Opportunity fund received relief for omitted Form 8996

Plain-English summary

A partnership's operating agreement stated that it was intended to be a qualified opportunity fund and invest only in qualified opportunity zone property. Its members believed the first-year partnership return had been filed with Form 8996, and an investor's return reported gain deferral consistent with that understanding. A new accounting firm later discovered that the original preparer had omitted Form 8996 through inadvertence. The IRS found reasonable reliance, good faith, and no prejudice to the government. It granted 60 days to attach Form 8996 to an amended return or administrative adjustment request and self-certify from the intended first month.

Ruling snapshot

• Question: May the partnership file a late Form 8996 after its original accountant inadvertently omitted it?
• Outcome: Approved, with 60 days to file Form 8996
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202437005 Third Party Communication: None
Release Date: 9/13/2024 Date of Communication: Not Applicable
Index Number: 9100.00-00, 1400Z.02-00
Person To Contact:
------------------------- ---------------------------, ID No. ---------------
------------------------------------ -----------------
--------------------------------- Telephone Number:
------------------------------------------- --------------------
---------------------------------- Refer Reply To:
CC:ITA:B05
PLR-124834-23
Date:
June 13, 2024

    TY: -------

Legend

Taxpayer = -----------------------------------------------------------
Member 1 = -----------------------------------------------------------------
-------------
Member 2 = -----------------------------------------------------------------
------------------------------------------------------------
Individual = -----------------------
Director = ---------------------
Accounting Firm 1 = ------------------------
Accounting Firm 2 = -------------------
Operating Agreement = -----------------------------------------------------------------
-------
State = -------------
Year 1 = -------
Year 2 = -------
Date 1 = --------------------------
Date 2 = -------------------
Date 3 = ------------------
Date 4 = -------------------
Month 1 = ------
Month 2 = -----------

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

This responds to the request by Taxpayer, dated Date 1, for relief under §§ 301.9100-1
through 301.9100-3 of the Procedure and Administration Regulations to file Form 8996,
Qualified Opportunity Fund. Taxpayer supplemented its request on Date 2 and Date 3.
Specifically, Taxpayer requests that the Internal Revenue Service (Service) grant to

PLR-124834-23 2

Taxpayer an extension of time to make an election under § 1400Z-2 of the Internal
Revenue Code (Code) and § 1.1400Z2(d)-1(a)(2) of the Income Tax Regulations to self-
certify Taxpayer as a Qualified Opportunity Fund (QOF) and to be treated as a QOF,
effective Month 1, Year 1, as provided under § 1400Z-2 of the Code and § 1.1400Z2(d)-
1(a) of the Income Tax Regulations.

                                      FACTS

The information and affidavits submitted reflect the following facts.

Taxpayer, a limited liability company, was formed under the laws of State. Taxpayer is
treated as a partnership for federal income tax purposes and files income tax returns on
the basis of a calendar year. Taxpayer computes income under the accrual method of
accounting. The current members of Taxpayer are Member 1 and Member 2, and both
are regarded entities for federal income tax purposes. Individual, a partner of Member 1
and grantor of Member 2, is the managing member of Taxpayer.

The Operating Agreement of Taxpayer, dated Date 4, provides that Taxpayer is
intended to be a qualified opportunity fund within the meaning and requirements of §
1400A-2(d)(1) of the Code and will invest only in qualified opportunity zone property as
defined in § 1400Z-2(d)(2) of the Code. The Operating Agreement also provides that
Taxpayer will have and exercise all powers conferred by the laws of State on limited
liability companies and do any and all things necessary, convenient or incidental to
achieving Taxpayer’s purpose. In addition, the Operating Agreement provides that the
managing member shall use commercially reasonable efforts to cause the Taxpayer to
operate in a manner so that it qualifies as a qualified opportunity fund.

