PLR 200846014: Omitted tax-exempt-control election received deadline relief

Plain-English summary

A taxable subsidiary of a tax-exempt nonprofit was a general partner in a partnership operating rehabilitated historic property. Its president signed an election under § 168(h)(6)(F)(ii) not to treat the subsidiary as a tax-exempt controlled entity, but believed counsel had completed the filing. The subsidiary did not alert its return preparer, so the election was omitted from its first federal return even though the nonprofit owner included it with Form 990. The IRS found reasonable conduct, good faith, and no prejudice to the government. It granted 60 days to file the election with an amended return and required copies with the relevant returns of tax-exempt shareholders or beneficiaries.

Ruling snapshot

• Question: Could the subsidiary make the § 168(h)(6)(F)(ii) election after inadvertently omitting it from its first return?
• Outcome: Approved. The taxpayer received 60 days to file the election and required attachments.
• Key authorities: IRC § 168(h)(6)(F)(ii); Treas. Reg. §§ 301.9100-3 and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200846014
[Third Party Communication:
Release Date: 11/14/2008
Date of Communication: Month DD, YYYY]
Index Number: 9100.04-00, 168.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:ITA:B05
PLR-126520-08
Date:
August 07, 2008

Legend

Taxpayer = ---------------------------------------------------
State N = -------------
A = -----------------------------------------------
B = ----------------------- ------------------------
C = ----------------------------------------------- -------
D = ----------------------------------------------------------
Tax Year = --------------------
Project = -------------------------------------------------------------------------------------
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Accountant = -------------------------------

Dear ----:

This is in response to your letter of June 4, 2008, requesting, on behalf of the above- named Taxpayer, an extension of time under sections 301.9100-1 and 301.9100-3 of the Regulations on Procedure and Administration to file an election under
§ 168(h)(6)(F)(ii) of the Internal Revenue Code (the "Election"). The material information submitted for consideration is summarized below.

Taxpayer is a corporation incorporated in State N. Taxpayer is a wholly-owned subsidiary of A, which is a non-profit corporation that is a tax-exempt entity under
§ 501(c)(3). A was formed to raise funds to manage the renovation of Project and to create a civic, arts and cultural center to occupy certain renovated buildings in Project. A created Taxpayer to be the general partner of B, a limited partnership formed under the laws of State N that is owned by the Taxpayer, as the 01 percent general partner, and by C, as the 99.99 percent limited partner. B was formed to acquire a leasehold interest in certain rehabilitated buildings within Project owned by D and to operate such
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buildings on a day to day basis in order to obtain long term appreciation, cash and return of capital.

The rehabilitation was financed by loans obtained from a community development entity formed in order to obtain the New Markets Tax Credit under § 45D of the Code. It has been represented that Project was placed on the National Register of Historic Places. Final approval by the National Park Service of the rehabilitation of the buildings at issue in Project as “certified historic structures” for purposes of the rehabilitation tax credit is pending.

The parties decided to lease Project to B for 19 years pursuant to a net lease that permitted D, as owner and landlord of Project, to make an election under § 50D of the Code to pass rehabilitation tax credits through to B. In order to claim the rehabilitation tax credits, the property cannot be tax-exempt use property. In the case of property owned by a partnership with tax-exempt entity partners, the portion of the property treated as tax-exempt use property is the tax-exempt partner’s highest share of income or gain. Since Taxpayer is a wholly-owned subsidiary of A, Taxpayer is required to file an election under § 168(h)(6)(F)(ii) to not be treated as a tax-exempt controlled entity for purposes of § 168(h)(6). All parties to the transaction agreed to memorialize the requirement that Taxpayer make the § 168(h)(6)(F)(ii) election in B’s partnership agreement.

Legal counsel for A sent a § 168(h)(6)(F)(ii) election to Taxpayer for signature. Taxpayer’s president signed the election and returned it to Taxpayer’s legal counsel. Taxpayer was under the impression that the election had been made and that it did not need to do anything further. B’s partnership agreement requires that Taxpayer and D, as landlord, make the necessary § 168(h)(6)(F)(ii) election and that it be verified by accountant.

Accountant was engaged by Taxpayer and B to prepare its Federal and State tax returns for the ------- tax year. Based upon the information submitted, Taxpayer intended to make an election under § 168(h)(6)(F)(ii) on a timely filed federal income tax return for its first tax year ended December 31, ------. However, Taxpayer did not make Accountant aware of the provisions of B’s partnership agreement requiring that the
§ 168(h)(6)(F)(ii) election be made. The ------- Federal tax return was prepared reflecting a taxable loss for the year and the § 168(h)(6)(F)(ii) election was inadvertently omitted from the tax return. Subsequently, A reviewed the ------- tax return of Taxpayer and Taxpayer realized that the § 168(h)(6)(F)(ii) election had inadvertently been omitted from the return. A filed its ------- Form 990 Return of Organization Exempt From Income Tax. That return contained the § 168(h)(6)(F)(ii) election with respect to Taxpayer effective for tax year -------.
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The Taxpayer is seeking relief under §§ 301.9100-1 and 301.9100-3 for failure to make a timely election.

Section 168(h)(6)(A) provides that, for purposes of § 168(h), if (1) any property which is not tax-exempt use property is owned by a partnership which has both a tax-exempt entity and a person who is not a tax-exempt entity as partners, and (2) any allocation to the tax-exempt entity of partnership items 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 that, for purposes of § 168(h)(6), any tax-exempt controlled entity shall be treated as a tax-exempt entity.

Section 168(h)(6)(F)(ii) provides that, for purposes of § 168(h)(6), a tax-exempt controlled entity may elect not to 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.

Section 301.9100-7T(a)(2)(i) requires elections under § 168(h)(6)(F)(ii) to be made by the due date of the tax return for the first taxable year for which the election is to be effective. Therefore, the Election is a regulatory election under § 301.9100-1(b).

Under § 301.9100-1(c) and § 301.9100-3(a), the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election under all subtitles of the Internal Revenue Code, except subtitles E, G, H, and I, provided the taxpayer demonstrates to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government.

Based on the facts and information submitted, including the affidavits submitted and representations made, we conclude that Taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the government. Accordingly, the requirements of the regulations for granting relief in this case have been satisfied and we grant an extension of time, until 60 days from the date of issuance of this letter, for Taxpayer to file the Election.

Taxpayer must file an amended federal income tax return for its tax year ending on December 31, -------, and attach thereto the Election and information set forth in
§ 301.9100-7T(a)(3). Taxpayer should also attach a copy of this letter to the amended return. In addition, pursuant to § 301.9100-7T(a)(3)(ii), a copy of the Election statement should also be attached to the federal income tax returns of each of the tax-exempt shareholders or beneficiaries of Taxpayer.
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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(s) 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 representatives.

The rulings contained in this letter are based upon information and representations submitted by the 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.

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.

Sincerely,

/s/ William A. Jackson

William A. Jackson
Branch Chief, Branch 5
Office of Chief Counsel
(Income Tax & Accounting)

Enclosure (1)
Copy for section 6110 purposes