Nonprofit-owned housing entity gets late relief to elect out of tax-exempt-entity depreciation treatment

Plain-English summary

A 501(c)(3) nonprofit created a wholly owned entity (treated as a corporation for tax purposes) to act as general partner in a low-income housing partnership. Because that entity is controlled by a tax-exempt parent, the depreciation rules in Section 168(h) would normally treat part of the partnership's property as "tax-exempt use property," forcing slower depreciation that hurts the deal. Section 168(h)(6)(F)(ii) lets a tax-exempt-controlled entity elect out of being treated as tax-exempt so the property depreciates normally, but the election must be filed by the tax return due date for the first effective year. The partnership agreement required the entity to make that election, but the nonprofit's longtime accountant never filed a separate return for the entity and so missed it. A later compliance review caught the omission, and the entity filed the election with a late return. The IRS granted 9100 relief: the taxpayer reasonably relied on a qualified professional who failed to act, and relief would not lower its tax, so the late Section 168(h)(6) election is treated as timely filed.

Ruling snapshot

• Question: Should the IRS grant an extension of time to make a late Section 168(h)(6)(F)(ii) election to forgo tax-exempt-entity treatment?
• Outcome: approved
• Key authorities: IRC § 168(h)(6)(A), (F); Treas. Reg. § 301.9100-7T(a)(2)(i); Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202429014                                             Third Party Communication: None
 Release Date: 7/19/2024                                       Date of Communication: Not Applicable
 Index Number: 9100.04-00
                                                               Person To Contact:
 --------------------------                                    --------------------------,
 -----------------------                                       ID No. -----------------
 ----------------------------------                            Telephone Number:
                                                               --------------------
 --------------------------------                              Refer Reply To:
                                                               CC:ITA:B05
                                                               PLR-124326-23
                                                               Date:
                                                               April 24, 2024




Legend


 Taxpayer                    = -----------------------------------------------------
 Sole Member                 = ---------------------------------------------------------------------------------
                               -------------------------
 Partnership                 = ------------------------------------------------
 Project                     = ----------------------------------------------------------
 Year 1                      = --------------------------------------------
 State Z                     = -------------
 Accountant                  = ------------
 New Accountant              = ---------------------------------------
 Date 1                      = --------------------------
 Date 2                      = -------------
 Date 3                      = -----------------------
 Date 4                      = --------------------------
 Date 5                      = --------------
 Date 6                      = ----------------


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

This ruling responds to Taxpayer's request dated Date 1. Specifically, Taxpayer is
requesting that the Internal Revenue Service ("IRS") exercise its authority under
§ 301.9100-3 of the Procedure and Administration Regulations (Regulations) to grant an
extension of time so that its election to forgo treatment as a tax-exempt entity ("Section
168(h)(6) Election") under section 168(h)(6)(F)(ii) of the Internal Revenue Code ("IRC")
will be treated as timely filed and valid.
PLR-124326-23                                  2

                                           FACTS

On Date 2, Sole Member, a tax-exempt entity under Section 501(c)(3), created
Taxpayer as a wholly owned entity to provide housing for low-income persons and to
serve as a general partner in a limited partnership that owns and operates housing for
the benefit of low-income persons. Taxpayer was organized as a limited liability
company under the laws of State Z and is treated as a corporation for federal income
tax purposes.

On Date 4, Taxpayer was admitted as a managing general partner of Partnership.
Partnership, formed on Date 3, by parties unrelated to Sole Member or Taxpayer, had
as its purposes "to develop, rehabilitate, own, maintain and operate the Project.
Partnership's Limited Partnership Agreement ("LPA") provides that:

       No portion of the Project is or will be treated as "tax-exempt use property"
       as defined in Section 168(h) of the Code. In the event a General Partner
       or any member or partner of a General Partner is controlled by a tax-
       exempt entity, such entity will make the election permitted under Section
       168(h)(6)(F) of the Code

 Because Taxpayer is wholly owned by Sole Member, a tax-exempt entity, it was
required to make the Section 168(h)(6) Election under the LPA.

