IRS granted more time for a section 168 election

Plain-English summary

The IRS granted a subchapter S corporation an extension of time to make an election under section 168(h)(6)(F)(ii), which would allow it not to be treated as a tax-exempt entity for the alternative depreciation rules. The corporation had relied on a qualified tax professional who failed to make or advise it to make the election. The IRS found that the corporation acted reasonably and in good faith, requested relief before the Service discovered the omission, and would not prejudice the government. It granted 60 days from the letter date to file an amended return with the election and related materials.

Ruling snapshot

• Question: Could the taxpayer receive more time to make the section 168(h)(6)(F)(ii) election?
• Outcome: approved
• Key authorities: IRC §§ 168(h)(6)(F)(ii), 6501(a), 6662, 47, and 6110(k)(3); Treas. Reg. §§ 301.9100-1 through 301.9100-3 and 301.9100-7T.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201149018
[Third Party Communication:
Release Date: 12/9/2011
Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00, 9100.22-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:ITA:B05
PLR-127114-11
Date:
August 23, 2011

Legend

Taxpayer = -------------------------------------------------------
Exempt Organization = ----------------------------------------------------
LLC 1 = ------------------------------------------------------------------------------
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LLC 2 = ------------------------------------------------------------------------------
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Historic Building = ------------------------------------------------------------
Year = --------
Firm = ---------------------------------------

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

This letter is in response to a request for a private letter ruling dated June 22, 2011, submitted on your behalf by your authorized representative. Specifically, you have requested an extension of time for Taxpayer to make an election under § 168(h)(6)(F)(ii) of the Internal Revenue Code (“Code”).

FACTS

Taxpayer is a subchapter S corporation that uses an accrual method as its overall method of accounting and has the calendar year as its taxable year. Taxpayer is wholly owned by Exempt Organization, which has received a determination that it is a tax- exempt organization described in § 501(c)(3).

LLC 1 is a limited liability company that is treated as a partnership for federal income tax purposes. LLC 1 is responsible for the rehabilitation of Historic Building, a certified historic structure. Taxpayer owns a majority of the outstanding units of LLC 1 and is LLC1’s managing partner. The remaining units in LLC 1 are owned by LLC 2. LLC 2 is
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a limited liability company that is treated as a partnership for federal income tax purposes. LLC 2 was formed to operate as the master lessee of Historic Building and collects and pays all expenses related to the Historic Building.

Taxpayer represents that LLC 1’s operating agreement provides for allocations that are not qualified allocations within the meaning § 168(h)(6)(B). LLC 1’s operating agreement also provides that the managing member will make the election under
§ 168(h)(6)(F)(ii) so that LLC 1 will not be treated as a tax-exempt entity.

Taxpayer, Exempt Organization, LLC 1, and LLC 2 have all filed federal income tax returns for Year. Taxpayer, Exempt Organization, LLC 1, and LLC 2 engaged Firm to prepare their federal income tax returns for Year. Taxpayer represents that it relied on Firm to file its return timely and to file all elections required in the LLC 1 operating agreement. Firm represents that it, in its review of LLC 1’s operating agreement, failed to discover the requirement to make the § 168(h)(6)(F)(ii) election. Consequently, the
§ 168(h)(6)(F)(ii) election was not included with Taxpayer's initial income tax return for Year. However, the affidavits and other materials submitted by Taxpayer indicate that, at all times, it intended to make the § 168(h)(6)(F)(ii) election. Firm subsequently discovered that the required § 168(h)(6)(F)(ii) election had not been made. As soon as they realized that the election had not been made, Firm and Taxpayer promptly sought an extension of time to make the election.

LAW

Section 167(a) of the Code 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)(1)(A) provides generally that “tax exempt use property” means that portion of any tangible property (other than certain nonresidential real property) which is leased to a tax-exempt entity. Section 168(h)(6)(A) provides that, for purposes of
§ 168(h), if any property that 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.

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). Because Exempt Organization owns more than 50 percent in value of the stock of
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Taxpayer, Taxpayer is a "tax-exempt controlled entity" within the meaning of
§ 168(h)(6)(F)(iii).

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity can 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. Under § 301.9100-7T(a)(2)(i) of the Procedure and Administration Regulations, 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 301.9100-1(c) provides that the Commissioner of Internal Revenue has 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 the due date for which is prescribed by a regulation. Because the due date of the
§ 168(h)(6)(F)(ii) election is prescribed in § 301.9100-7T, the election is a regulatory election.

Section 301.9100-1 through § 301.9100-3 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 requests for extensions of time for regulatory elections (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 will be 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.
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Under § 301.9100-3(b)(3), a taxpayer will not be considered to have 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

(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 the interests of the Government will not be prejudiced by the granting of relief. 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. Section 301.9100-3(c)(1)(i). In addition, the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made, or any taxable years 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. Section 301.9100-3(c)(1)(ii).

ANALYSIS

The information submitted by Taxpayer indicates that Taxpayer at all times after the formation of LLC 1 intended to make the § 168(h)(6)(F)(ii) election, that it reasonably relied on a qualified tax professional to make the election, and that the qualified tax professional failed to make or advise the Taxpayer to make the election. Taxpayer requested relief before the failure to make the election was discovered by the Service. In addition, there is no evidence that Taxpayer is using hindsight in requesting relief. We conclude, therefore, that Taxpayer acted reasonably and in good faith.

Furthermore, based on the facts presented and representations made, Taxpayer will not have a lower tax liability for all tax years affected by the election than it would have had if the election had been timely made and the taxable year in which the election should have been made is not closed under § 6501. Therefore, the interests of the Government will not be prejudiced by the granting of relief.

CONCLUSION
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Accordingly, we conclude that the requirements of § 301.9100-3 have been met and Taxpayer is granted an extension of time of 60 days from the date of this letter to file an amended return for Year making the election under § 168(h)(6)(F)(ii). Taxpayer must attach the aforementioned election and the information set forth in § 301.9100-7T(a)(3) to the amended return. Taxpayer also must attach a copy of this letter to the amended return. Pursuant to § 301.9100-7T(a)(3)(ii), a copy of the election statement also should be attached to the federal income tax returns of each of the tax-exempt shareholders or beneficiaries of Taxpayer.

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. In particular, we express no opinion as to whether any expenses incurred to rehabilitate the Historic Building are “qualified rehabilitation expenditures” within the meaning of § 47.

The ruling in this letter is based upon the information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. Although this office has not verified any of the material submitted in support of the request for the ruling, it is subject to verification on examination.

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.

Enclosed is a copy of the letter showing the deletions proposed to be made when it is disclosed under § 6110. If you have any questions concerning this matter, please contact the individual whose name and telephone number appear at the top of the letter.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, a taxpayer filing a return electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of the letter ruling.

Sincerely,

Jeffrey T. Rodrick
Senior Technician Reviewer, Branch 5
Office of Chief Counsel
(Income Tax & Accounting)
Enclosure (1)