Opportunity fund's late self-certification is treated as timely

Plain-English summary

A limited liability company was formed to invest in qualified opportunity zone property and hired an adviser to prepare its first federal tax return and Form 8996. The adviser failed to file both by the due date, even though the company and adviser understood that timely filing was required for self-certification as a qualified opportunity fund. After discovering the error, the company requested regulatory election relief. The IRS found that the company acted reasonably and in good faith and that relief would not prejudice the government. It treated the Form 8996 as timely filed and the company as self-certified from its formation month, without ruling that its investments or operations otherwise satisfied the qualified opportunity fund rules.

Ruling snapshot

• Question: Should the company's late Form 8996 election to self-certify as a qualified opportunity fund be treated as timely?
• Outcome: Approved: the Form 8996 is treated as timely filed from the requested effective month.
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1, 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202116011
Third Party Communication: None
Release Date: 4/23/2021
Date of Communication: Not Applicable
Index Number: 1400Z.02-00
Person To Contact:
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---------------------, ID No. -----------------
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Telephone Number:
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Refer Reply To:
In Re: ------------------------------
CC:ITA:B05
PLR-124804-20
Date:
January 22, 2021

Legend

Taxpayer = --------------------------------------------------------
Date 1 = ---------------------------
Date 2 = --------------------------
State B = -------------
Date 3 = ---------------------------
Advisor = ------------------
Date 4 = -----------------------
Year 1 = --------

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

This ruling responds to Taxpayer’s request dated Date 1. Specifically, Taxpayer requests relief under § 301.9100-3 of the Income Tax Regulations for Taxpayer’s Form 8996 (Qualified Opportunity Fund), as filed on Date 2, to be treated as timely for purposes of the election: (1) to self-certify the Taxpayer as a Qualified Opportunity Fund (QOF), as defined in section 1400Z-2(d) of the Internal Revenue Code (Code); and (2) for the taxpayer to be treated as a QOF, effective as of the month Taxpayer was formed, as provided under section 1400Z-2 and Treasury Regulation 1.1400Z2(d)-1(a).

FACTS

According to the information submitted to us, Taxpayer, a limited liability company under the laws of State B, was formed as a QOF on Date 3 for the purpose of investing in qualified opportunity zone property as defined in § 1400Z-2(d)(2) of the Code. Taxpayer enlisted the services of Advisor on Date 4 regarding the preparation of Taxpayer’s Federal income tax return for Taxpayer’s first year of operation – Year 1, the year Taxpayer was formed. The information provided by Taxpayer indicates that Advisor was tasked with preparing and timely filing Taxpayer’s Federal income tax return and all related forms and elections to self-certify Taxpayer as a QOF.
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According to the affidavits and additional information provided to us, Taxpayer and Advisor were aware of the requirement to file Form 8996 (Qualified Opportunity Fund) with the Taxpayer’s timely filed Year 1 Federal income tax return for Taxpayer to self- certify QOF status and to be treated as a QOF as of the month Taxpayer was formed. Advisor was retained by Taxpayer so that Taxpayer could comply with the Form 8996 requirements and Advisor was expected to timely file the Form 8996 for Taxpayer’s 2019 Federal income tax return. However, according to the information submitted to us, Advisor failed to file Taxpayer’s Federal income tax return and Form 8996 by the due date. On Date 3, Advisor discovered that it had failed to file Taxpayer’s Federal income tax return and Form 8996. Upon discovering that the election had not been timely filed, Advisor was enlisted by Taxpayer to pursue relief under § 301.9100-3.

LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations provides that the self-certification of a QOF must be timely-filed and effectuated annually in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the Internal Revenue Service forms or instructions, or in publications or guidance published in the Internal Revenue Bulletin.

To self-certify as a QOF, a taxpayer must file Form 8996 (Qualified Opportunity Fund) with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the Federal income tax return (including extensions). The information provided indicates that Taxpayer did not file its Form 8996 by the due date of its Federal income tax return (including extensions) due to Advisor’s failure to file the income tax return.

Section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for electing to be a QOF and electing to self-certify as a QOF. As such, these elections are regulatory elections, as defined in section 301.9100-1(b). According to 301.9100- 3(a), requests for extensions of time for regulatory elections that do not meet the requirements of § 301.9100-2 (automatic extensions) must be made under the rules of n § 301.9100-3. Additionally, requests for relief subject to § 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, and that the granting of relief will not prejudice the interests of the Government.

Under § 301.9100-3(b) a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer requests relief before the failure to make the regulatory election is discovered by the Service, or reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make the election. However, a taxpayer is not considered to have reasonably relied on a qualified tax professional if
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the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts.

In addition, § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer –

i. seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested;
ii. was fully informed in all material respects of the required election and related tax consequences but chose not to make 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 Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief.

Section 301.9100-3(c)(1)(i) provides that the interest 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 (taking into account the time value of money).

Section 301.9100-3(c)(1)(ii) provides that 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 that would have been 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.

Based on the facts and information submitted and the representations made, we conclude that Taxpayer’s request for extension of time to elect to be a QOF and to self- certify as a QOF is a regulatory election governed by § 301.9100-3. We further conclude that, based on the facts and information submitted in connection with this request, Taxpayer has acted reasonably and in good faith, and that the granting of relief would not prejudice the interests of the Government. Accordingly, Taxpayer has satisfied the requirements of the regulations for the granting of relief, and Taxpayer’s Form 8996, certifying Taxpayer as a QOF as of the month Taxpayer was formed is considered timely filed.

This ruling is based upon facts and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for a ruling.
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However, as part of an examination process, the Service may verify the facts, 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. Specifically, we have no opinion, either express or implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in Treasury Regulation § 1.1400Z2(a)-1(b)(34) or whether Taxpayer meets the requirements under section 1400Z-2 and the regulations thereunder to be a QOF. We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction.

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

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant. 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 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.

Sincerely,

Shareen S. Pflanz
Chief, Branch 5
Office of Associate Chief Counsel
(Income Tax & Accounting)

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