PLR 1314033: IRS grants late election relief for a tax-exempt controlled entity

Plain-English summary

A corporation wholly owned by a tax-exempt parent was involved in a historic rehabilitation project. The corporation intended to elect under IRC § 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity, but the election was omitted from its original return. The IRS found that the omission was inadvertent, that the taxpayer acted reasonably and in good faith, and that granting relief would not prejudice the government. The corporation was treated as having made the election with its original return, provided it attached the ruling or the required control-number statement to its current and later relevant returns.

Ruling snapshot

• Question: May the taxpayer make a late election under IRC § 168(h)(6)(F)(ii)?
• Outcome: Approved, subject to the stated return-attachment conditions.
• Key authorities: IRC §§ 47 and 168(h)(6)(F); Treas. Reg. §§ 301.9100-1 and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201314033 Third Party Communication: None
Release Date: 4/5/2013 Date of Communication: Not Applicable
Index Number: 9100.04-00
Person To Contact:
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------------------------------------------------ Telephone Number:
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--------------------------------- Refer Reply To:
CC:ITA:B04
PLR-146264-12
Date:
December 21, 2012

TY: ----------------------------

LEGEND:

Taxpayer = ------------------------------------------------
Parent = ----------------------------------------------------------------------
Landlord = ------------------------------------------
Tenant = ------------------------------------------
Investor = ---------------------------------------------------
Area = -----------------------------------------
Project = ---------------
Firm A = ---------------------------
Firm B = -------------

Dear -----------------------

This is in reply to Taxpayer’s request for permission to make a late election under
§ 168(h)(6)(F)(ii) of the Internal Revenue Code, under authority contained in
§ 301.9100-3 of the Procedure and Administration Regulations pertaining to late
regulatory elections.

FACTS:

Project is a certified historic structure eligible for rehabilitation tax credits under § 47 of
the Code. Taxpayer is a C corporation wholly owned by Parent. Parent is a corporation
that is a tax-exempt entity under § 501(c)(3). Taxpayer was formed to develop and
manage quality affordable housing in Area. Its activities include acting as the general
partner for Landlord and as the managing member for Tenant. Landlord is a limited
partnership and Tenant is a limited liability company. Landlord was formed to acquire,
develop, maintain, improve and manage the Project and to lease the Project to Tenant.
Tenant was formed to acquire a leasehold interest in the Project and, as Master Tenant,
PLR-146264-12 2

to operate the building on a day-to-day basis in order to obtain long term appreciation,
cash income and return of capital. Tenant is owned -----% by Taxpayer (its general
partner) and --------% by Investor (as a limited partner). The Taxpayer owns --------% of
Landlord; Tenant and Parent own the remaining ---% and ----% of Landlord respectively.

Section 5.5 of the Landlord operating agreement executed by Taxpayer, Parent, and
Tenant requires Taxpayer to make an election under § 168(h)(6)(F)(ii) to ensure that the
Project would not constitute "tax-exempt use property" under § 168. Taxpayer had no
knowledge of the specific tax compliance procedures required for this type of
transaction because this was Taxpayer's first historic rehabilitation tax credit project.
Therefore, Taxpayer relied on qualified tax professionals to ensure that all necessary
elections were made and timely filed.

Taxpayer engaged Firm A to prepare tax projections and provide consulting services
related to the transaction structure. Although Taxpayer intended for Firm A to prepare
the tax returns as well, Taxpayer never actually engaged Firm A for this purpose. Not
until October 2011 did Taxpayer realize it had not engaged Firm A to file its tax returns
for the tax year ending December 31, 2010.

In November 2011 Parent engaged Firm B to prepare Taxpayer's corporate return for
tax year 2010. Parent did not inform Firm B of the § 168(h)(6)(F)(ii) election
requirement to be filed with the original 2010 return for Taxpayer, so it was inadvertently
omitted from the return filed. Firm B was unaware of the requirement to make the
election and was not informed by Taxpayer that the election was required pursuant to
the Landlord’s operating agreement. Parent and Taxpayer were unaware of the tax
consequences of not making a timely § 168(h)(6)(F)(ii) election until after filing
Taxpayer’s original return.

APPLICABLE LAW:

Section 47(a)(2) of the Code provides a rehabilitation credit for 20 percent of the
qualified rehabilitation expenditures with respect to any certified historic structure.

Section 47(c)(2)(B)(v) states that any expenditure in connection with the rehabilitation
of a building which is allocable to the portion of such property which is tax-exempt use
property as defined in § 168(h) is not included in qualified rehabilitation expenditures.

Section 168(h) defines tax-exempt use property. Under § 168(h)(6)(A), property may be
tax-exempt use property if it is held by a tax-exempt entity in a partnership that has tax-
exempt and non tax- exempt partners and if the partnership allocations are not qualified
allocations as defined by §168(h)(6)(B).

Section 168(h)(6)(F) states that a tax-exempt controlled entity is treated as a tax-
exempt entity unless under § 168(h)(6)(F)(ii) the tax exempt controlled entity makes an
PLR-146264-12 3

election 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 168(h)(6)(F)(iii) describes a tax-exempt controlled entity as any corporation,
which would not otherwise be considered a tax-exempt entity, where 50% or more of the
stock is owned by one or more tax-exempt entities.

Parent owns 100% of Taxpayer’s stock. Thus, Taxpayer is a tax-exempt controlled
entity within the meaning of § 168(h)(6)(F)(iii) and is treated as a tax-exempt entity
unless it makes a § 168(h)(6)(F)(ii) election.

Section 301.9100-1(b) of the regulations defines the term "regulatory election" as
including any election the due date for which is prescribed by a regulation. Section
301.9100-7T(a)(2)(i) requires an election 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.
Thus, the § 168(h)(6)(F)(ii) election is a regulatory election.

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 301.9100-3(a) provides that requests for extension of time for regulatory
elections will be granted when the taxpayer provides evidence establishing to the
satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith,
and the grant of relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) provides that, except as provided in paragraphs (b)(3)(i)
through (iii) of § 301.9100-2, a taxpayer is deemed to have acted reasonably and in
good faith if the taxpayer (i) requests relief under § 301.9100-3 before the failure to
make the regulatory election is discovered by the Internal Revenue Service ("IRS"); (ii)
failed to make the election because of intervening events beyond the taxpayer’s control;
(iii) failed to make the election because, after exercising reasonable diligence (taking
into account the taxpayer’s experience and the complexity of the return or issue), the
taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the
written advice of the IRS; or (v) reasonably relied on a qualified tax professional,
including a tax professional employed by the taxpayer, and the tax professional failed to
make, or advise the taxpayer to make, the election.

Section 301.9100-3(b)(3) provides that a taxpayer is deemed to have not acted
reasonably and in good faith if the taxpayer (i) seeks to alter a return position for which
an accuracy related penalty has been or could be imposed under § 6662 at the time the
taxpayer requests relief and the new position requires or permits a regulatory election
for which relief is requested; (ii) was informed in all material respects of the required
election and related tax consequences, but chose not to file the election, or (iii) uses
hindsight in requesting relief.
PLR-146264-12 4

Section 301.9100-3(c)(1) states that the Commissioner will grant a reasonable
extension of time to make a regulatory election only when the interests of the
Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i)
provides that the interests of the Government are prejudiced if granting the relief would
result in the 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 (taking into account the time value of money). Similarly, if the tax
consequences of more than one taxpayer are affected by the election, the
Government's interests are prejudiced if extending the time for making the election may
result in the affected taxpayers, in the aggregate, having a lower tax liability than if the
election had been timely made.

ANALYSIS:

Taxpayer acknowledges that it did not properly make the § 168(h)(6)(F)(ii) election on
the return it filed for taxable year ending December 31, 2010. However, the facts
establish that Taxpayer intended to make the election and that the failure to properly
make the election was inadvertent. Thus, Taxpayer acted reasonably and in good faith,
within the meaning of § 301.9100-3(b)(1) and is not using hindsight in requesting
permission to make a late election.

Moreover, the government’s interest is not prejudiced as a result of granting relief under
§ 301.9100-3 with respect to the election. The interests of the Government are
prejudiced if granting the relief would result in a taxpayer having a lower tax liability in
the aggregate for all years affected by the election than they would have had if the
election had been timely made. The aggregate tax liability of Taxpayer, Parent,
Landlord and Tenant will not be lower than the aggregate tax liability as reported as a
result of granting relief. The returns for Parent and Taxpayer were filed as if the election
was made in a timely fashion so there will be no change to the tax liability if the relief is
granted.

RULING:

Based on facts, affidavits and representations submitted, the requirements for relief
under § 301.9100-3 are satisfied. Accordingly, Taxpayer is treated as if it made the
§ 168(h)(6)(F)(ii) election with the original return it filed for Taxpayer’s taxable year
ended December 31, 2010 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.
PLR-146264-12 5

DISCLAIMERS AND LIMITATIONS:

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.

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

The ruling contained in this letter is 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.

                                   Sincerely,


                                   Michael J. Montemurro
                                   Branch Chief, Branch 4
                                   (Income Tax & Accounting)

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