Tax-exempt controlled entity received 45 days to make late election

Plain-English summary

A corporation wholly owned by a section 501(c)(3) organization intended to elect under section 168(h)(6)(F)(ii) not to be treated as a tax-exempt controlled entity. Its tax preparer filed the corporation’s returns consistently with that intended election but inadvertently omitted the required election statement from the first return. The corporation discovered the omission, requested relief before the IRS did, and showed that it had reasonably relied on the preparer. Granting relief would not reduce its aggregate tax liability compared with a timely election or otherwise prejudice the government. The IRS granted 45 days from the ruling date to file the election statement.

Ruling snapshot

• Question: May the corporation receive extra time to make its section 168(h)(6)(F)(ii) election?
• Outcome: approved, with 45 days from the ruling date to file the required election statement
• Key authorities: IRC § 168(h)(6)(F)(ii); 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: 202004008                                            Third Party Communication: None
Release Date: 1/24/2020                                      Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.04-00,
              168.00-00                                      Person To Contact:
                                                             -------------------------
----------------------------------                           ID No. ----------------
----------------------                                       Telephone Number:
-----------------------------                                --------------------
                                                             Refer Reply To:
---------------------------------                            CC:ITA:B04
                                                             PLR-119893-19
                                                             Date:
                                                             October 22, 2019




LEGEND

Taxpayer                             =   ------------------------------------------------------------
Date 1                               =   ----------------
Date 2                               =   -------------------
Date 3                               =   -------------------
State                                =   -------------------
Exempt Organization                  =   ----------------------------------
Partnership                          =   --------------------------------------------
Year 1                               =   ------
Firm                                 =   -----------------

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

This letter is in response to a private letter ruling request filed on August 15, 2019, on
behalf of Taxpayer, seeking an extension of time under §§ 301.9100-1 and 301.9100-3
of the Procedure and Administration Regulations to make an election under
§ 168(h)(6)(F)(ii) of the Internal Revenue Code to not be treated as a tax-exempt
controlled entity.

FACTS

Based on the information submitted and representations made, the relevant facts are as
follows.
PLR-119893-19                                  2


On Date 1, Taxpayer was organized under the laws of State as a corporation. Exempt
Organization, a corporation that is a tax-exempt entity pursuant to § 501(c)(3), owns
100 percent of Taxpayer. Taxpayer is a tax-exempt controlled entity within the meaning
of § 168(h)(6)(F)(iii) because Exempt Organization owns more than 50 percent in value
of the stock of Taxpayer. Taxpayer is the majority owner of Partnership, a domestic
partnership that owned real property that was placed in service in Year 1.

Since its incorporation on Date 1, Taxpayer has engaged Firm to prepare all of its
federal and state tax returns. When filing its return for the first fiscal year ending Date 2,
Taxpayer intended to make an election under § 168(h)(6)(F)(ii) to not be treated as a
tax-exempt controlled entity and reasonably relied on Firm to make the election. All of
taxpayer’s tax returns since its incorporation have been prepared by Firm and filed by
Taxpayer as if it had made the § 168(h)(6)(F)(ii) election so that the Taxpayer will not
have a lower tax liability because of the relief requested.

On Date 3, Taxpayer contacted Firm requesting evidence that the § 168(h)(6)(F)(ii)
election had been made. It was discovered that Taxpayer and its return preparer
inadvertently failed to attach the required § 168(h)(6)(F)(ii) election statement to
Taxpayer’s Date 2 return. Upon discovering its mistake, Taxpayer promptly submitted
this private letter ruling request seeking an extension of time under § 301.9100-3 to
make the § 168(h)(6)(F)(ii) election.

APPLICABLE LAW

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
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
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 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
corporation (without regard to that subparagraph and § 168(h)(2)(E)) constitutes a “tax-
exempt controlled entity” 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). In the
case of tiered partnerships and other entities, § 168(h)(6)(E) applies similar rules.
PLR-119893-19                                 3

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity can elect not to be treated as a
tax-exempt entity. Once made, the 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, a
§ 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)(i)
provides that the § 168(h)(6)(F)(ii) election must be made by attaching a statement to
the tax return for the taxable year for which the election is to be effective. Per §
301.9100-7T(a)(3)(ii), a copy of the election must also be attached to the income tax
returns of the tax-exempt shareholders of the tax-exempt controlled entity.

Section 301.9100-1(c) provides the Commissioner of Internal Revenue has the
discretion to grant a reasonable extension of time to make a regulatory election. Per §
301.9100-1(b), the term “regulatory election” includes any election the due date for
which is prescribed by a regulation. 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.

The Service uses standards set forth in §§ 301.9100-1 through 301.9100-3 to determine
whether to grant an extension of time to make a regulatory election. Under § 301.9100-
3(a), the Service will grant requests for extensions of time for regulatory elections (other
than automatic extensions of time covered in § 301.9100-2) when the taxpayer provides
evidence (including affidavits) to establish that the taxpayer acted 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 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.

Per § 301.9100-3(b)(3), a taxpayer is considered to have not acted reasonably and in
good faith if the taxpayer:
PLR-119893-19                                 4

       (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)(1) provides that the Service will grant a reasonable extension of
time only when doing so will not prejudice the interests of the Government. Section
301.9100-3(c)(1)(i) states 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
may be 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.

ANALYSIS

The representations made and information provided by Taxpayer establishes that
Taxpayer acted reasonably and in good faith. Taxpayer has shown that it intended to
make the § 168(h)(6)(F)(ii) election and would have but for the inadvertent mistake by
its tax professional on whom Taxpayer reasonably relied. Taxpayer requested this relief
before failure to make the election was discovered by the Service. Taxpayer does not
seek to alter a return position for which an accuracy-related penalty could be imposed
under § 6662 at the time Taxpayer’s request for relief. Taxpayer has also represented
that it did not affirmatively choose to decline making the § 168(h)(6)(F)(ii) election and is
not using hindsight in requesting relief.

In addition, an extension of time granted to Taxpayer will not prejudice the interests of
the Government. Based on representations made by the Taxpayer, granting the
request for relief will not provide Taxpayer with a lower tax liability in the aggregate for
all taxable years to which the election applies than Taxpayer would have had if the
election was timely made. As such, granting an extension to make the § 168(h)(6)(F)(ii)
election does not prejudice the interests of the Government.

CONCLUSION

Based solely on the facts as represented and the applicable law, we conclude that the
requirements of §§ 301.9100-1 and 301.9100-3 have been met. Taxpayer is granted an
extension of 45 days from the date of this ruling to file the election statement with the
PLR-119893-19                                  5

appropriate service center containing the information required in § 301.9100-7T(a)(3).
Taxpayer must attach a copy of this letter to the election statement.

A copy of this ruling should be attached to Taxpayer's federal tax returns for the tax
years affected. 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 ruling contained in this letter is based upon information and representations
submitted by Taxpayer, accompanied by a penalty of perjury statements executed by an
appropriate party, and on other affidavits. This office has not verified any of the material
submitted in support of the request for a ruling. However, as part of an examination
process, the Service may verify the factual information, representations, and other data
submitted.

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.

Pursuant to the Form 2848, Power of Attorney and Declaration of Representation, on
file, we are sending a copy of this letter to Taxpayer's authorized representative.

                                       Sincerely,



                                       Ronald J. Goldstein
                                       Senior Technician Reviewer, Branch 4
                                       (Income Tax & Accounting)