Affordable-housing LLC received extensions for two related elections

Plain-English summary

A single-member LLC wholly owned by a section 501(c)(3) organization served as general partner of a low-income housing partnership. Its partnership agreement required it both to elect out of tax-exempt controlled entity treatment under section 168(h)(6)(F)(ii) and to elect corporate classification on Form 8832, but both filings were inadvertently missed. The taxpayer sought relief before IRS discovery, showed no hindsight, represented that aggregate tax would not be lower, and agreed to file all necessary returns or amendments. The IRS granted 120 days to make both elections with the intended effective date.

Ruling snapshot

• Question: Could the LLC make late elections to avoid tax-exempt controlled entity treatment and to be classified as a corporation?
• Outcome: Both extensions were approved for 120 days, with the specified return, statement, and Form 8832 filing requirements.
• Key authorities: IRC §§ 168(h)(6)(F) and 7701; Treas. Reg. §§ 301.7701-3, 301.9100-1 through 301.9100-3, and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201928008                                              Third Party Communication: None
Release Date: 7/12/2019                                        Date of Communication: Not Applicable
Index Number: 168.00-00, 9100.04-00,
              7701.00-00, 9100.31-00                           Person To Contact:
                                                               -----------------------, ID No. -------------------
---------------------------------------------------------      ---------------------------------------------------
------------------                                             Telephone Number:
-------------------------                                      ---------------------
--------------------------------------                         Refer Reply To:
                                                               CC:PSI:B03
                                                               PLR-127238-18
                                                               Date:
                                                               April 15, 2019


                                                      LEGEND

X                 =         -------------------------------
---------------------------------------------------

Y                 =         -----------------------------------------------------------------------------------------
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Affidavit 1       =        ------------------------------------------------------

Affidavit 2       =        -------------------------------------------------------------

Affidavit 3       =        ---------------------------------------------------------------

Agreement =                 -----------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------

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

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

Date 3            =        --------------------------

Partnership =              --------------------------------------------------------------

Project           =        ---------------------------------------------------------------------

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

PLR-127238-18                                2


Tax Year        =        ------



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

       This letter is in response to a request for a private letter ruling dated September
6, 2018, and subsequent correspondence, submitted on behalf of X by its authorized
representative, requesting that the Service grant X an extension of time under
§ 301.9100-3 of the Procedure and Administration Regulations to make an election
under § 168(h)(6)(F)(ii) of the Internal Revenue Code (“Code”) to not be treated as a
tax-exempt controlled entity beginning Date 1, and for a ruling granting an extension of
time for X to make an election under § 301.7701-3(c) of the Regulations to be treated as
an association taxable as a corporation for federal tax purposes beginning Date 1.

                                         FACTS

       The information submitted states that X was formed as a limited liability company
under the laws of State on or about Date 1. X uses the cash method as its overall
method of accounting and has the calendar year as its taxable year. X has been wholly
owned by Y, a tax-exempt entity described in § 501(c)(3), since its date of formation. X
was formed to serve as the general partner of Partnership, a limited partnership formed
on Date 2 pursuant to Agreement. X intended to be a Tax-Exempt Controlled Entity
under § 168(h)(6)(F)(iii).

        Partnership was formed to provide affordable housing and, in furtherance of such
purpose, to acquire, rehabilitate, own, lease and manage Project. Project is a qualified
low income housing project pursuant to § 42 of the Code. Project was placed in service
on Date 3. Under § 5.9(ll) and (mm) of the Agreement, X, as the general partner of
Partnership, is required to make the election under § 168(h)(6)(F)(ii) of the Code to not
be treated as a tax-exempt controlled entity for purposes of the tax-exempt use property
rules (“§ 168(h)(6)(F)(ii) election”). In order to make the foregoing election, X was
required to make an entity classification election under § 301.7701-3(c) to be treated as
an association taxable as a corporation for federal tax purposes (“entity classification
election”).

        X represents that at all times after the formation of Partnership it intended to
make an election to be treated as an association taxable as a corporation for federal tax
purposes effective Date 1, and that it intended to make a § 168(h)(6)(F)(ii) election
effective for Date 1. However, X inadvertently failed to timely file a Form 8832, Entity
Classification Election, and the § 168(h)(6)(F)(ii) election. Given that § 5.9(II) and (mm)
of Agreement required the timely filing of the entity classification election and the

PLR-127238-18                                  3

§ 168(h)(6)(F)(ii) election, there is no evidence that X is using hindsight in requesting
relief.

        X has submitted Affidavit 1, Affidavit 2, and Affidavit 3 to support its position. X
represents that X has requested relief before the failure to make the §168(h)(6)(F)(ii)
election and the entity classification election was discovered by the Service. X further
represents that, during the pendency of the review of X’s request, neither X nor Y’s
returns for the taxable years --------------------------have been or are being examined by a
district director, or have been or are being considered by an appeals office or a federal
court.

        X represents that it will not have a lower tax liability for all tax years affected by
the § 168(h)(6)(F)(ii) election and the entity classification election than it would have had
if both elections had been timely made, and the taxable year in which the two elections
should have been made is not closed under § 6501. X and Y represent that they will file
all required returns and/or amended returns as necessitated by the grant of the
requested extension of time to make regulatory elections and will recognize any
formerly unreported income as applicable.

                                            LAW

        Section 167(a) 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
which (but for this subparagraph) is not tax-exempt use property is owned by a
partnership having a tax-exempt entity and a non-exempt entity as partners and any
allocation to the tax-exempt entity 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 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 for purposes of §§ 168(h)(5) and (6). Such an election is
irrevocable and will bind all tax-exempt entities holding an interest in the tax-exempt
controlled entity.

PLR-127238-18                                  4

        Under § 301.9100-7T(a)(2)(i), the § 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 301.7701-3(a) provides 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 as provided in § 301.7701-3. An eligible
entity with a single owner can elect to be classified as an association taxable as a
corporation or to be disregarded as an entity separate from its owner.

       Section 301.7701-3(b)(1) provides that except as provided in § 301.7701-3(b)(3),
unless the entity elects otherwise, a domestic eligible entity is (i) a partnership if it has
two or more members; or (ii) disregarded as an entity separate from its owner if it has a
single owner.

        Section 301.7701-3(c)(1) 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 service center designated on
Form 8832.

        Section 301.7701-3(c)(1)(iii) provides that an election 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.

       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 automatic extensions of time for making certain
elections. Section 301.9100-3 provides extensions of time for making regulatory
elections that do not meet the requirements of § 301.9100-2.

       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
§ 168(h)(6)(F)(ii) election is prescribed in § 301.9100-7T, that election is a regulatory
election. In addition, because the due date of the entity classification election is
prescribed in § 301.7701-3(c), that election is a regulatory election.

        Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3
will be granted when the taxpayer provides evidence, including affidavits described in
§ 301.9100-3(e), to establish to the satisfaction of the Commissioner that the taxpayer

PLR-127238-18                                 5

acted reasonably and in good faith, and the grant of the 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 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 the 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 the 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 year 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 and representations submitted indicate that X at all times
intended from the outset to make the § 168(h)(6)(F)(ii) election and the entity
classification election, and that X’s failure to make the § 168(h)(6)(F)(ii) election and the

PLR-127238-18                                 6

entity classification election was inadvertent. X represents that X has requested relief
before the failure to make both elections was discovered by the Service. There is no
evidence that X is using hindsight in requesting relief.

        Further, 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) election and
the entity classification election than X would have had if both elections had been timely
made, and the taxable year in which the § 168(h)(6)(F)(ii) election and the entity
classification election should have been made is not closed under § 6501(a). We
conclude that X has acted reasonably and in good faith. Further, the interests of the
Government will not be prejudiced by the granting of relief.

       X requests an extension of time, under §§ 301.9100-1 and 301.9100-3 to file the
§ 168(h)(6)(F)(ii) election and the entity classification election to be treated as an
association taxable as a corporation for federal tax purposes under § 301.7701-3.
Based solely on the above facts and representations, we conclude that X has met the
requirements of §§ 301.9100-1 and 301.9100-3 with respect to obtaining an extension
of time to file both the § 168(h)(6)(F)(ii) election and the entity classification election.

                                      CONCLUSION

       Based solely on the facts as represented and the applicable law, we conclude
that the requirements of § 301.9100-3 have been met. Accordingly, X is granted an
extension of time of 120 days from the date of this letter to file an original or amended
return for Tax Year. X must attach the aforementioned § 168(h)(6)(F)(ii) election and
the information set forth in § 301.9100-7T(a)(3) to the original or amended return. X
also must attach a copy of this letter to the original or amended return. Pursuant to
§ 301.9100-7T(a)(3)(ii), a copy of this letter and the § 163(h)(6)(F)(ii) election statement
must also be attached to the federal income tax returns of each of the tax-exempt
members or beneficiaries of X.

        In addition, based on the facts submitted and representations made, we conclude
that X has satisfied the requirements of §§ 301.9100-1 and 301.9100-3 with respect to
the entity classification election. Accordingly, X is granted an extension of time of 120
days from the date of this letter to elect to be treated as an association taxable as a
corporation for federal tax purposes effective Date 1. The election should be made by
filing a properly executed Form 8832 with the appropriate service center. A copy of this
letter should be attached to the election.

       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 timely
income tax return with respect to any taxable year.

PLR-127238-18                                7


      The rulings contained in this letter are based upon information and
representations submitted by the taxpayers 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 a 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.

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


                                                 Sincerely,


                                                 Associate Chief Counsel
                                                 (Passthroughs & Special Industries)



                                             By: ______________________________
                                                 Caroline E. Hay
                                                 Assistant to the Branch Chief, Branch 3
                                                 Office of Associate Chief Counsel
                                                 (Passthroughs & Special Industries)



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