PLR 1303001: IRS grants late election relief for a tax-exempt controlled entity

Plain-English summary

A tax-exempt controlled corporation asked for more time to make an election under section 168(h)(6)(F)(ii) to be treated as a taxable entity for depreciation rules. The corporation had intended to make the election but omitted it from its timely return. It sought relief before the IRS discovered the omission. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It treated the taxpayer as having made the election with the original return, subject to attaching the ruling or a required statement to later returns.

Ruling snapshot

• Question: May a tax-exempt controlled entity receive late-election relief under section 9100 for a section 168(h)(6)(F)(ii) election?
• Outcome: Approved
• Key authorities: IRC §§ 168 and 6110; Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-7T; IRC § 6662

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201303001 [Third Party Communication:
Release Date: 1/18/2013 Date of Communication: Month DD, YYYY]
Index Number: 9100.04-00
Person To Contact:
---------------------------- ---------------------------, ID No. ---------------
--------------------------------------------------------- -----------------
---------------------------------------------------- Telephone Number:
-------------------------- ------------------------------
---------------------------- Refer Reply To:
CC:ITA:B04
In Re: --------------------------------------------------- PLR-116340-12
---------------------------------------------------- Date:
------------------------ October 05, 2012

LEGEND

Taxpayer = ------------------------------------------
EIN = ----------------

Development Corporation = ------------------------------------------------------

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

EIN = ----------------

Exempt Organization = ------------------------------------------------------

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

EIN = ----------------

Limited Partnership = --------------------------------------
EIN = ----------------

State = -------------

Address = --------------------------
----------------------------

Date 1 = -------------------

Date 2 = ----------------
PLR-116340-12 2

Building 1 = ----------------------------
------------------

Building 2 = ---------------------------
------------------

City = ------------

y = ----

z = --------

Successor Owner = ---------------------------------------
EIN = ----------------

Date 3 = ------------------

Year 1 = -------

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

This letter responds to your private letter ruling request, dated February 23, 2012,
regarding an extension of time to make an election under § 168(h) of the Internal
Revenue Code (Code). Specifically, you requested an extension of time to make an
election under § 168(h)(6)(F)(ii) for Taxpayer, a tax-exempt controlled entity under
§ 168(h)(6)(F)(iii).

Facts

Taxpayer is a Subchapter C corporation for federal income tax purposes, uses the
accrual method of accounting, and has the calendar year as its taxable year. Taxpayer,
a holding company, is wholly owned by Development Corporation, a not-for-profit
corporation. Development Corporation, in turn, is wholly owned by Exempt
Organization, a not-for-profit corporation which has received a determination that it is a
tax-exempt organization described in § 501(c)(3). Based on Exempt Organization’s
ultimate control of Taxpayer, Taxpayer is a “tax-exempt controlled entity” within the
meaning of Code § 168(h)(6)(F)(iii).

Taxpayer, Development Corporation, and Exempt Organization all are organized under
the laws of State and all are located at Address.
PLR-116340-12 3

Taxpayer was formed on Date 1. On Date 2, Limited Partnership was formed. Limited
Partnership was formed to acquire, own and rehabilitate Building 1 and Building 2, both
of which are low-income housing projects located in City, State.

Taxpayer is the sole general partner of Limited Partnership and has a y percent interest
in Limited Partnership’s capital, profits and losses. Exempt Organization owned the
remaining z percent interest in Limited Partnership’s capital, profits and losses on Date

2. Subsequently, at a closing held on Date 3, Exempt Organization withdrew as a
   limited partner, with Successor Organization being admitted to the Limited Partnership
   and succeeding to Exempt Organization’s z percent interest.

As part of the closing agreements signed on Date 3, Taxpayer was contractually
obligated to make an election under Code § 168(h)(6)(F)(ii) to be treated as a taxable
entity. The election was to be made for the year in which Buildings were placed in
service.

Buildings were placed in service in Year 1. Taxpayer filed a timely federal income tax
return for Year 1, but failed to make the § 168(h)(6)(F)(ii) election on that return.
However, from the affidavit and other materials submitted it is clear that Taxpayer at all
times intended to make the § 168(h)(6)(F)(ii) election. Upon discovering its failure,
Taxpayer promptly sought an extension of time in which to file the election.

Applicable Law

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)(5) and (6).

Under §168(h)(6)(F)(ii), a tax-exempt controlled entity can elect not to 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, 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(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. The § 168(h)(6)(F)(ii) election is a
regulatory election.
PLR-116340-12 4

Section 301.9100-1 though § 301.9100-3 provides 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) 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.

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) 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
PLR-116340-12 5

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.

Analysis

It is apparent from the facts submitted by Taxpayer that 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.

Conclusion

Based solely on the facts as represented and the applicable law, we conclude that the
request for relief under § 301.9100-3 should be granted. Accordingly, Taxpayer is
treated as if it made the § 168(h)(6)(F)(ii) election with the tax return it filed for Year 1,
provided that Taxpayer attaches a copy of this letter to the next return it files. If
Taxpayer files electronically it may satisfy this requirement by attaching a statement to
the return that provides the date and control number of this letter ruling. In addition, the
letter ruling (or statement) should be attached for all subsequent returns (and amended
returns) for all taxable years to which this ruling is relevant.

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.

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 requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
PLR-116340-12 6

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,

                                  Michael J. Montemurro
                                  Branch Chief
                                  Associate Chief Counsel
                                  (Income Tax & Accounting)

Enclosure: Copy for § 6110 purposes