Late entity classification and tax-exempt controlled entity elections allowed

Plain-English summary

A limited liability company wholly owned by a section 501(c)(3) organization served as general partner of a partnership that owned an affordable housing project. The operating agreement required the company to elect corporate tax classification and then elect under section 168(h)(6)(F)(ii) not to be treated as a tax-exempt controlled entity for the tax-exempt use property rules. The company intended both results from the outset but inadvertently failed to file Form 8832 and the section 168 election. The IRS found good faith, no hindsight, and no prejudice to the government. It granted 120 days to make both elections, subject to the required return attachments and filings by affected tax-exempt owners or beneficiaries.

Ruling snapshot

• Question: May the company make late elections for corporate classification and to opt out of tax-exempt controlled entity treatment?
• Outcome: Approved, with 120 days to file both elections
• Key authorities: IRC §§ 167, 168(g), 168(h)(6)(F); Treas. Reg. §§ 301.7701-3, 301.9100-1, 301.9100-3, 301.9100-7T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202440011 Third Party Communication: None
Release Date: 10/4/2024 Date of Communication: Not Applicable
Index Number: 168.00-00, 9100.04-00,
9100.31-00, 7701.00-00 Person To Contact:
--------------------, ID No. -----------------
---------------------------------------------- Telephone Number:
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------------------------- Refer Reply To:
--------------------------- CC:PSI:01
PLR-125215-23
Date:
June 26, 2024

                                              LEGEND

X = -------------------------------------------------------------------------------------------
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Y = -------------------------------------------------------------------------------------------
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State = ----------

Date 1 = ---------------------

Date 2 = -----------------------

Date 3 = ---------------------

Partnership = -------------------------------------------------------------------------------------------
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Agreement = ----------------------------------------------------------------------------------------

Project = -------------------------

Tax Year = -------

PLR-125215-23 2

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

This letter is in response to a request for a private letter ruling dated December 19,
2023, submitted on behalf of X by its authorized representative, requesting an extension
of time under § 301.9100-3 of the Procedure and Administration Regulations to make
an election under § 168(h)(6)(F)(ii) of the Internal Revenue Code (“Code”) to not be
treated as a tax-exempt controlled entity effective for Tax Year, and for a ruling granting
an extension of time for X to make an election under § 301.7701-3(c) of the Regulations
to be treated as an association taxable as a corporation for federal tax purposes
effective Date 2.

                                      FACTS

The information submitted states that X was formed as a limited liability company under
the laws of State on Date 1. X has been wholly owned by Y, a tax-exempt entity
described in § 501(c)(3), since Date 1. X was formed to serve as the general partner of
Partnership, a limited partnership formed on Date 2 pursuant to Agreement. X intended
to be a Tax-Exempt Controlled Entity under § 168(h)(6)(F)(iii).

Partnership was formed to provide affordable housing and, in furtherance of such
purpose, to acquire, rehabilitate, own, lease, and manage Project. Project is a qualified
low-income housing project pursuant to § 42 of the Code. Project was placed in service
on Date 3. Under § 5.3(z) of the Agreement, X, as the general partner of Partnership,
was required to make the election under § 168(h)(6)(F)(ii) of the Code to not be treated
as a tax-exempt controlled entity for purposes of the tax-exempt use property rules
(“§ 168(h)(6)(F)(ii) election”). In order to make the foregoing election, X was required to
make an entity classification election under § 301.7701-3(c) to be treated as an
association taxable as a corporation for federal tax purposes (“entity classification
election”).

X represents that at all times after the formation of Partnership it intended to make an
election to be treated as an association taxable as a corporation for federal tax
purposes effective Date 2, and that it intended to make a § 168(h)(6)(F)(ii) election
effective for Tax Year. However, X inadvertently failed to timely file a Form 8832, Entity
Classification Election, and the § 168(h)(6)(F)(ii) election. Given that § 5.3(z) of
Agreement required the timely filing of the entity classification election and the
§ 168(h)(6)(F)(ii) election, there is no evidence that X is using hindsight in requesting
relief.

X represents that it will not have a lower tax liability for all tax years affected by the §
168(h)(6)(F)(ii) election and the entity classification election than it would have had if
both elections had been timely made, and the taxable year in which the two elections
should have been made is not closed under § 6501. X and Y represent that they will file
all required returns and/or amended returns as necessitated by the grant of the

PLR-125215-23 3

requested extension of time to make regulatory elections and will recognize any
formerly unreported income as applicable.

                                        LAW

Section 167(a) provides generally for a depreciation deduction for property used in a
trade or business. Under § 168(g), the alternative depreciation system must be used for
any tax-exempt use property as defined in § 168(h).

Section 168(h)(6)(A) provides that, for purposes of § 168(h), if any property which (but
for this subparagraph) is not tax-exempt use property is owned by a partnership having
a tax-exempt entity and a non-exempt entity as partners and any allocation to the tax-
exempt entity is not a qualified allocation, then an amount equal to the tax-exempt
entity’s proportionate share of such property is treated as tax-exempt use property.

Section 168(h)(6)(F)(i) provides generally that any tax-exempt controlled entity is
treated as a tax-exempt entity for purposes of § 168(h)(6). Under § 168(h)(6)(F)(iii)(I), a
“tax-exempt controlled entity” means any corporation (without regard to that
subparagraph and § 168(h)(2)(E) if 50 percent or more (in value) of the corporation’s
stock is held by one or more tax-exempt entities (other than a foreign person or entity).

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity can elect not to be treated as a
tax-exempt entity for purposes of §§ 168(h)(5) and (6). Such an election is irrevocable
and will bind all tax-exempt entities holding an interest in the tax-exempt controlled
entity.

Under § 301.9100-7T(a)(2)(i), the § 168(h)(6)(F)(ii) election must be made by the due
date of the tax return for the first taxable year for which the election is to be effective.
Section 301.9100-7T(a)(3) provides the manner in which the § 168(h)(6)(F)(ii) election
is made.

Section 301.7701-3(a) provides that a business entity that is not classified as a
corporation under §§ 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (an eligible entity) can
elect its classification for federal tax purposes as provided in § 301.7701-3. An eligible
entity with a single owner can elect to be classified as an association taxable as a
corporation or to be disregarded as an entity separate from its owner.

Section 301.7701-3(b)(1) provides that except as provided in § 301.7701-3(b)(3), unless
the entity elects otherwise, a domestic eligible entity is (i) a partnership if it has two or
more members; or (ii) disregarded as an entity separate from its owner if it has a single
owner.

Section 301.7701-3(c)(1) provides, in part, that an eligible entity may elect to be
classified other than as provided under § 301.7701-3(b), or to change its classification,

PLR-125215-23 4

by filing Form 8832, Entity Classification Election, with the service center designated on
Form 8832.

Section 301.7701-3(c)(1)(iii) provides that an election under § 301.7701-3(c)(1)(i) will be
effective on the date specified by the entity on Form 8832 or on the date filed if no such
date is specified on the election form. The effective date specified on Form 8832
cannot be more than 75 days prior to the date on which the election is filed and cannot
be more than 12 months after the date on which the election is filed. If an election
specifies an effective date more than 75 days prior to the date on which the election is
filed, it will be effective 75 days prior to the date it was filed.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make the election. Section
301.9100-2 provides automatic extensions of time for making certain elections. Section
301.9100-3 provides extensions of time for making regulatory elections that do not meet
the requirements of § 301.9100-2.

Section 301.9100-1(b) defines the term “regulatory election” as including any election
the due date for which is prescribed by a regulation. Because the due date of
§168(h)(6)(F)(ii) election is prescribed in § 301.9100-7T, that election is a regulatory
election. In addition, because the due date of the entity classification election is
prescribed in § 301.7701-3(c), that election is a regulatory election.

Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3 will be
granted when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and the grant of the
relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer—
(i) Requests relief before the failure to make the regulatory election is
discovered by the Service;
(ii) Failed to make the election because of intervening events beyond the
taxpayer’s control;
(iii) Failed to make the election because, after exercising due diligence, the
taxpayer was unaware of the necessity for the election;
(iv) Reasonably relied on the written advice of the Service; or
(v) Reasonably relied on a qualified tax professional, and the professional
failed to make, or advise the taxpayer to make, the election.

Under § 301.9100-3(b)(3), a taxpayer is considered to have not acted reasonably and in
good faith if the taxpayer—
(i) Seeks to alter a return position for which an accuracy-related penalty
could be imposed under § 6662 at the time the taxpayer requests relief,

PLR-125215-23 5

            and the new position requires a regulatory election for which relief is
            requested;
    (ii)    Was fully informed of the required election and related tax consequences,
            but chose not to file the election; or
    (iii)   Uses hindsight in requesting relief. If specific facts have changed since
            the original deadline that make the election advantageous to the
            taxpayer, the Service will not ordinarily grant relief.

Section 301.9100-3(c)(1) provides that the Service will grant a reasonable extension of
time only when the interests of the Government will not be prejudiced by the granting of
the 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. Under § 301.9100- 3(c)(1)(ii), 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 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.

                                      ANALYSIS

The information and representations submitted indicate that X at all times intended from
the outset to make the § 168(h)(6)(F)(ii) election and the entity classification election,
and that X’s failure to make the § 168(h)(6)(F)(ii) election and the entity classification
election was inadvertent. X represents that X has requested relief before the failure to
make both elections was discovered by the Service. There is no evidence that X is
using hindsight in requesting relief.

Further, based on the facts presented and the representations made, X will not have a
lower tax liability for all tax years affected by the § 168(h)(6)(F)(ii) election and the entity
classification election than X would have had if both elections had been timely made,
and the taxable year in which the § 168(h)(6)(F)(ii) election and the entity classification
election should have been made is not closed under § 6501(a). We conclude that X
has acted reasonably and in good faith. Further, the interests of the Government will
not be prejudiced by the granting of relief.

X requests an extension of time, under §§ 301.9100-1 and 301.9100-3 to file the
§ 168(h)(6)(F)(ii) election and the entity classification election to be treated as an
association taxable as a corporation for federal tax purposes under § 301.7701-3.
Based solely on the above facts and representations, we conclude that X has met the
requirements of §§ 301.9100-1 and 301.9100-3 with respect to obtaining an extension
of time to file both the § 168(h)(6)(F)(ii) election and the entity classification election.

PLR-125215-23 6

                                 CONCLUSION

Based solely on the facts as represented and the applicable law, we conclude that the
requirements of § 301.9100-3 have been met. Accordingly, X is granted an extension of
time of 120 days from the date of this letter to file an original or amended return for Tax
Year. X must attach the aforementioned § 168(h)(6)(F)(ii) election and the information
set forth in § 301.9100-7T(a)(3) to the original or amended return. X also must attach a
copy of this letter to the original or amended return. Pursuant to § 301.9100-7T(a)(3)(ii),
a copy of this letter and the § 168(h)(6)(F)(ii) election statement must also be attached
to the federal income tax returns of each of the tax-exempt members or beneficiaries of
X.

In addition, based on the facts submitted and representations made, we conclude that X
has satisfied the requirements of §§ 301.9100-1 and 301.9100-3 with respect to the
entity classification election. Accordingly, X is granted an extension of time of 120 days
from the date of this letter to elect to be treated as an association taxable as a
corporation for federal tax purposes effective Date 2. The election should be made by
filing a properly executed Form 8832 with the appropriate service center. A copy of this
letter should be attached to the election.

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. Further, we express no opinion concerning the assessment of any interest,
additions to tax, additional amounts or penalties for failure to file timely income tax
return with respect to any taxable year.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayers 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 a ruling, it is subject to verification on
examination.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

PLR-125215-23 7

Pursuant to powers of attorney on file with this office, we are sending copies of this
letter to X’s authorized representatives.

                                             Sincerely,



                                             Holly Porter
                                             Associate Chief Counsel
                                             (Passthroughs & Special Industries)



                                             By:
                                             Christiaan T. Cleary
                                             Assistant to the Branch Chief, Branch 1
                                             Office of Associate Chief Counsel (Passthroughs
                                             & Special Industries)

Enclosure
Copy for § 6110 purposes

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