Z-
2(d)(1). Investor invested in Taxpayer shortly after its formation in Year 1. At the time
of the investment, Investor owned X% of the capital and profits of Taxpayer and
Investor’s sister owned the remaining Y%.

Investor met with CPA in Year 2 to prepare for the filing of his Year 1 Form 1040.
Investor explained to CPA that he intended to defer certain capitals gains realized by
investing them into the Taxpayer, and his intention that the Taxpayer was to be a QOF.
CPA filed Investor’s Form 1040 for Year 1 to report the full realized gain and the amount
of eligible gain deferred through investment in the intended QOF.

On Date 3, CPA filed a Form 1065 for the Taxpayer, reporting the Investor’s investment
into Taxpayer. However, CPA failed to file a Form 8996 with the Taxpayer’s 1065,
electing to treat Taxpayer as a QOF. CPA was unaware that filing Form 8996 was
necessary for Taxpayer to meet the QOF requirements. Investor was also unaware of
this requirement. Investor has employed CPA for personal and business return
preparation for the last 30 years and relied on the knowledge and experience of CPA to
correctly file all documents relating to the intended QOF.

Upon discussion with an attorney in Year 3, Investor learned that a Form 8996 should
have been included with the Taxpayer’s Form 1065 for Year 1. Investor spoke with
CPA after these discussions, and CPA acknowledged an election should have been
made by filing Form 8996. Taxpayer promptly engaged Tax Firm to assist with this
ruling request.

                                  LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) of the Internal Revenue Code directs the Secretary to
prescribe regulations for 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 Internal Revenue Service
forms or instructions, or in publications or guidance published in the Internal Revenue
Bulletin.

To self-certify as a QOF, a taxpayer must file Form 8996, Qualified Opportunity Fund,
with its tax return for the year to which the certification applies. The Form 8996 must be
PLR-101265-23                                 3

filed by the due date of the tax return (including extensions). Taxpayer did not file its
Form 8996 by the due date of its income tax return (including extensions) due to
Taxpayer’s belief that CPA, having received all necessary documents and data to
perform the intended services, would make all necessary filings on time.

Because § 1.1400Z2(d)-1(a)(2)(i) 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).

Sections 301.9100-1 through 301.9100-3 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), a taxpayer is deemed to have acted reasonably and in good
faith if the taxpayer requests relief before the failure to make the regulatory election is
discovered by the Service, or reasonably relied on a qualified tax professional, and the
tax professional failed to make, or advise the taxpayer to make, the election. However,
a taxpayer is not considered to have reasonably relied on a qualified tax professional if
the taxpayer knew or should have known that the professional was not competent to
render advice on the regulatory election or was not aware of all relevant facts.

In addition, § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted
reasonably and in good faith if the taxpayer—

       (i)     seeks to alter a return position for which an accuracy-related penalty has
               been or 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 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) 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.
PLR-101265-23                                 4

Section 301.9100-3(c)(1)(i) 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) 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 section 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 would not prejudice the interests of the government. Taxpayer relied on a
qualified tax professional who failed to attach the Form 8996 to the Taxpayer’s Form
1065. Accordingly, based solely on the facts and information submitted, and the
representations made in the ruling request, we grant Taxpayer an extension of 60 days
from the date of this letter ruling to file a Form 8996 to make the election to self-certify
as a QOF under § 1400Z-2 and § 1.1400Z2(d)-1(a)(2)(i). The election must be made
on a completed Form 8996 attached to the Taxpayer’s amended tax return or
administrative-adjustment request (as applicable).

This ruling is based upon facts and representations submitted by Taxpayer and
accompanied by a penalty of perjury statement executed by an appropriate party. This
office has not verified any of the material submitted in support of the request for a ruling.
However, as part of an examination process, the Service may verify the factual
information, representations, and other data submitted.

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) or whether Taxpayer meets the requirements under § 1400Z-2
and the regulations thereunder to be a QOF. Further, we also express no opinion on
whether any interest owned in any entity by Taxpayer qualifies as qualified opportunity
zone property, as defined in § 1400Z-2(d)(2), or whether such entity would be treated as
a qualified opportunity zone business, as defined in § 1400Z-2(d)(3). 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.
PLR-101265-23                                  5

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

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,




                                                   Amy Pfalzgraf
                                                   Branch Chief, Branch 5
                                                   Office of Associate Chief Counsel
                                                   (Income Tax and Accounting)


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