Controlled corporation received relief for a late tax-exempt-entity election

Plain-English summary

A corporation wholly owned by a tax-exempt organization was a managing member in entities involved with rehabilitation and leasing of a historic commercial property. It needed to elect under section 168(h)(6)(F)(ii) not to be treated as tax-exempt so that tax-exempt-use-property rules would not limit the rehabilitation credit. The return preparer mistakenly treated the corporation as a disregarded single-member LLC, despite its prior Form 8832 election for C corporation status, and failed to prepare its first-year Form 1120 on time. That missed return also prevented a timely section 168 election. The IRS granted relief and treated the election as made with the late-filed return, provided the corporation attached the ruling to its next return and supplied the required election statement to its tax-exempt owner.

Ruling snapshot

• Question: Could the tax-exempt controlled corporation make a late election not to be treated as a tax-exempt entity under section 168(h)(6)?
• Outcome: approved
• Key authorities: IRC §§ 47, 168(h)(6)(F); Treas. Reg. §§ 301.9100-1, 301.9100-3, 301.9100-7T

Full text (IRS public release)

Internal Revenue Service                                    Department of the Treasury
                                                            Washington, DC 20224

Number: 201737002                                           Third Party Communication: None
Release Date: 9/15/2017                                     Date of Communication: Not Applicable
Index Number: 9100.04-00, 168.29-02

                                                            Person To Contact:
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                                                            Telephone Number:
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                                                            Refer Reply To:
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                                                            CC:ITA:B04
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                                                            PLR-113439-17
                                                            Date:
                                                            June 19, 2017




Taxpayer                            =     -------------------
EIN:                                =     -----------------

Exempt Organization                 =     ----------------------------------------------------
EIN:                                =     -----------------

State                               =     -------------

Landlord                            =     ---------------------------

Tenant                              =     ------------------------------------------------

Taxable Year 1                      =     -------

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

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

Taxable Year 2                      =      ---------


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

This letter responds to your private letter ruling request, dated March 19, 2017,
regarding an extension of time to make an election under § 168(h) of the Internal
Revenue Code. Specifically, you requested an extension of time to make an election

PLR-113439-17                                 2

under § 168(h)(6)(F)(ii) for Taxpayer, a tax-exempt controlled entity seeking to not be
treated as a tax-exempt entity.

Facts

Taxpayer is organized under the laws of State and is a limited liability company for
federal income tax purposes. Taxpayer uses the accrual method of accounting and the
calendar year as its taxable year. Taxpayer is wholly owned by Exempt Organization, a
tax-exempt entity. 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).

Taxpayer is a managing member of Landlord and Tenant. Landlord was organized to
develop, finance, rehabilitate, construct, own, operate, maintain, lease and sell or
otherwise dispose of the property. Landlord qualified for the rehabilitation credit under §
47 and elected to pass the credit through to Tenant. Tenant was organized to lease,
hold, and maintain the project as a commercial office building and related facilities.
Taxpayer is Tenant’s managing member with a 1% ownership interest.

Landlord and Tenant executed an agreement on Date 1, which stated that neither
Landlord nor any of its members constitute a “tax-exempt controlled entity” within the
meaning of § 168(h)(6)(F)(iii). Further, under Tenant’s operating agreement, Taxpayer
was required to make an election under § 168(h)(6) so that the rehabilitation credit
would not be limited as a result of a portion of the property being treated as tax-exempt
use property.

Exempt Organization hired a tax preparer to prepare returns for Landlord and Tenant.
The tax preparer mistakenly failed to prepare Form 1120, U.S. Corporation Income Tax
Return, for Taxpayer due to the tax preparer’s assumption that Taxpayer was a single
member LLC disregarded for Federal income tax purposes. Tax preparer was unaware
that Taxpayer had filed Form 8832, Entity Classification Election, to elect to be treated
as a C-Corporation. As a result, the Taxable Year 1 Federal income tax return for
Taxpayer was not timely filed and a § 168(h)(6) election could not be made since the
return was filed late. After discovering the mistake, the tax preparer prepared and filed
the return on Date 2, along with Taxpayer’s timely Taxable Year 2 return.

Applicable Law

Under § 47(a)(2), a rehabilitation credit is provided for 20 percent of the qualified
rehabilitation expenditures with respect to any certified historic structure.

Section 168(h)(6)(A) provides that (1) if any property which 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

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partnership items is not a qualified allocation, then an amount equal to the tax-exempt
entity’s proportionate share of such property is treated as tax-exempt use property.
Section 47(c)(2)(B) provides that expenditures allocable to the portion of a certified
historic structure that is tax-exempt use property are not qualified rehabilitation
expenditures.

A tax-exempt controlled entity is treated as a tax-exempt entity under § 168(h)(6)(F)(i).
Section 168(h)(6)(F)(iii)(I) defines a tax-exempt controlled entity as any corporation if 50
percent or more of the corporation’s stock is held by one or more tax-exempt entities.

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. This 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) of the Procedure and Administration Regulations 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. 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 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.

Analysis

Based on the facts and information submitted, we conclude that Taxpayer has satisfied
the requirements of the regulations for granting an extension of time to file its
§ 168(h)(6)(F)(ii) election. Accordingly, Taxpayer is treated as if it had made the §
168(h)(6)(F)(ii) election with the tax return it filed for Taxable Year 1, provided that
Taxpayer attaches a copy of this letter to the next tax return it files. In addition, pursuant
to § 301.9100-7T(a)(3)(ii), a copy of the election statement should be attached to the
federal income tax returns of each of the tax-exempt shareholders or beneficiaries of
Taxpayer. 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.

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)
provides that it may not be used or cited as precedent.

If the taxpayer wants its authorized representative to receive copies of notices and
communications in this matter with the Service, the taxpayer must submit a new
completed Form 2848, Power of Attorney and Declaration of Representative, which is

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available at irs.gov. The box under the Representative’s name and address must be
checked.

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.

If you have any questions concerning this matter, please contact the individual whose
name and telephone number appear at the beginning of the letter.


                                     Sincerely,



                                     Stephen J. Toomey
                                     Senior Counsel
                                     Office of Associate Chief Counsel
                                     (Income Tax & Accounting)