Individual retained Accounting Firm 1 to serve as Taxpayer’s accounting and tax
advisor. Accounting Firm 1 is a management consulting and accounting firm which had
provided tax advice and preparation services for many years. Accounting Firm 1 was
responsible for preparing and filing Taxpayer’s Year 1 Form 1065, U.S. Return of
Partnership Income, and Form 8996, Qualified Opportunity Fund, to self-certify
Taxpayer as a QOF as of the month Taxpayer was formed. Taxpayer’s Members
understood that Taxpayer’s Year 1 tax return was accurately and timely filed with the
Form 8996 attached. In addition, Individual’s federal income tax return reflected gain
deferral, which suggested that the proper election had been made to qualify Taxpayer
as a QOF.

In Month 2, Year 2 Taxpayer retained new tax advisors at Accounting Firm 2 to prepare
all required tax filings for Taxpayer. After reviewing Taxpayer’s Year 1 Form 1065
prepared by Accounting Firm 1, the tax advisors at Accounting Firm 2 identified that the
initial tax return of Taxpayer was not properly prepared to certify Taxpayer as a QOF.
Specifically, Accounting Firm 2 discovered that Accounting Firm 1 had neither prepared
nor submitted a Form 8996 with Taxpayer’s initial tax return.

PLR-124834-23 3

Accounting Firm 2 contacted Member 1, Member 2 and Individual to inform them that
Accounting Firm 1 had failed to file Form 8996 with Taxpayer’s Year 1 Form 1065.
Accounting Firm 2 advised Taxpayer that it could seek to make the QOF election by
filing a private letter ruling request, in order to request an extension of time to file the
self-certification included in Form 8996 pursuant to §§ 301.9100-1 and 301.9100-3 of
the Procedure and Administrative Regulations. Accounting Firm 2 was immediately
authorized to prepare and submit a request for a private letter ruling.

Taxpayer has submitted affidavits signed under penalties of perjury from Individual,
from a Senior Manager at Accounting Firm 2, and from Director, a Director of Tax
Services at Accounting Firm 1 in support of the requested ruling. Director stated in his
affidavit that although he was aware that Taxpayer’s members intended to treat
Taxpayer as a QOF pursuant to the relevant provision of the Code, he failed to file Form
8996 with Taxpayer’s Year 1 Form 1065 due solely to inadvertence.

                               LAW AND ANALYSIS

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 an 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) 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
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

PLR-124834-23 4

relevant here, the taxpayer requests relief before the failure to make the regulatory
election is discovered by the Service, or although exercising reasonable diligence
(taking into account the taxpayer’s experience and the complexity of the return or
issue), the taxpayer was unaware of the necessity for an election. A taxpayer may
alternatively demonstrate good faith actions if he reasonably relies on a qualified tax
professional and the professional failed to make, or advise the taxpayer to make, the
election.

A taxpayer is deemed not to have acted reasonably and in good faith pursuant to the
provisions 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
the regulatory election should have been made or any taxable year that would have
been affected by the election had it been timely made is closed by the period of
limitations on assessment under § 6501(a) before the taxpayer’s receipt of a ruling
granting relief under that 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. Members and Individual
reasonably relied on a qualified tax professional who failed to make, or advise Taxpayer

PLR-124834-23 5

to make, the election to self-certify as a QOF pursuant to § 1.1400Z2(d)-1(a)(2) of the
Income Tax Regulations.

Accordingly, we grant Taxpayer an extension of 60 days from the date of this letter
ruling to file a Form 8996 to make an election to self-certify as a QOF, effective Month
1, Year 1, under § 1400Z-2 of the Code and § 1.1400Z2-1(a)(2)(i) of the Income Tax
Regulations. The election must be made on a completed Form 8996 attached to the
Taxpayer’s amended tax return or by making an administrative-adjustment request (as
applicable).

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.

The rulings contained in this letter are based upon affidavits, information and
representations submitted by Taxpayer and accompanied by a penalty of perjury
statement executed by 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.

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,



                                       Gerald Semasek,
                                       Assistant to the Chief, Branch 5
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)

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