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

Plain-English summary

The IRS granted a tax-exempt controlled corporation 60 days to make an election under section 168(h)(6)(F)(ii). The election allows the corporation to be treated as not tax-exempt for purposes of the tax-exempt-use-property rules, producing a more favorable depreciation period for a residential rental project. The corporation had intended to make the election but omitted it from its timely return. The IRS found that the omission was inadvertent, the request was made before the Service discovered the failure, and granting relief would not prejudice the government. The corporation must file an amended return and attach the ruling.

Ruling snapshot

• Question: Whether the corporation could receive more time to make the section 168(h)(6)(F)(ii) election.
• Outcome: Approved, with an extension of 60 days from the ruling date.
• Key authorities: IRC §§ 167(a), 168(g), 168(h), and 168(h)(6)(F)(ii); Treas. Reg. §§ 301.9100-1 through 301.9100-3 and 301.9100-7T(a)(2)(i).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201316007
Third Party Communication: None
Release Date: 4/19/2013
Date of Communication: Not Applicable
Index Number: 168.29-00, 9100.04-00
Person To Contact:
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Refer Reply To:
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CCITA:04
In Re: PLR-131986-12
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January 09, 2013
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Taxpayer = --------------------------------------------------
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Exempt Organization = ---------------------------------------------------------------
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Business x = ----------------

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

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

Investor Member = ------------------------------------------------------------------------
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Date 1 = --------------------------

y = ----

w = --------

Address = --------------------------
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z = -----

Year 1 = -------
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Dear ----------------:

This letter responds to your private letter ruling request, dated July 12, 2012, regarding an extension of time to make an election under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations (Regulations). Specifically, you requested an extension of time to make an election under § 168(h)(6)(F)(ii) of the Internal Revenue Code (Code) for Taxpayer, a tax-exempt controlled entity under
§ 168(h)(6)(F)(iii).

Facts

Taxpayer is organized under the laws of State and is a Subchapter C corporation for federal income tax purposes. Taxpayer is engaged in Business x, uses the cash method of accounting, and has the fiscal year ending October 31 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) 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 1, Limited Partnership was formed. Taxpayer is the General Partner of Limited Partnership, with an ownership interest of y percent. The Limited Partnership was organized to build and operate a multiple-family residential building at Address. The building contains z units of multi-family rental housing development and other improvements to be rehabilitated, developed, constructed, owned and operated by Limited Partnership. Investor Member owns a w percent interest in Limited Partnership.

The taxable investors in Limited Partnership required Taxpayer to make an election pursuant to § 168(h)(6)(F)(ii) for Year 1 when Taxpayer filed its federal income tax for Year 1. In fact, Investor Member’s contribution was predicated on Taxpayer making an election under § 168(h)(6)(F)(ii) for Year 1. The election was necessary to ensure a more favorable depreciable life for the residential rental property.

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 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).
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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 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.

Section 301.9100-1 through section 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
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(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 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 granted an extension of time of 60 days from the date of this letter ruling to file an amended return making the election under § 168(h)(6)(F)(ii). Taxpayer should attach this letter to its amended return.
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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.

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
Chief, Branch 4
Associate Chief Counsel
(Income Tax & Accounting)

Enclosure: Copy for section 6110 purposes

cc: