Tax-exempt-controlled corporation received 60 days to make depreciation election

Plain-English summary

A taxable corporation wholly owned by a section 501(c)(3) organization indirectly invested in a partnership that developed low-income rental housing. Because the corporation was tax-exempt controlled, the taxable investors required it to elect under section 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity for depreciation purposes. The corporation intended to make the election from the outset but inadvertently omitted it from its timely return and promptly sought relief after discovery. The IRS found that it acted reasonably and in good faith, was not using hindsight, and that relief would not prejudice the government. It granted 60 days to file an amended return making the election.

Ruling snapshot

• Request: Extend the deadline for the section 168(h)(6)(F)(ii) tax-exempt-controlled-entity election
• Outcome: Approved; 60 days to file an amended return with the election
• Key authorities: I.R.C. § 168(h)(6)(F); Temp. Treas. Reg. § 301.9100-7T; Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201543005                                             Third Party Communication: None
Release Date: 10/23/2015                                      Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.22-00
                                                              Person To Contact:
---------------------------                                   -------------------------, ID No. -----------------
--------------                                                -----------------------------------------------------
----------------------                                        Telephone Number:
------------------------------------------                    ----------------------
------------------------------                                Refer Reply To:
                                                              CC:ITA:4
                                                              PLR-103759-15
                                                              Date:
                                                              July 28, 2015




Legend
Taxpayer                      =    ----------------------
EIN                           =    -----------------
Exempt Organization           =    ----------------------------------------------
State                         =    --------------
Year 1                        =    -------
LLC                           =    -----------------------------------
Company                       =    ---------------------------------------


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

This letter responds to your letter, dated January 9, 2015, requesting an extension of
time for Taxpayer to make an election under § 168(h)(6)(F)(ii) of the Internal Revenue
Code (Code).

FACTS

Taxpayer is a subchapter C corporation for federal income tax purposes. Taxpayer
uses the cash method of accounting, and its taxable year is the calendar year.
Taxpayer is the managing member of a limited liability company, LLC, and owns 51
percent of LLC. LLC is the managing member of a limited liability company, Company,
and owns .01 percent of Company. Company was formed as a State LLC to acquire
land, construct a multifamily residential low-income building, and rent individual units.
Company is taxed as a partnership.

Taxpayer is wholly owned by Exempt Organization, a tax-exempt entity described in
PLR-103759-15                                 2

 § 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).

The rental units in the building were placed in service in Year 1. The taxable investors in
Company required Taxpayer to make an election under § 168(h)(6)(F)(ii) for Year 1.
Taxpayer failed to make the § 168(h)(6)(F)(ii) election on a timely filed return for Year 1.
However, the affidavit and other materials submitted support the conclusion that
Taxpayer at all times intended to make a timely § 168(h)(6)(F)(ii) election. Upon
discovering this 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).

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 shall be treated as tax-exempt use property. Section
168(h)(6)(F)(i) provides generally that any tax-exempt controlled entity shall be 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 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, 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 301.9100-3(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
for which a regulation prescribes the due date. The § 168(h)(6)(F)(ii) election is a
regulatory election.

Sections 301.9100-1 through 301.9100-3 provide 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
PLR-103759-15                                  3

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

(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

The facts submitted by Taxpayer indicate that Taxpayer intended from the outset to
make the § 168(h)(6)(F)(ii) election, that its failure to make the election on a timely filed
PLR-103759-15                                  4

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.

This ruling is based on information and representations submitted by the taxpayer.
While this office has not verified any of the material submitted in support of this request
for a ruling, it is 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.

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

                                       Sincerely,



                                       Stephen J. Toomey
                                       Senior Counsel, Branch 4
                                       (Income Tax & Accounting)

Enclosure