Indirectly controlled corporation receives late-election relief

Plain-English summary

A corporation indirectly controlled through a parent by a tax-exempt organization was a tax-exempt controlled entity and served as the general partner of a partnership holding real property. It intended to elect under section 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity, but its return preparer did not know an affirmative election statement had to accompany the return. All filed returns nevertheless used the same treatment as if the election had been made, and the taxpayer promptly sought relief after discovering the omission. Although the original election year was closed, the IRS found good faith, no hindsight, and no reduction in aggregate tax liability. It treated the election as timely if the taxpayer attached the required election information to its next and later relevant returns. Tax-exempt shareholders or beneficiaries also had to attach the ruling and election statement to their federal returns.

Ruling snapshot

• Question: Could the indirectly tax-exempt controlled corporation make a late election not to be treated as a tax-exempt entity under section 168(h)(6)?
• Outcome: Approved, subject to attaching the election information to relevant returns
• Key authorities: IRC §§ 168(h)(6)(F)(ii) and 168(h)(6)(F)(iii); Treas. Reg. §§ 301.9100-3 and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201510033 Third Party Communication: None
Release Date: 3/6/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.04-00,
168.00-00 Person To Contact:
---------------------------
---------------------------- ID No. ----------------
------------------- Telephone Number:
------------------------------------------- --------------------
---------------------------- Refer Reply To:
---------------------------------------- CC:ITA:B05
PLR-125305-14
Date:
November 04, 2014

              TY:--------

Legend

Taxpayer = --------------------------------------------
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Parent = --------------------------
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Exempt Organization = --------------------
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Member = --------------------------
Partnership = ----------------------------------------
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Taxable Year 1 = ------
a percent = --------------
b percent = --------------
State = ------------
Affidavit 1 = -----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Affidavit 2 = -----------------------------------------------------------------------------
Related Partnership = ----------------------------------------------

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

This letter is in response to a request for a private letter ruling dated May 6, 2013,
submitted on your behalf by your authorized representative. Specifically, you have
requested an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations for Taxpayer, a tax-exempt controlled entity under
§ 168(h)(6)(F)(iii) of the Internal Revenue Code, to make an election under
§ 168(h)(6)(F)(ii) to not be treated as a tax-exempt controlled entity.

PLR-125305-14 2

FACTS

Taxpayer was formed in Tax Year in State and is taxed as a C corporation for federal
income tax purposes. Taxpayer is wholly owned by Parent. Parent is a percent owned
by Exempt Organization, a not-for-profit corporation exempt from taxation under
§ 501(c)(4), and b percent owned by Member. Based on Exempt Organization’s
majority ownership interest in, and control of, Parent, which is the owner of Taxpayer,
Taxpayer is a “tax-exempt controlled entity” within the meaning of § 168(h)(6)(F)(iii).

Taxpayer is the general partner of Partnership. Partnership’s real property was placed
in service in Tax Year, and Taxpayer filed a timely federal income tax return for Tax
Year, but failed to make the § 168(h)(6)(F)(ii) election on that return. Taxpayer’s failure
to make the required § 168(h)(6)(F)(ii) election was discovered for the first time when
evidence of such election was requested in the case of Related Partnership, which is
also owned by Exempt Organization. However, from Affidavit 1, Affidavit 2, and the
other materials submitted, it is clear that Taxpayer at all times intended to make the
§ 168(h)(6)(F)(ii) election to not be treated as a tax-exempt controlled entity. Affidavit 1
and Affidavit 2 further make it clear that Taxpayer’s return preparer was unaware that
an affirmative election statement was required to be attached to the Taxpayer’s federal
tax return for Tax Year. Upon discovering its failure, Taxpayer promptly sought an
extension of time in which to file the § 168(h)(6)(F)(ii) election.

Taxpayer makes the following representations. Notwithstanding omitting the statement
to make the § 168(h)(6)(F)(ii) election from the tax return for Tax Year, every tax return
prepared and filed by Taxpayer reflects the same treatment as if the § 168(h)(6)(F)(ii)
election had been made. Taxpayer is not under audit nor is being considered by an
appeals officer or federal court for any tax year in which the § 168(h)(6)(F)(ii) election
should have been made or for any tax year affected by that election. Taxpayer is not
seeking to alter a return position for which an accuracy-related penalty has been or
could be imposed under § 6662. Taxpayer is not using hindsight in requesting the relief
sought. The requested relief will not result in a lower tax liability (in the aggregate for all
tax years affected by the § 168(h)(6)(F)(ii) election) than Taxpayer would have had if the
§ 168(h)(6)(F)(ii) election had been timely made. Finally, although the period of
limitations on assessment under § 6501(a) for Tax Year has expired, Taxpayer states
that the Government is not prejudiced in this case and thus § 9100 relief should be
granted.

LAW

Section 167(a) of the Internal Revenue Code provides generally for a depreciation
deduction for property used in a trade or business. Under § 168(g), the alternative

PLR-125305-14 3

depreciation system must be used for any tax-exempt use property as defined in
§ 168(h).

Section 168(h)(6)(A) provides that, for purposes of § 168(h), if any property which (but
for this subparagraph) 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)(6). Under § 168(h)(6)(F)(iii)(I), a
“tax-exempt controlled entity” means any corporation (without regard to that
subparagraph and § 168(h)(2)(E)) if 50 percent or more (in value) of the corporation’s
stock is held by one or more tax-exempt entities (other than a foreign person or entity).
Section 168(h)(6)(E) applies similar rules in the case of tiered partnerships and other
entities.

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity can 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.

Under § 301.9100-7T(a)(2)(i) of the Procedure and Administration Regulations, a
§ 168(h)(6)(F)(ii) election 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 301.9100-7T(a)(3)
provides the manner in which the § 168(h)(6)(F)(ii) election is made.

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. Because the due date of the
§ 168(h)(6)(F)(ii) election is prescribed in § 301.9100-7T, the § 168(h)(6)(F)(ii) election
is a regulatory election.

Sections 301.9100-1 through 301.9100-3 provide the standards 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 extensions of time 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.

PLR-125305-14 4

Section 301.9100-3(b)(1) provides that a taxpayer is 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 is considered 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 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)(1) 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. Section 301.9100-3(c)(1)(i) provides that 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. Under § 301.9100-3(c)(1)(ii), the interests of
the Government are ordinarily prejudiced if the taxable year in which the regulatory
election should have been made, or any taxable years affected by the election had it
been timely made, are closed by the period of limitations on assessment under
§ 6501(a) before the taxpayer’s receipt of a ruling granting relief under this section.

ANALYSIS

The information submitted indicate that Taxpayer at all times intended from the outset to
make the § 168(h)(6)(F)(ii) election, and Taxpayer’s failure to make the § 168(h)(6)(F)(ii)
election was inadvertent. Taxpayer represents that it has requested relief before the
failure to make the § 168(h)(6)(F)(ii) election was discovered by the Service pursuant to

PLR-125305-14 5

an examination. There is no evidence that Taxpayer is using hindsight in requesting
relief. Further, based on the facts presented and the representations made, Taxpayer
will not have a lower tax liability for all tax years affected by the § 168(h)(6)(F)(ii) than it
would have had if the § 168(h)(6)(F)(ii) election had been timely made.

Although the taxable year in which the § 168(h)(6)(F)(ii) election should have been
made is closed under § 6501, the above representations support our conclusion that
Taxpayer has acted reasonably and in good faith. Therefore, the interests of the
Government will not be prejudiced by the granting of relief.

CONCLUSION

Based solely on the facts as represented and the applicable law, we conclude that the
requirements of § 301.9100-3 have been met, and the request for relief under
§ 301.9100-3 is granted. Accordingly, Taxpayer is treated as if it had made the
§ 168(h)(6)(F)(ii) election with the tax return it filed for Tax Year. Taxpayer must attach
the aforementioned § 168(h)(6)(F)(ii) election and the information set forth in
§ 301.9100-7T(a)(3) to its next return. 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.

Pursuant to § 301.9100-7T(a)(3)(ii), a copy of this letter and the § 168(h)(6)(F)(ii)
election statement also should be attached to the federal income tax returns of each of
the tax-exempt shareholders or beneficiaries 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 referenced in
this letter. Further, we express no opinion concerning the assessment of any interest,
additions to tax, additional amounts or penalties for failure to file a timely income tax
return with respect to any taxable year.

The ruling in this letter is based upon the information and representations submitted by
Taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. Although this office has not verified any of the material submitted in
support of the request for the ruling, it is subject to verification on examination.

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.

PLR-125305-14 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 top of the letter.

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

                                   Sincerely,



                                   Seoyeon Sharon Park
                                   Assistant to the Branch Chief, Branch 5
                                   Office of Chief Counsel
                                   (Income Tax & Accounting)

Enclosure (1)

cc: