IRS permits a late election for a tax-exempt controlled corporation to receive taxable-entity depreciation treatment

Plain-English summary

A corporation wholly owned by a § 501(c)(3) organization was the general partner of a partnership that acquired and rehabilitated multifamily housing. The corporation intended and contractually agreed to elect under § 168(h)(6)(F)(ii) not to be treated as tax-exempt, allowing the partnership property to use the general depreciation system rather than the tax-exempt-use rules. Its preparer mistakenly believed the corporation was a disregarded entity with no return-filing obligation, so neither Form 1120 nor the election was timely filed. After another accounting firm found the problem, the corporation filed a delinquent return and promptly requested relief. The IRS found reasonable action, good faith, and no prejudice to the government, and treated the election as timely from the corporation's first taxable year, provided the ruling is attached to its next Form 1120 and the required election statements are attached to the tax-exempt owners' returns.

Ruling snapshot

• Question: Could the tax-exempt controlled corporation make a late, irrevocable § 168(h)(6)(F)(ii) election not to be treated as tax-exempt for depreciation purposes?
• Outcome: approved (the election is treated as timely from the requested first taxable year, subject to filing conditions)
• Key authorities: IRC §§ 167, 168(g), 168(h)(6), 501(c)(3); 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: 202051001                                             Third Party Communication: None
 Release Date: 12/18/2020                                      Date of Communication: Not Applicable
 Index Number: 168.00-00
                                                               Person To Contact:
 -------------------                                           --------------------, ID No. -----------------
 --------------------------------------                        Telephone Number:
 ------------------------------                                --------------------
 -----------------------------------                           Refer Reply To:
                                                               CC:ITA:B04
                                                               PLR-101834-20
                                                               Date:
                                                               September 18, 2020




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

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

State                              =      ---------

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

The Property                       =      ------------------

Taxable Year 1                     =      -------

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

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




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

This letter responds to your private letter ruling request, dated December 17, 2019,
regarding an extension of time under § 301.9100-3 of the Treasury Regulations to make
an election under § 168(h) of the Internal Revenue Code. Specifically, you requested
an extension of time to make an election under § 168(h)(6)(F)(ii) for Taxpayer, a tax-
exempt controlled entity seeking to not be treated as a tax-exempt entity under
§ 168(h)(6)(F)(ii), from its inception (Date 1).
PLR-101834-20                               2



Facts

Taxpayer is organized under the laws of State and is a limited liability company that has
elected to be treated as a corporation for Federal income tax purposes. Taxpayer uses
the cash method of accounting and the calendar year as its taxable year. Taxpayer is
wholly owned by Exempt Organization. It has been represented that Exempt
Organization is a tax-exempt organization described in § 501(c)(3). 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 the general partner of Partnership. Partnership was formed to acquire,
rehabilitate, operate, and lease buildings with numerous multifamily residential units
known as the Property. Partnership first acquired and placed the Property in service on
Date 1, and continued to place additional property in service until Date 2. Since its
inception, Partnership has computed the depreciation deductions for Property utilizing
the General Depreciation System, a method Partnership properly could have used if the
§ 168(h)(6)(F)(ii) election had been made timely. Taxpayer intended to make a timely
Section 168 election, but inadvertently failed to do so. Upon discovering its failure to
make the elections, Taxpayer promptly sought an extension of time in which to file the
elections.

According to your request, Taxpayer intended to make a timely election under
§ 168(h)(6)(F)(ii) to be treated as a taxable entity, but inadvertently failed to do so.
Additionally, the Taxpayer agreed, in good faith and in writing, in the partnership
agreement to make an election under § 168(h)(6)(F)(ii) to be treated as a taxable entity.

Taxpayer relied on its tax preparer to prepare and file the necessary forms and
elections for Taxable Year 1. However, the tax preparer inadvertently misunderstood
Taxpayer to be a disregarded entity with no tax return filing obligation. Taxpayer
subsequently engaged an accounting firm which notified the Taxpayer of its failure to
timely file Form 1120 and make the § 168(h)(6)(F)(ii) election for Taxable Year 1. It has
been represented that upon discovering its failure to make the election under
§ 168(h)(6)(F)(ii), Taxpayer promptly sought to take corrective action and filed a
delinquent Form 1120. However, because Taxpayer’s Form 1120 was not timely filed,
Taxpayer could not make a § 168(h)(6)(F)(ii) election and is now requesting relief, under
§ 301.9100-1 and § 301.9100-3, to file a late § 168(h)(6)(F)(ii) election.

Applicable Law

Section 167(a) provides generally for a depreciation deduction for property used in a
trade or business. However, § 168(g)(1) provides the alternative depreciation systems
that must be used for any tax-exempt use property as defined in § 168(h).
PLR-101834-20                                 3

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
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.

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) 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.

Conclusion

Taxpayer is wholly owned by a tax-exempt entity as described in § 501(c)(3) and as
such, is a tax-exempt controlled entity which is treated as a tax-exempt entity for
purposes of § 168(h)(6). Under § 168(h)(6)(A), Taxpayer is able to elect not to be
treated as a tax-exempt entity for purposes of § 168(h)(6).

Based solely on the facts and information submitted and representations made, we
conclude that Taxpayer has satisfied the requirements of the §§ 301.9100-1 and
301.9100-3 for granting an extension of time to file its § 168(h)(6)(F)(ii) election.
Taxpayer’s intent was to make an election under § 168(h)(6)(F)(ii) to be treated as a
taxable entity from inception, but failed to make an election on a timely filed tax return.
This failure was inadvertent and Taxpayer is not using hindsight in requesting relief.
Moreover, Taxpayer requested relief before the failure to make the election was
discovered by the Internal Revenue Service. Finally, Taxpayer acted reasonably and in
good faith and the interests of the Government will not be prejudiced by the granting of
relief under § 301.9100-3.

Accordingly, pursuant to § 301.9100-3, Taxpayer is treated as if it had made a timely
§ 168(h)(6)(F)(ii) election for Taxable Year 1, provided that Taxpayer attaches a copy of
this letter to the next Form 1120 it files with the Internal Revenue Service. In addition,
pursuant to § 301.9100-7T(a)(3)(ii), a copy of the election statement should be attached
PLR-101834-20                                   4

to the Federal 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 letter ruling is directed only to the taxpayer requesting it. Section
6110(k)(3) provides that it may not be used or cited as precedent.

The letter ruling contained in this letter is 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 this letter ruling, it is subject to verification on
examination.

Pursuant to the provisions of a power of attorney and the private letter ruling request
submission currently on file, we are sending a copy of this letter to Taxpayer’s
authorized representatives, ----------------------- and ----------------.

If you have any questions concerning this matter, please contact ------------------------ at --
--------------------.

                                        Sincerely,

                                         /LM/

                                        Lisa Mojiri-Azad
                                        Assistant to the Branch Chief, Branch 4
                                        (Income Tax & Accounting)




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