Late Form 8996 self-certification as a Qualified Opportunity Fund treated as timely after preparer's omission

Plain-English summary

A limited liability company (taxed as a partnership) was set up to operate as a
Qualified Opportunity Fund, or QOF, the investment vehicle that lets investors
defer capital gains by putting them into opportunity zones. To become a QOF, the
entity has to "self-certify" each year by filing Form 8996 with its return. The
company's tax preparer filed the partnership return on time but left out the Form
8996, so the certification never happened. The problem surfaced when one of the
fund's investors got an IRS letter saying the investment did not count because the
fund was not a certified QOF. A later attempt to fix it by filing an amended
request (an AAR) with Form 8996 did not work, because the form is only valid when
filed with the original return. The company asked the IRS for extra time under the
Section 301.9100-3 relief rules. The IRS granted relief, finding the company
reasonably relied on a professional who failed to make the election, so the Form
8996 filed with the amended request is treated as timely and the fund is
self-certified for Year 1. The IRS expressed no opinion on whether the fund
actually qualifies as a QOF or whether any investment is a qualifying investment.

Ruling snapshot

• Question: Should the IRS grant more time to self-certify as a QOF when the preparer omitted Form 8996 from a timely return?
• Outcome: Approved (extension granted; Form 8996 filed with the AAR treated as timely under Treas. Reg. § 301.9100-3)
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1(a)(2), 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                          Department of the Treasury
                                                  Washington, DC 20224

Number: 202426009                                 Third Party Communication: None
Release Date: 6/28/2024                           Date of Communication: Not Applicable
Index Number: 9100.00-00, 1400Z.02-00
                                                  Person To Contact:
[Taxpayer name and address redacted]                --------------, ID No. --------
                                                  Telephone Number:
                                                    --------------
                                                  Refer Reply To:
                                                    CC:ITA:B05
                                                  PLR-119526-23
                                                  Date:
                                                  April 02, 2024

Legend:
Taxpayer         = --------------
Date 1           = --------------
Date 2           = --------------
Date 3           = --------------
Date 4           = --------------
Date 5           = --------------
Date 6           = --------------
Year 1           = --------------
Year 2           = --------------
Year 3           = --------------
State            = --------------
Managing Member  = --------------
Tax Preparer     = --------------
Accounting Firm  = --------------

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

This ruling responds to Taxpayer's request dated Date 1, and Taxpayer's supplemental
correspondence dated Date 2 and Date 3. Specifically, Taxpayer requests relief 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).

                                         FACTS

Taxpayer represents the facts as follows:

Taxpayer is a limited liability company organized under the laws of State on Date 4.
Taxpayer is treated as a partnership for Federal income tax purposes and is subject to
the centralized partnership audit regime under § 6221 of the Code. Taxpayer uses the
cash method of accounting and the calendar year as its taxable year.

Taxpayer was formed for the purpose of investing in a qualified opportunity zone
business and operating as a QOF as defined in § 1400Z-2(d). Taxpayer's Managing
Member engaged Tax Preparer to prepare its Year 1 Form 1065, U.S. Return of
Partnership Income, and all related forms and elections to self-certify Taxpayer as a
QOF for its Year 1 tax year. Taxpayer's Managing Member had previously relied on
Tax Preparer for accurate tax advice in other matters for multiple years.

Tax Preparer filed the Year 1 Form 1065 by the extended due date, on or before Date 5.
However, Tax Preparer failed to include a Form 8996, Qualified Opportunity Fund, to
self-certify Taxpayer as a QOF. Taxpayer ended its professional relationship with Tax
Preparer in Year 2, after the Year 1 return was filed.

Taxpayer engaged Accounting Firm to prepare the Taxpayers partnership return for
Years 2 and 3, and all forms related to Taxpayer being treated as a QOF for those
years.

Taxpayer discovered there was an error relating to its QOF status when one of
Taxpayer's investor-members received Letter 6502 from the Internal Revenue Service.
The Letter 6502 informed the investor-member that their investment in a QOF was not a
qualifying investment, because the identification number reported was not associated
with a certified QOF.

Upon discovery, Accounting Firm prepared an administrative adjustment request (AAR)
for Year 1 and remitted it to the Internal Revenue Service on Date 6. Accounting Firm
included the Taxpayer's Form 8996 with the Year 1 AAR.

After filing the Year 1 AAR, the Accounting Firm learned that Form 8996 is only valid
when timely filed with the original return. Taxpayer then retained a law firm to prepare
the 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
filed by the due date of the tax return (including extensions). The information provided
indicates that Taxpayer did not file its Form 8996 by the due date of its income tax
return due to the Tax Preparer's failure to make the necessary elections and to include
the Form 8996 with the Taxpayer's Year 1 tax return.

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.

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 § 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 reasonably relied
on a qualified tax professional, and the tax professional failed to make, or advise the
taxpayer to make, the election. Consequently, the Form 8996 attached to Taxpayer's
Year 1 AAR, filed Date 6, 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 return.

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 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.

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.

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



                                                   Sincerely,



                                                   Amy J. Pfalzgraf
                                                   Branch Chief, Branch 5
                                                   Office of Associate Chief Counsel
                                                   (Income Tax & Accounting)


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