PLR 200851001: 60 days to group rental real estate as one activity, with eligibility left open

Plain-English summary

Taxpayers are a married couple who filed jointly. Rental activity is generally passive under section 469(c)(2), which caps the losses a taxpayer can deduct. Section 469(c)(7) lifts that presumption for people in a real property trade or business, but it applies interest by interest, so a taxpayer with several rental properties must clear the material participation hurdle on each one separately unless an election is made to treat them all as a single activity. That election is made by attaching a statement to the original return under section 1.469-9(g)(3). Taxpayers filed their Year 1 joint return without the statement. The Service granted 60 days to make the election for Year 1.

The mechanics of the relief differ from the other extensions in this release. Because the election belongs on an original return that has already been filed, the statement must go on an amended return for Year 1, not on a fresh filing with a service center.

What gives this short letter its edge is the reservation at the end. The Service grants time to make the election while expressly declining to say whether Taxpayers satisfy the requirements of section 469(c)(7)(B) or whether they materially participate in any activity. Those are the two conditions that make the election worth anything. The ruling therefore restores a procedural opportunity and leaves the entire substantive predicate open to examination. The facts recited are consistent with that posture: eligibility under section 469(c)(7)(B) appears only as something Taxpayers represent, never as something found.

The section 301.9100-3 analysis is again absent. The letter states the standard, that the taxpayer acted reasonably and in good faith and that relief will not prejudice the government, and then concludes the requirements are satisfied. No reason for the omitted statement is given, and no adviser is mentioned.

One divergence should be recorded. This letter defines a regulatory election under section 301.9100-1(b) as one whose due date is prescribed by a regulation published in the Internal Revenue Bulletin. PLR 200851002, signed by the same official on the same day out of the same branch, and PLR 200851005, released the same day, both say the Federal Register. The three are reproduced as released and the difference is noted rather than resolved, because no citation verification tool was available to this session. Smaller inconsistencies sit alongside it: the letter drops the section symbol once, writing "the requirements of section 469(c)(7)(B)" where it otherwise uses the symbol, and its legend runs to two tokens, Taxpayers and Year 1, with Year 1 spaced where other letters in this release write Year1 closed up.

Ruling snapshot

• Question: May Taxpayers receive an extension of time under section 301.9100-3 to make the section 469(c)(7)(A) election, through the statement required by section 1.469-9(g)(3), to treat all interests in rental real estate as a single rental real estate activity for Year 1?
• Outcome: Approved. Sixty days from the date of the letter, the statement to be attached to an amended return for Year 1 along with a copy of the letter. No opinion on whether Taxpayers qualify under section 469(c)(7)(B) or materially participate in any activity.
• Key authorities: Sections 469(c)(2), 469(c)(7)(A) and 469(c)(7)(B); section 1.469-9(g)(3) of the Income Tax Regulations; sections 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200851001 Third Party Communication: None
Release Date: 12/19/2008 Date of Communication: Not Applicable

Person To Contact:
Index Number: 9100.00-00, 469.00-00, ------------------------, ID No. ------------ 469.03-00, 469.03-03 Telephone Number:
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Refer Reply To:
-------------------------------------- CC:PSI:B02
------------------------------ PLR-112048-08
Date:
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September 10, 2008

Legend

Taxpayers = --------------------------------------
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Year 1 = ------

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

This responds to a letter dated February 9, 2008 submitted on behalf of Taxpayers by their authorized representative, requesting an extension of time under
§ 301.9100-3 of the Procedure and Administration Regulations for Taxpayers to file an election under § 469(c)(7) of the Internal Revenue Code and § 1.469-9(g)(3) of the Income Tax Regulations to treat all interests in rental real estate as a single rental real estate activity.

According to the information submitted, Taxpayers are married individuals who filed their tax returns jointly. Taxpayers represent that in Year 1 they were in a real property business as defined by § 469 and were qualified under § 469(c)(7)(B) to make an election to treat all interests in rental real estate as a single rental real estate activity. However, Taxpayers filed their joint return for Year 1 without the statement required under § 1.469-9(g)(3).

Under § 469(c)(2), the term “passive activity” generally includes any rental activity. Section 469(c)(7) provides a limited exception to this rule for taxpayers in a real property trade or business. Specifically, § 469(c)(7)(A) indicates that if a taxpayer meets the requirements of section 469(c)(7)(B), the taxpayer’s rental real estate activity will no longer be presumptively passive. By its terms, the exception under
§ 469(c)(7)(A) is to be applied as if each interest of the taxpayer in rental real estate were a separate activity. However, a taxpayer may elect to treat all interests in rental real estate as a single activity.

Section 1.469-9(g)(3) provides that a qualifying taxpayer makes the election to treat all interests in rental real estate as a single rental real estate activity by filing a statement with the taxpayer’s original income tax return for the taxable year. Section 1.469-9(g)(3) describes the information that must be contained in the statement.

Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term “regulatory election” as including an election whose due date is prescribed by a regulation published in the Internal Revenue Bulletin.

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

Section 301.9100-3 provides that requests for relief under § 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 that the grant of relief will not prejudice the interests of the government.

Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. As a result, Taxpayers are granted an extension of time of 60 days from the date of this letter to make an election under § 469(c)(7)(A) to treat all their interests in rental real estate as a single rental real estate activity effective Year 1. The election must be in the form of the statement required by § 1.469-9(g)(3) and attached to an amended return for Year 1. A copy of this letter should be attached to the election. A copy is enclosed for that purpose.

Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code. Specifically, no opinion is expressed concerning whether Taxpayers satisfy the requirements under § 469(c)(7)(B) or whether Taxpayers materially participate in any activity.

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, copies of this letter are being sent to your authorized representatives.

Sincerely,

William P. O’Shea
Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for § 6110 purposes

cc: