Late-election relief for an LLC to be taxed as a corporation and opt out of tax-exempt-use rules

Plain-English summary

A single-member LLC, wholly owned by a § 501(c)(3) tax-exempt organization, was the co-general partner in a partnership that developed a low-income housing tax credit property for the elderly. Because a tax-exempt entity held more than 50 percent of it, the LLC was a "tax-exempt controlled entity." It intended to make two elections effective for the same tax year: one to be treated as a corporation (a check-the-box election on Form 8832), and one under § 168(h)(6)(F)(ii) to not be treated as a tax-exempt entity (which keeps the partnership's property from being slower-depreciating "tax-exempt use property"). The LLC inadvertently filed the corporation election with the wrong effective date and never made the § 168 election on time. It asked the IRS for a late-election extension under Treasury Regulation § 301.9100-3. Finding the taxpayer acted reasonably and in good faith and that relief would not prejudice the government, the IRS granted 60 days to make both elections.

Ruling snapshot

• Question: May a tax-exempt controlled LLC get a late-election extension to be taxed as a corporation and to opt out of tax-exempt-entity treatment under § 168(h)?
• Outcome: Approved (60-day extension granted for both elections)
• Key authorities: Treas. Reg. §§ 301.9100-1 and 301.9100-3; Treas. Reg. § 301.7701-3(c); IRC § 168(h)(6)(F)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202052001
Release Date: 12/24/2020
Index Number: 9100.00-00, 9100.04-00, 9100.31-00, 168.00-00, 7701.00-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
ID No.
Telephone Number:
Refer Reply To: CC:ITA:B04
PLR-103114-20

Date: September 30, 2020

Taxpayer =
Date 1 =
Date 2 =
Date 3 =
Date 4 =
Date 5 =
Date 6 =
Date 7 =
State =
Exempt Organization =
Partnership =
Year 1 =
Year 2 =
Agreement =

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

This letter responds to your letter, dated Date 1, in which Taxpayer requested an
extension of time under § 301.9100-3 of the Procedure and Administration Regulations
("Regulations") to make two elections, each effective as of tax year Year 1. The
elections are: (1) to file an election under § 301.7701-3(c) to treat Taxpayer as an
association taxable as a corporation for federal tax purposes ("the Corporation
Election"); and (2) to make an election under § 168(h)(6)(F)(ii) of the Internal Revenue
Code ("Code") for Taxpayer to not be treated as a tax-exempt controlled entity ("the
Section 168 Election").

                                      FACTS

Taxpayer represents that the facts are as follows.

Taxpayer was organized under the laws of State as a limited liability company on Date 2
and is a calendar-year taxpayer using the cash method of accounting. The Taxpayer
serves as the co-general partner of Partnership. The Taxpayer has been wholly-owned
by Exempt Organization, a tax-exempt entity described in § 501(c)(3), since its date of
formation. 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) of the Code. The Taxpayer owns -----------of Partnership.

Partnership was formed to acquire, construct, rehabilitate, develop, improve, maintain,
own, operate, lease, dispose of and otherwise deal with a multi-family property for
elderly persons, to be operated in an a manner that qualifies for federal low-income
housing tax credits under § 42 of the Code (the "Property"). The Partnership purchased
the Property in Year 1, and it continued to be operational during the rehabilitation
period. The Partnership placed in service the acquired portion of the Property on Date
3 due to ongoing operations, and the Partnership placed the rehabilitated rental units in
service between Date 4 and Date 5 as it completed rehabilitation in Year 2. The
Taxpayer represents that at all times after the formation of the Partnership it intended to
make an election to be treated as an association taxable as a corporation for federal tax
purposes effective Date 6. However, the Taxpayer inadvertently failed to timely file a
Form 8832, Entity Classification Election, effective Date 6. Instead, the Taxpayer
inadvertently filed an election effective Date 7.

The Agreement states that no portion of the Partnership property will be treated as "tax-
exempt use property" as defined in § 168(h) of the Code, a result that can be achieved
by the Taxpayer making an election pursuant to § 168(h)(6)(F)(ii). In addition, under
Schedule 1 of the Agreement, the fourth installment of capital contributions is partially
contingent on the Taxpayer making an election under § 168(h)(6)(F)(ii). These
elections are made only by tax-exempt controlled entities, and tax-exempt controlled
entities by definition must be corporations pursuant to § 168(h)(6)(F)(iii)(I).

Taxpayer has submitted three affidavits in support of its representations and its ruling
request. The Taxpayer represents that the Taxpayer has requested relief before the
failure to make the entity classification election was discovered by the Internal Revenue
Service ("Service"). The Taxpayer further represents that it will not have a lower tax
liability for all tax years affected by the entity classification election than it would have
had if this election had been timely made, and the taxable year in which the election
should have been made is not closed under § 6501. The Taxpayer has also provided a
representation that it and its owner are not seeking to alter a return position for which a
penalty has been or could be imposed under § 6662.

                              LAW AND ANALYSIS

The Corporation Election

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.

The Section 168 Election

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.
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.

Section 301.9100-1(c) provides that the Commissioner has the discretion to grant a
reasonable extension of time to make a regulatory election. 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 the entity classification election is
prescribed in § 301.7701-3(c), that election is a regulatory election. 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 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 301.9100-3(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
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 reasonable
           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 informed in all material respects 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 to make a regulatory election 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 § 301.9100-3.

                                    ANALYSIS

The information and representations submitted indicate that the Taxpayer at all times
intended to make the § 168(h)(6)(F)(ii) election and the entity classification election to
be classified as a corporation, and that the Taxpayer's failure to make the §
168(h)(6)(F)(ii) election and the entity classification election was inadvertent. The
Taxpayer represents that the Taxpayer has requested relief before the failure to make
both elections 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.

Further, based on the facts presented and the representations made, the Taxpayer will
not have a lower tax liability for all tax years affected by the entity classification election
than the Taxpayer would have had if the election had been timely made, and the
taxable year in which the entity classification election should have been made is not
closed under § 6501(a). We conclude that the Taxpayer has acted reasonably and in
good faith. Further, the interests of the Government will not be prejudiced by the
granting of relief.

                                   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 time of 60 days from the date of this letter ruling to make both the
Corporation Election and the Section 168 Election. This ruling is contingent on
Taxpayer filing, within 60 days from the date of this letter ruling, all required returns for
all prior years consistent with the requested relief. As to the Corporation Election,
Taxpayer should file a properly executed Form 8832 with the appropriate service center
electing to be treated as an association taxable as a corporation effective Date 6. A
copy of this letter ruling should be attached to the Form 8832. As to the Section 168
Election, Taxpayer should file the election statement with the appropriate service center
containing the information required in § 301.9100-7T(a)(3). Taxpayer should 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 this 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.

This letter is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-
21 I.R.B. 859. A paper copy will not be mailed to the taxpayer.

                                            Sincerely,

                                            /s/ Ronald J. Goldstein

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

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