IRS grants extra time for a tax-exempt controlled entity election

Plain-English summary

The IRS granted a tax-exempt controlled corporation 60 additional days to make an election under section 168(h)(6)(F)(ii). The election allowed the corporation not to be treated as a tax-exempt entity for purposes of the depreciation rules, and the original failure occurred when its accounting firm prepared the return. The corporation had used the depreciation method that would have applied if the election had been timely made, and the IRS found that it acted reasonably and in good faith without prejudicing the government. The corporation had to file an amended return for the specified year, attach the election and required information, and include a copy of the ruling.

Ruling snapshot

• Question: Whether a tax-exempt controlled corporation could receive more time to make its section 168(h)(6)(F)(ii) election.
• Outcome: Approved.
• Key authorities: IRC §§ 167, 168, 6662, and 6110; Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201234004 Third Party Communication: None
Release Date: 8/24/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 9100.00-00 ---------------------------, ID No. ----------------
-----------------
Telephone Number:

                                                           -----------------------------

-------------------------------------------------------- Refer Reply To:
----------------------------------------- CC:ITA:B04
-------------------------------------- PLR-103459-12
---------------------------- Date:
May 14, 2012
In Re: -----------------------------------------

Legend

Taxpayer = -----------------------------------------------------------------
Exempt Organization = ----------------------------------------------------------------
State = ----------------
Limited Partnership (LP) = ---------------------------------------------------------------------------
------------
Date 1 = ------------------------
Date 2 = ------------------------
Building = ---------------------------------------------
Address = ------------------------------------------------------
Y = ----
Z = ---
Year 1 = -------
First Accounting Firm = ---------------------------------------------------------------------------
(FAF) ---------------------------------
Year 2 = -------
Date 3 = ---------------------------
Additional Property = ---------------------------------------------------------------------------
----------------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Second Accounting Firm = ------------------------
(SAF)

Dear ---------------:
PLR-103459-12 2

This letter responds to Taxpayer’s private letter ruling request, dated December 15,
2011, regarding an extension of time to make an election under § 168(h) of the Internal
Revenue Code (Code). Taxpayer, a tax-exempt controlled entity, seeks to not be
treated as a tax-exempt entity under § 168(h)(6)(F)(ii).

Facts

Taxpayer, formed on Date 1, is organized under the laws of State and is a C corporation
for Federal income tax purposes. It uses the accrual method of accounting and has the
calendar year as its taxable year. Taxpayer is wholly owned by Exempt Organization, a
tax-exempt organization described in § 501(c)(3) of the Code. Because Exempt
Organization owns more than 50 percent in value of the stock of Taxpayer, Taxpayer is
a “tax-exempt controlled entity” within the meaning of § 168(h)(6)(F)(iii).

On Date 2, Limited Partnership (LP) was formed. Taxpayer is the General Partner of
LP, with an ownership interest of y percent. Taxpayer is also the tax matters partner of
LP. LP was organized to build and operate Building at Address. Building contains z
units of qualified low-income housing.

Building was placed in service in Year 2. The taxable investors in LP required Taxpayer
to make an election pursuant to § 168(h)(6)(F)(ii) for Year 2 when Taxpayer filed its
federal income tax return for Year 2. Taxpayer’s Year 2 tax return was filed by First
Accounting Firm (FAF) on Date 3. FAF inadvertently failed to make the
§ 168(h)(6)(F)(ii) election on the Year 2 return. However, FAF computed the
depreciation deduction for LP using the Modified Accelerated Cost Recovery System
(MACRS), a method LP properly could have used if the election had been timely made.

Taxpayer placed Additional Property in service in Years 3 and 4, using MACRS as the
method of depreciation on Additional Property. Although FAF did not make an
§ 168(h)(6)(F)(ii) election when it filed the Year 3 return, LP continued using MACRS to
depreciate Building.

In Year 4, Taxpayer changed to Second Accounting Firm (SAF). SAF filed Taxpayer’s
Year 4 return using the MACRS system. In Year 5, after Taxpayer’s search of its files
revealed that it never made a § 168(h)(6)(F)(ii) election, Taxpayer submitted its request
for an extension of time to make the election.

Applicable Law and Analysis

Section 167(a) of the Code provides generally for a depreciation deduction for property
used in a trade or business. Under § 168(g) of the Code, the alternative depreciation
system must be used for any tax-exempt use property as defined in § 168(h).
PLR-103459-12 3

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 shall be treated as tax-exempt use property. Section
168(h)(6)(F)(i) provides generally that any tax-exempt controlled entity shall be treated
as a tax-exempt entity for purposes of § 168(h)(5) and (6).

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 (Regulations), an election under
§ 168(h)(6)(F)(ii) 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(a) of the Regulations 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. 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 that
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 changes 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) of the Regulations 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

PLR-103459-12 4

   (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) of the Regulations, 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) of the Regulations 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.

Based on the facts and information submitted, we conclude Taxpayer intended from the
outset to make the § 168(h)(6)(F)(ii) election, that its failure to make the election on its
original return was inadvertent, and that Taxpayer is not using hindsight in requesting
relief. Moreover, Taxpayer requested relief before the failure to make the election was
discovered by the Service. Finally, Taxpayer acted reasonably and in good faith and
the interests of the Government will not be prejudiced by the granting of relief under
§ 301.9100-3. Accordingly, pursuant to § 301.9100-3, Taxpayer is granted an extension
of time of 60 days from the date of this letter ruling to file an amended return for Year 2
making the election under § 168(h)(6)(F)(ii). To make the election, Taxpayer must file
an amended Federal income tax return for Year 2, and attach thereto the election and
information set forth in § 301.9100-7T(a)(3)(ii). Also, Taxpayer must attach a copy of
this letter to its amended return.

Although this office has not verified any of the material submitted or facts assumed in
support of the request for ruling, they are subject to verification on examination.
PLR-103459-12 5

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 accordance with the provisions of a power of attorney currently on file with this office,
a copy of this letter is being sent to Taxpayer’s authorized representative.

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 beginning of
the letter.

                                     Sincerely,



                                     Christina M. Glendening
                                     Assistant to the Branch Chief, Branch 4
                                     Office of Associate Chief Counsel
                                     (Income Tax & Accounting)

Enclosure: Copy for § 6110 purposes

cc: