Charity-owned entity receives late section 168 election

Plain-English summary

A charity formed a wholly owned taxable entity to hold an interest in an affordable-housing partnership after advisers concluded that the charity should not hold the interest directly. The new entity was a tax-exempt controlled entity and was expected to elect under section 168(h)(6)(F)(ii) not to be treated as tax-exempt for the tax-exempt-use property rules. It intended to make the election but failed to file the required timely return and election. The IRS concluded that the entity acted reasonably and in good faith and that relief would not prejudice the government. It granted an extension to file the election with an amended return and required copies of the election statement on the returns of the entity's tax-exempt shareholders or beneficiaries.

Ruling snapshot

• Question: May the charity-owned entity make a late section 168(h)(6)(F)(ii) election?
• Outcome: Yes, by filing the election and required information with an amended return.
• Key authorities: IRC § 168; 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: 201606005                                              Third Party Communication: None
Release Date: 2/5/2016                                         Date of Communication: Not Applicable
Index Numbers: 9100.04-00; 168.29-02


---------------------------------------------                  Person To Contact:
----------------------------------------------------           -------------------, ID No.----------------
-------------------------                                      Telephone Number:
------------------------------                                 --------------------
------------------------------                                 Refer Reply To:
 -------------------------                                     CC:ITA:B04
                                                               PLR-116369-15
                                                               Date:
                                                               October 15, 2015




Legend

Taxpayer                   =        -------------------------------------------------------
LLC1                       =        ----------------------------------------------------------------------
LLC 2                      =        ---------------------------------------------------------------------------------
LLC3                       =        ---------------------------------------------------------------------------------
Company                    =        -------------------------------------
Charity                    =         --------------------------------------------------------------------------------
-----------------------------------------------
w                          =        ---
x                          =        ---
year 1                     =        ------
year 2                     =        ------
year 3                     =        ------
Date 1                     =        -------------------------
Date 2                     =        ------------------
Date 3                     =        ----------------------
Date 4                     =        ------------------
City                       =        -------------------




Dear --------------
PLR-116369-15                                 2

This refers to Taxpayer’s request for an extension of time under §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to file an election under
§ 168(h)(6)(F)(ii) of the Internal Revenue Code (the “Election”). The material
information submitted for consideration is summarized below.

Taxpayer is a w% member of LLC1. LLC1 acts as the managing member of LLC2,
whose business purpose is to develop an affordable apartment project. LLC2 was
formed on Date 3 with LLC1 and Company as the original members. LLC2 is the owner
of Phase 1, which consists of a community service facility and affordable housing units.
Company and Charity are the co-developers. Charity’s mission is to develop affordable
rental housing for low income persons.

In year 1, LLC 3 presented Charity and its related entity with an opportunity to
participate in a low income housing tax credit project in an area of City that needed
additional affordable housing units. Charity agreed, and was admitted to LLC1 as a w%
non-manager member with LLC3 as the x% manager member.

In year 2, Company advised Charity that Company had set up the initial structure
incorrectly. Rather than Charity being a w% non-manager member in LLC1, there
should have been a taxable entity, wholly owned by Charity, set up to be the member
since Charity would not be in a position to make an election under § 168(h)(6)(F)(ii) of
the Internal Revenue Code, which the investors had required as a condition of their
investment. Thus, with Company’s assistance, Charity formed Taxpayer and
transferred Charity’s interest in LLC1 to Taxpayer on Date 1.

In year 3, Taxpayer, Charity, and Company began Phase 2, a similarly structured low
income housing tax credit project. Company required the Taxpayer’s accountants to
execute a document describing their understanding that Taxpayer must make the §
168(h)(6)(F)(ii) election with the return for Taxpayer’s fiscal year ending Date 4. No
similar certification was required for Phase 1, and no explicit advice was provided
regarding when the election should be made.

Taxpayer is a “tax-exempt controlled entity” within the meaning of § 168(h)(6)(F)(iii).
Under the agreement, Taxpayer was required to make an election under
§ 168(h)(6)(F)(ii) on the return it filed for the taxable year ending Date 2. The taxpayer
acknowledges that it did not file a timely return for the year ending Date 2, which
prohibited it from properly making the § 168(h)(6)(F)(ii) election on a timely filed return
for that year. However, Taxpayer represents that it intended to make the election and
that the failure to do so was inadvertent.

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 with 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
PLR-116369-15                                  3

to the tax-exempt entity's proportionate share of such property is 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 is 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 for the first taxable year for which the election is to be
effective. Therefore, the Election is a regulatory election under § 301.9100-1(b).

Under § 301.9100-1(c) and § 301.9100-3(a), 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.

Based on the facts and information submitted, we conclude that Taxpayer acted
reasonably and in good faith and granting relief will not prejudice the interests of the
government. Accordingly, the requirements of the regulations for granting relief in this
case have been satisfied and we grant an extension of time for Taxpayer to file the
Election.

Taxpayer must file an amended federal income tax return for year 3, and attach to the
amended return the § 168(h)(6)(F)(ii) election and the information set forth in
§ 301.9100-7T(a)(3). Taxpayer should also attach a copy of this letter to the return. In
addition, pursuant to § 301.9100-7T(a)(3)(ii), a copy of the election statement should
also 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.

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.

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-116369-15                                 4


A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

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



                                       Michael J. Montemurro
                                       Chief, Branch 4
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)