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

Plain-English summary

The IRS granted a corporation 60 days to file an amended return making an election under IRC § 168(h)(6)(F)(ii). The election allows a tax-exempt controlled entity to avoid being treated as a tax-exempt entity for a qualified low-income housing project. The corporation's accountants failed to include the election on the timely filed return, and the IRS found that the corporation reasonably relied on a qualified tax professional. The corporation must attach the election information and the IRS letter to the amended return, and the tax-exempt shareholders must receive a copy of the election statement. The IRS did not rule on whether the corporation qualified to make the election or whether the partnership's partners were entitled to the low-income housing tax credit.

Ruling snapshot

• Question: May the corporation make a late election not to be treated as a tax-exempt entity under IRC § 168(h)(6)(F)(ii)?
• Outcome: Approved, a 60-day extension was granted to file an amended return with the election
• Key authorities: IRC §§ 168(h)(6)(F)(ii), 168(h)(6)(F)(iii), and 42; Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201411009 Third Party Communication: None
Release Date: 3/14/2014 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
--------------------------------------------- --------------------, ID No. -------------
---------------------------- Telephone Number:
------------------------ ----------------------
Refer Reply To:
------------------------------------------------------ CC:ITA:B05
PLR-126949-13
Date:
December 11, 2013

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

In a letter dated ----------------------------, the taxpayer named above (taxpayer) requested
a private letter ruling under Rev. Proc. 2013-1, 2013-1 C.B. 1. Taxpayer, a C
corporation, requested an extension of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to make an election under § 168(h)(6)(F)(ii)
of the Internal Revenue Code.

                                                FACTS

Taxpayer is wholly owned by ----------------------------------, a tax-exempt entity described
in § 501(c)(3) of the Code. Taxpayer is the general partner of a -------------- limited
partnership, ------------------------------------------------ (Partnership), and owns ------ percent
of Partnership. It represents that Partnership was formed as a low-income housing tax
credit partnership to acquire land, construct a multifamily residential building (Property),
and rent individual units therein. Taxpayer further states that the rental units in the
building were placed in service in ---------------------- as qualified low-income housing
units.

The partners of Partnership cannot claim the low-income housing tax credit for certain
expenditure under § 42, if Property is “tax-exempt use property” under § 168(h).
Because taxpayer is wholly owned by a tax exempt entity, it is a “tax-exempt controlled
entity” within the meaning of § 168(h)(6)(F)(iii), and a portion of Property is “tax-exempt
use property.” Under § 168(h)(6)(F)(ii), taxpayer may elect not to be treated as a tax-
exempt entity for purposes of § 168(h)(6). This election must comply with the
requirements of § 301.9100-7T of the temporary Procedure and Administration
Regulations.

Under the partnership agreement of Partnership, taxpayer was required to make the
§ 168(h)(6)(F)(ii) election for taxable year ------- (Taxable Year), the year when Property
PLR-126949-13 2

was placed in service. Taxpayer intended to make the § 168(h)(6)(F)(ii) election for
Taxable Year.

Taxpayer engaged certified public accountants to prepare its Federal income tax return
for Taxable Year. Those accountants failed to include an election under
§ 168(h)(6)(F)(ii) in taxpayer's timely filed Federal income tax return for Taxable Year.

Subsequently, taxpayer changed accounting firms. Only then did taxpayer and the
certified public accountants at the new firm discover the prior accountants' failure to
prepare and include the § 168(h)(6)(F)(ii) election for Taxable Year. Taxpayer seeks
relief under §§ 301.9100-1 and 301.9100-3 to make a late § 168(h)(6)(F)(ii) election.

                              LAW AND ANALYSIS

Section 168(h)(6)(A) provides that, for purposes of § 168(h), if (1) any property that is
not “tax-exempt use property” is owned by a partnership which has both a tax-exempt
entity and a person who is not a tax-exempt entity as partners, and (2) any allocation to
the tax-exempt entity of partnership items is not a qualified allocation, then an amount
equal to the tax-exempt entity's proportionate share of that property must be treated as
“tax-exempt use property.” "Tax-exempt use property" is that portion of any tangible
property (other than nonresidential real property) leased to a tax-exempt entity. See
§ 168(h)(1)(A).

Section 168(h)(6)(F)(i) provides that, for purposes of § 168(h)(6), any “tax-exempt
controlled entity” must be treated as a tax-exempt entity.

Section 168(h)(6)(F)(ii) provides that, for purposes of § 168(h)(6), a “tax-exempt
controlled entity” may 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.”

Section 168(h)(6)(F)(iii) defines the term "tax-exempt controlled entity" as any
corporation that is not a tax-exempt entity and in which one or more tax-exempt entities
own 50 percent or more (in value) of the stock.

Section 301.9100-7T(a)(2)(i) of the Procedure and Administration Regulations requires
elections under § 168(h)(6)(F)(ii) to be made by the due date of the tax return (including
extensions) for the first taxable year for which the election is to be effective.

Under § 301.9100-1(c) and § 301.9100-3(a) and (b) the Procedure and Administration
Regulations, the Commissioner has discretion to grant a reasonable extension of time
to make a regulatory election under all subtitles of the Code, except subtitles E, G, H,
and I, if the taxpayer demonstrates to the satisfaction of the Commissioner that the
taxpayer acted reasonably and in good faith, and that granting relief will not prejudice
PLR-126949-13 3

the interests of the government. Under § 301.9100-3(b)(1)(v), a taxpayer is deemed to
have acted reasonably and in good faith if the taxpayer 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.

Based on the information submitted and the representations made, we hold that
taxpayer has acted reasonably and in good faith, and that the granting of relief will not
prejudice the interests of the government. The requirements of § 301.9100-3 have
been satisfied in this case. Accordingly, taxpayer is granted an extension of time of 60
days from the date of this letter ruling to file an amended return for Taxable 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 must attach a copy of this letter to the amended return. In addition, pursuant
to § 301.9100-7T(a)(3)(ii), a copy of the election statement should be attached to the
Federal income tax return of each of the tax-exempt shareholders 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 referred to in
this letter. In particular, we express no opinion as to whether taxpayer qualifies to make
the election set forth in § 168(h)(6)(F)(ii). We express no opinion as to whether any
partners of Partnership are entitled to the low-income housing tax credit under § 42.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) 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.
PLR-126949-13 4

The rulings contained in this letter are based upon information and representations
submitted by 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,



                                  William A. Jackson
                                  Chief, Branch 5
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

Enclosures
Copy of this letter
Copy for § 6110 purposes