Company receives 60 days to make a late tax-exempt controlled entity election

Plain-English summary

A wholly owned limited liability company elected corporate tax status and intended to elect not to be treated as a tax-exempt controlled entity under section 168(h)(6)(F)(ii). Its later dissolution under state law changed its tax-year end and moved the return deadline earlier. The company's tax adviser mistakenly calculated the extended deadline using the former year end and filed the return and election late. The IRS found that the company intended to make the election from the outset, reasonably relied on a qualified tax professional, did not use hindsight, and would not prejudice the government. It granted 60 days to file an amended return with the election and a copy of the ruling. The IRS did not decide whether the company otherwise qualified to make the election.

Ruling snapshot

• Question: May the company make a late election not to be treated as a tax-exempt controlled entity for depreciation purposes?
• Outcome: Approved, with a 60-day filing period
• Key authorities: IRC § 168(h)(6)(F)(ii); Treas. Reg. §§ 301.9100-1, 301.9100-3, 301.9100-7T(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202443010 Third Party Communication: None
Release Date: 10/25/2024 Date of Communication: Not Applicable
Index Number: 168.00-00, 9100.00-00
Person To Contact:
-------------------------- ---------------------, ID No. -----------------
-------------------------------------- Telephone Number:
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--------------------------------------- Refer Reply To:
------------------------------- CC:ITA:B04
In Re: PLR-103754-24
Date:
July 29, 2024

Taxpayer = ----------------------------
----------------------------
-------------------------
State Z = -------------
Advisor = ---------------------
Tax Year End 1 = ------------------
Tax Year End 2 = ---------------
Fiscal Year 1 = -----------------------
Date 1 = ----------------
Date 2 = ---------------------------
Date 3 = -----------------------
Date 4 = -----------------------
Date 5 = -------------------
Date 6 = -----------------
Date 7 = ----------------------
Date 8 = ----------------------
Date 9 = -----------------------
Date 10 = -----------------------

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

This letter responds to Taxpayer’s request, dated Date 10, requesting an extension of
time under §§ 301.9100-1 and 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.

                                      FACTS

Taxpayer was organized as a wholly owned limited liability company under the laws of
State Z, with a default federal tax classification as a disregarded entity. On Date 2,
Taxpayer timely filed the Form 8832, Entity Classification Election to elect to be treated
as a corporation for federal income tax purposes, effective as of Date 1. Taxpayer had

PLR-103754-24 2

an initial tax year end of Tax Year End 1. Taxpayer and Advisor discussed the need for
Taxpayer to make a § 168 election to not be treated as a tax-exempt entity. Taxpayer
relied upon Advisor for federal tax income tax advice and compliance.

On Date 3, Taxpayer liquidated and filed a certificate of dissolution with State Z. As a
result of the dissolution under state law, Taxpayer’s tax year end changed from Tax
Year End 1 to Tax Year End 2. The change in tax year end changed Taxpayer’s
deadline to file its federal income tax return from Date 5 to Date 4. Taxpayer timely filed
for an automatic extension of time to file by Date 4, thereby extending Taxpayer’s due
date for Fiscal Year 1 federal income tax return to Date 7.

Advisor, due to administrative oversight, mistakenly believed that the extended due date
for Taxpayer’s Fiscal Year 1 federal income tax return was Date 9. Advisor discovered
the oversight during Date 6. Advisor, after discovering the oversight, immediately
began to complete Taxpayer’s Year 1 federal income tax return, including the § 168
election. On Date 8, Advisor filed Taxpayer’s federal income tax return. Date 8 is after
Date 7, the extended deadline to file Taxpayer’s Fiscal Year 1 federal income tax return;
thus, Taxpayer’s § 168 election was not timely filed.

                              APPLICABLE LAW

Section 167(a) of the Code generally provides 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)(F)(i)
provides generally that a tax-exempt controlled entity is treated as a tax-exempt entity
for purposes of § 168(h)(6).

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

Under §168(h)(6)(F)(iii)(I), a corporation (without regard to that subparagraph and
§ 168(h)(2)(E)) constitutes a “tax-exempt controlled entity” 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). In the case of tiered partnerships and other entities,
§ 168(h)(6)(E) applies similar rules.

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

Section 301.9100-7T(a)(2)(i) of the Procedure and Administration Regulations
(Regulations) provides that a §168(h)(6)(F)(ii) election must be made by the due date of

PLR-103754-24 3

the tax return for the first taxable year for which the election is to be effective. Section
301.9100-7T(a)(3)(i) provides that the § 168(h)(6)(F)(ii) election must be made by
attaching a statement to the tax return for the taxable year for which the election is to be
effective.

Section 301.9100-1(c) provides that the Commissioner of Internal Revenue has the
discretion to grant a reasonable extension of time to make a regulatory election. Section
301.9100-1(b) defines the term “regulatory election” as including any election for which
a regulation prescribes the due date. The § 168(h)(6)(F)(ii) election is a regulatory
election.

Sections 301.9100-1 through 301.9100-3 of the Regulations provide the standards the
Service will use to determine whether to grant an extension of time to make a regulatory
election. Section 301.9100- 3(a) provides that a request for an extension of time for a
regulatory election (other than automatic extensions of time 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 granting 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 tax professional
failed to make, or advise the taxpayer to make, the election.

Under § 301.9100-3(b)(3), a taxpayer will not be 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, 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

PLR-103754-24 4

(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 Service will grant a reasonable extension of
time only when doing so will not prejudice the interests of the Government. 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.

                                    ANALYSIS

The facts submitted by Taxpayer indicate that Taxpayer intended at the outset to make
the § 168(h)(6)(F)(ii) election, that its failure to make the election on a timely-filed return
was inadvertent, and that Taxpayer is not using hindsight in requesting relief. Taxpayer
relied upon Advisor, a qualified tax professional, to make the § 168(h)(6)(F)(ii) election
in Fiscal Year 1, but Advisor failed to submit the election with a timely submitted Fiscal
Year 1 return. Taxpayer acted reasonably in and good faith, and the interests of the
government will not be prejudiced by the granting of relief under Regulation
§ 301.9100-3.

The affidavits, from both Taxpayer and Advisor, filed in support of the request
adequately explain the events that led to the failure and discovery of the error to file the
election in a timely manner as required by Regulation § 301.9100-3(e)(2)-(3).

                                  CONCLUSION

Based solely on the facts as represented and the applicable law, we conclude that the
request for relief under Regulation § 301.9100-3 should be granted. Taxpayer is granted
an extension of 60 days from the date of this letter to file an amended return making the
election under § 168(h)(6)(F)(ii). Taxpayer must attach a copy of this ruling letter to its
amended return. If Taxpayer files its amended return electronically, it may satisfy this
requirement by attaching a statement to its amended return that provides the date and
control number of this letter ruling.

This ruling is based upon information and representations submitted by Taxpayer.
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.

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, this ruling grants Taxpayer an extension of time to make a
§168(h)(6)(F)(ii) election; however, this ruling does not address whether Taxpayer is
otherwise eligible to make this requested election.

PLR-103754-24 5

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.

Pursuant to the Form 2848, Power of Attorney and Declaration of Representation, on
file, we are sending a copy of this letter to Taxpayer's authorized representatives. This
letter is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-21
I.R.B. 859 and Rev. Proc. 2024-1, 2024-1 I.R.B. 1. A paper copy will not be mailed to
Taxpayer.

                                                   Sincerely,




                                                   Angella L. Warren
                                                   Chief, Branch 4
                                                   Office of Associate Chief Counsel
                                                   (Income Tax & Accounting)

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