When Taxpayer became a partner in Partnership, Sole Member engaged Accountant,
who had acted as Sole Member's tax advisor and tax return preparer in the past, to
prepare returns for Taxpayer and Sole Member. Accountant, a certified public
accountant, had over 30 years of public accounting experience. According to publicity
materials, Accountant specializes in tax work relating to nonprofit organizations and
affordable housing and real estate and presents the areas of expertise to include tax
planning and compliance for not-for-profit organizations. Sole Member provided
Accountant a copy of the LPA at the time of engagement. Taxpayer and Sole Member
believed that the election was made to take effect on or before Date 4. However,
Accountant did not prepare a separate income tax return for Taxpayer for Year 1 and
therefore failed to make the Section 168(h)(6) Election for Taxpayer.

On Date 5, during a compliance review, it was discovered that the Section 168(h)(6)
Election was never made. Sole Member alerted its new tax advisor, New Accountant,
and worked to take corrective action. On Date 6, Taxpayer filed its tax return for Year 1,
making the Section 168(h)(6) Election.

After Taxpayer became aware of the consequences of failing to timely file the Section
168(h)(6) Election, this request for relief was submitted under §§ 301.9100-1 and
301.9100-3. Taxpayer represents that it relied on Accountant to make a timely Section
168(h)(6) Election. Taxpayer further represents that the granting of relief under
§ 301.9100-3 will not result in a lower tax liability for the years affected by the election.
PLR-124326-23                                 3


The foregoing are material facts on which this ruling is based.

                                  LAW AND ANALYSIS

Section 167(a) of the Code generally provides for a depreciation deduction for property
used in a trade or business. The depreciation deduction provided by section 167(a) for
tangible property placed in service after 1986 generally is determined under section

168. Under section 168(g), the alternative depreciation system must be used for any
tax-exempt use property as defined in section 168(h).

Section 168(h)(6)(A) provides that, for purposes of section 168(h), if any property that is
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 shall be treated as tax-exempt use property.

Section 168(h)(6)(F)(i) provides generally that any tax-exempt controlled entity shall be
treated as a tax-exempt entity for purposes of section 168(h)(5) and (6). Section
168(h)(6)(F)(iii)(I) provides that a tax-exempt controlled entity is any corporation if 50
percent or more (in value) of the stock is held by 1 or more tax-exempt entities.

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity may elect to not be treated as a
tax-exempt entity. Such an election is irrevocable and will bind all tax -exempt entities
holding an interest in the tax-exempt controlled entity.

Because Sole Member is a tax-exempt entity which owns all of the membership
interests in Taxpayer, Taxpayer is a tax-exempt controlled entity within the meaning of
section 168(h)(6)(F)(iii)(I). Accordingly, Taxpayer is eligible to make the section
168(h)(6) election.

Under § 301.9100-7T(a)(2)(i) of the Regulations, an election under
section 168(h)(6)(F)(ii) must be made by the due date of the tax return for the first
taxable year for which the election is to be effective.

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 that the grant of relief will not prejudice
the interests of the Government.

Under § 301.9100-3(b)(1)(v), a taxpayer is deemed to have acted reasonably and in
good faith if the taxpayer reasonably relied on a qualified tax professional, including a
PLR-124326-23                                  4

tax professional employed by the taxpayer, and the tax professional failed to make, or
advise the taxpayer to make, the election. Section 301.9100-3(b)(2) provides that a
taxpayer will not be 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 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 section 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 § 301.9100-3.

Based on the facts and information submitted and the representations made, we
conclude that Taxpayer and Sole Member have acted reasonably and in good faith, and
that the granting of relief would not prejudice the interests of the Government. Taxpayer
has satisfied the requirements of the regulations for the granting of relief. Accordingly,
Taxpayer's Section 168(h)(6) Election, filed on Date 6, is considered timely filed.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, if Taxpayer files its returns electronically, it may satisfy this requirement by
PLR-124326-23                                  5

attaching a statement to the return that provides the date and control number of the
letter ruling.

This ruling is based upon facts and representations submitted by the 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.

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.



                                           Sincerely,



                                           Sue-Jean Kim
                                           Senior Technician Reviewer
                                           Office of Associate Chief Counsel
                                           (Income Tax and Accounting)


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