Entity received extensions for corporate classification and tax-exempt control elections

Plain-English summary

A limited liability company wholly owned by a section 501(c)(3) organization missed two intended elections. It failed to file Form 8832 for corporate tax classification and also failed to elect under section 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity for depreciation purposes. Without those elections, the company was disregarded and its exempt owner was treated as holding an indirect partnership interest in property placed in service. The IRS found that the company acted reasonably and in good faith and that relief would not prejudice the government. It granted 120 days to file Form 8832 and an amended return making the section 168 election.

Ruling snapshot

• Question: Could the company receive more time to elect corporate classification and make the section 168(h)(6)(F)(ii) election?
• Outcome: Approved.
• Key authorities: IRC §§ 167, 168, and 501; Treas. Reg. §§ 301.7701-3 and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201642010
Third Party Communication: None
Release Date: 10/14/2016
Date of Communication: Not Applicable
Index Number: 168.00-00, 7701.00-00,
9100.00-00, 9100.31-00
Person To Contact:
--------------------, ID No. ----------------
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Telephone Number:
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Refer Reply To:
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CC:PSI:B01
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PLR-104625-16
Date:
June 29, 2016

LEGEND

X = -----------------------------------
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Exempt Organization = -----------------------------------------------------------------------
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Y = -------------------------------------------------
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P = --------------------------------------------------
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State = --------

Date 1 = -----------------

Date 2 = ---------------------

Year 1 = ------

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

This responds to a letter dated February 1, 2016, submitted on behalf of X, requesting that the Service grant X an extension of time under § 301.9100-3 of the Procedure and
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Administration Regulations to file an election under § 301.7701-3(c) to be treated as an association taxable as a corporation for federal tax purposes effective on Date 2. Additionally, X requests an extension under § 301.9100-3 to make an election not to be treated as a tax-exempt entity under § 168(h)(6)(F)(ii) of the Code.

FACTS

According to the information submitted and representations made, X was formed as a limited liability company under the laws of State on Date 1. X represents that it is an entity eligible to elect to be treated as an association taxable as a corporation for federal tax purposes. X is wholly owned by Exempt Organization, which is represented to be a tax-exempt organization described in § 501(c)(3).

X has an ownership interest in Y. Y is the general partner of P, a limited partnership which is treated as a partnership for federal tax purposes. P acquired land, built property, and placed the property in service in Year 1.

X intended to be treated as an association taxable as a corporation for federal tax purposes effective Date 1. However, due to inadvertence, X failed to timely file Form 8832, Entity Classification Election, to elect to be treated as an association taxable as a corporation for federal tax purposes. X also intended to make a § 168(h)(6)(F)(ii) election for Year 1. However, due to inadvertence, X failed to file in a timely manner its tax return for Year 1. Because of these actions, under the applicable regulations, X was considered an entity disregarded from Exempt Organization for federal tax purposes and, therefore, Exempt Organization was considered a partner in P.

After X realized that it had not timely filed the two elections, it requested relief under
§ 301.9100-3 to make an election to be treated as an association taxable as a corporation effective Date 2, as well as relief to make the election provided for under
§ 168(h)(6)(F)(ii) effective for Year 1.

From the materials submitted, it is clear that X at all times intended to make the
§ 168(h)(6)(F)(ii) election. Upon discovering its failure, X promptly sought an extension of time in which to file the election. Moreover, X represents that it has acted reasonably and in good faith, that granting relief will not prejudice the interests of the government, and that it is not using hindsight in making either election.

LAW AND ANALYSIS

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

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).

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.

Section 301.7701-3(a) of the Procedure and Administration Regulations provides, in part, that a business entity that is not classified as a corporation under § 301.7701- 2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can elect its classification for federal tax purposes. An eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner.

Section 301.7701-3(b)(1) provides that, unless the entity elects otherwise, a domestic eligible entity is disregarded as an entity separate from its owner if it has a single owner.

Section 301.7701-3(c)(1)(i) provides, in part, that an eligible entity may elect to be classified other than as provided under § 301.7701-3(b), or to change its classification, by filing Form 8832, Entity Classification Election, with the designated service center.

Section 301.7701-3(c)(1)(iii) provides that an election made under § 301.7701-3(c)(1)(i) will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form. The effective date specified on Form 8832 cannot be more than 75 days prior to the date on which the election is filed and cannot be more than 12 months after the date on which the election is filed. If an election specifies an effective date more than 75 days prior to the date on which the election is filed, it will be effective 75 days prior to the date it was filed.

Under § 301.9100-7T(a)(2)(i), a § 168(h)(6)(F)(ii) election must be made by the due date (incluing extensions) 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 may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term “regulatory election” as an election whose due date is prescribed by a
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regulation published in the Federal Register or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. 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 Commissioner will use to determine whether to grant an extension of time to make the election. Section 301.9100-2 provides the rules governing automatic extensions of time for making certain elections. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of § 301.9100-2. Under § 301.9100-3, a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good faith, and (2) granting relief will not prejudice the interests of the government.

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
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(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.

X submitted information that indicates that at all times X intended to make the
§ 168(h)(6)(F)(ii) election by the due date (including extensions) for the tax return for the first taxable year for which the election would be effective, and that X’s failure to make the § 168(h)(6)(F)(ii) election was inadvertent. X represents that it failed to make the election because of intervening events beyond its control. Further, X has requested relief before the Service discovered the failure to make the § 168(h)(6)(F)(ii) election through an examination. There is no evidence that X is using hindsight in requesting relief. Furthermore, based on the facts presented and the representations made, X 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. We conclude that X 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 information submitted and the representations made, we conclude that, with respect to X’s failure to timely elect to be treated as an association taxable as a corporation effective Date 2, the requirements of § 301.9100-3 have been satisfied. As a result, X is granted an extension of time of 120 days from the date of this letter to file a Form 8832 with the appropriate service center to elect to be treated as an association taxable as a corporation for federal tax purposes effective Date 2. A copy of this letter should be attached to the Form 8832 filed for X.

In addition, we also conclude that the requirements of § 301.9100-3 have been satisfied with respect to X’s failure to make the election under § 168(h)(6)(F)(ii) for Year 1. Accordingly, X is granted an extension of time of 120 days from the date of this letter to file an amended return for Year 1 making the election under § 168(h)(6)(F)(ii). X should attach a copy of this letter to its amended return.
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Except as specifically set forth above, we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the Code.

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.

Pursuant to a power of attorney on file with this office, we are sending a copy of this letter to X’s authorized representatives.

Sincerely,

Associate Chief Counsel
(Passthroughs & Special Industries)

By: David R. Haglund
David R. Haglund
Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy of this letter for section 6110 purposes

cc: