Taxpayer receives more time for tax-exempt controlled entity election

Plain-English summary

A tax-exempt entity wholly owned a taxpayer that was a partner in a low-income housing partnership. The taxpayer intended to elect under IRC § 168(h)(6)(F)(ii) not to be treated as tax-exempt for rules affecting depreciation of partnership property, but its accountants omitted the election from its return. The IRS found reasonable reliance on qualified tax professionals and no prejudice to the government. It granted 60 days to file an amended return with the election, required information, and ruling letter, while expressing no opinion on whether the taxpayer otherwise qualified to make the election.

Ruling snapshot

• Question: May the taxpayer receive an extension to make the IRC § 168(h)(6)(F)(ii) election?
• Outcome: Approved, with 60 days to file an amended return containing the election and required attachments
• Key authorities: IRC § 168(h)(6); 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: 201447018 Third Party Communication: None
Release Date: 11/21/2014 Date of Communication: Not Applicable
Index Number: 9100.04-00, 168.00-00
Person To Contact:

-------------------------, ID No. -----------------

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

Telephone Number:

Refer Reply To:
CC:ITA:B05
PLR-110349-14
Date:
August 06, 2014

Legend:

Taxpayer = -----------------------------------------------------------
Corporation = -----------------------------------------------------------------

Partnership = -------------------------------------
Tax Year = -------
Accountants = -----------------

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

This is in response to your letter of March 6, 2014, requesting an extension of time
under §§ 301.9100-1 and 301.9100-3 of the Regulations on Procedure and
Administration for Taxpayer to file an election under § 168(h)(6)(F)(ii) of the Internal
Revenue Code.

FACTS

Taxpayer is wholly-owned by Corporation, a tax-exempt entity. Taxpayer is a member
of Partnership, a limited partnership. Partnership developed a low-income housing
project in Tax Year.

Since Taxpayer is wholly-owned by Corporation, Taxpayer is a “tax-exempt controlled
entity” within the meaning of § 168(h)(6)(F)(iii) and a portion of Partnership’s
depreciable property is “tax-exempt use property.” A designation of tax-exempt use
property affects the depreciation that Partnership can take for its depreciable property.
Taxpayer may elect, under § 168(h)(6)(F)(ii), 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 Regulations on Procedure and Administration.

PLR-110349-14 2

Taxpayer intended to file the § 168(h)(6)(F)(ii) election for Tax Year. Partnership’s
partnership agreement required Taxpayer to make the election under § 168(h)(6)(F)(ii)
during Tax Year. The accounting firm preparing Taxpayer’s tax return for Tax Year
failed to prepare the election and attach it to the return. Partnership filed its Tax Year
tax return and information returns as if Taxpayer had made the § 168(h)(6)(F)(ii)
election. Accountants were retained to prepare the tax returns for Taxpayer and
Partnership. Accountants inadvertently failed to include the § 168(h)(6)(F)(ii) election
with Taxpayer’s Tax Year tax return. Accountant’s subsequently discovered that the
§ 168(h)(6)(F)(ii) election had not been made and informed Taxpayer. Taxpayer filed
the request for relief under § 9100 shortly thereafter.

LAW

Section 168(h)(6)(A) provides that, for purposes of § 168(h), if (1) any property which 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 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 that, for purposes of § 168(h)(6), any “tax-exempt
controlled entity” shall 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 301.9100-7T(a)(2)(i) 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 Commissioner has discretion
to grant a reasonable extension of time to make a regulatory election under all subtitles
of the Internal Revenue Code, except subtitles E, G, H, and I, provided 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 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 all of the facts and information submitted and the representations made,
Taxpayer relied on a qualified tax professional to make the election under

PLR-110349-14 3

§ 168(h)(6)(F)(ii). That tax professional failed to make a timely election. We therefore
conclude that Taxpayer has acted reasonably and in good faith as described in
§ 301.9100-3(b)(1), and granting the requested relief will not prejudice the interests of
the government.

Taxpayer is granted an extension of time of 60 days from the date of this letter ruling to
file an amended return for Tax 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 also must attach a copy of this
letter to the amended return. Pursuant to § 301.9100-7T(a)(3)(ii), a copy of the election
statement also should be attached to the federal income tax returns of each of the tax-
exempt shareholders of Taxpayer.

CAVEATS

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 particular, we express no opinion as to whether Taxpayer qualifies to
make the election set forth in § 168(h)(6)(F)(ii).

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

The ruling contained in this letter is 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

Sincerely,

Amy Pfalzgraf
Senior Counsel, Branch 5
Office of Chief Counsel
(Income Tax & Accounting)

Enclosure (1)
Copy for section 6110 purposes