IRS treats late opportunity-fund self-certification as timely

Plain-English summary

An S corporation formed to invest in qualified opportunity zone property intended to self-certify as a qualified opportunity fund. Its accountant mistakenly used the later filing deadline for a C corporation, so the corporation filed its return and Form 8996 after the applicable deadline. The IRS found that the taxpayer reasonably relied on a qualified tax professional, acted in good faith, and would not gain a lower aggregate tax liability from the relief. It therefore treated the late Form 8996 as timely filed, while expressing no opinion on whether the investments or the entity otherwise met the qualified opportunity fund rules.

Ruling snapshot

• Question: Could the corporation obtain an extension to make its qualified opportunity fund self-certification effective from its formation month?
• Outcome: Approved.
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(a)-1(a)(2)(i), 1.1400Z2(d)-1(a), and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202120014 Third Party Communication: None
Release Date: 5/21/2021 Date of Communication: Not Applicable
Index Number: 1400Z.02-00
Person To Contact:
----------------------------------------------------------- --------------------------,
-------------------------- ID No. -----------------
------------------------ Telephone Number:
--------------------
--------------------------------- Refer Reply To:
CC:ITA:B05
------------ PLR-126319-20
Date:
February 22, 2021

Legend

Taxpayer = -----------------------------------------------------------------------
---------------------------------
Financial Advisor = -------------------------
Accountant = ---------------------
Accounting Firm = -------------
State Z = ----------
Date 1 = --------------------------
Year 1 = -------
Date 2 = --------------------------
Date 3 = ----------------
Date 4 = --------------
Date 5 = -------------------------
C-Corporation Deadline = ------------------
S-Corporation Deadline = ---------------------
Extended C-Corporation = -----------------
Deadline

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

This ruling responds to the taxpayer’s request dated --------------------------. Specifically,
the taxpayer requests an extension of time under sections 301.9100-1 and 301.9100-3
of the Income Tax Regulations to (1) make a timely election under section 1.1400Z2(a)-
1(a)(2)(i) to be certified as a qualified opportunity fund (QOF), as defined in section
1400Z-2(d) of the Internal Revenue Code; and (2) for the taxpayer to be treated as a
QOF, effective as of the month the taxpayer was formed in Year 1, as provided under
section 1400Z-2(d) of the Code and section 1.1400Z2(d)-1(a) of the Income Tax
Regulations.
PLR-126319-20 2

                                      FACTS

The taxpayer was organized as a limited liability company under the laws of State Z on
Date 1 and is classified as an S-Corporation for Federal income tax purposes. The
taxpayer was organized for the purpose of investing in qualified opportunity zone
property as defined in section 1400Z-2(d)(2). Financial Advisor advised and assisted
with the creation of the taxpayer as a qualified opportunity fund.

On Date 2, Financial Advisor contacted Accountant, a certified public accountant and a
managing director with Accounting Firm, to prepare the taxpayer’s federal income tax
return for Year 1. Financial Advisor informed Accountant that the entity was intended to
be a qualified opportunity fund. Accountant understood that the taxpayer would need to
file Form 8996, Qualified Opportunity Fund along with its federal income tax return for
Year 1 in order to self-certify as a qualified opportunity fund. Advisor and Accountant did
not discuss the taxpayer’s entity classification.

Thinking that the taxpayer was a C-Corporation, Accountant assumed that Accounting
Firm had until the C-Corporation Deadline to file the taxpayer’s federal income tax
return, rather than the earlier S-Corporation Deadline. Because of the COVID-19
pandemic, Accountant further thought the deadline was extended to the Extended C-
Corporation Deadline.

On Date 3, Accountant attempted to e-file a federal extension for taxpayer’s Form 1120,
U.S. Corporation Income Tax Return for Year 1. The extension was rejected, and
Accountant was unable to determine the reason for rejection.

On Date 4, Accountant prepared taxpayer’s Form 1120, including the Form 8996 to self-
certify as a qualified opportunity fund. Accountant sent the return through Accounting
Firm’s internal auditing process, at which time the entity classification error was
discovered. After corrections were made, the final Form 1120-S, U.S. Income Tax
Return for an S-Corporation was e-filed on Date 5, after the deadline. Attached to the
return was the completed Form 8996.

According to the affidavits and information provided to us, the taxpayer and the
Accountant were aware of the requirement to file Form 8996 with the taxpayer’s timely
filed Federal income tax return for Year 1 for the taxpayer to elect to certify itself as a
QOF. The taxpayer and Accountant were aware of the taxpayer’s desire to be certified
as a QOF. However, according to the information submitted, Accountant failed to file
the taxpayer’s return and Form 8996 until after the deadline for S-Corporations.

After becoming aware of the consequences of failing to timely file the Form 8996, the
taxpayer directed Accounting Firm to promptly submit this request for relief under
sections 301.9100-1 and 301.9100-3. Taxpayer represents that it relied on Accountant
to timely file Form 8996. Taxpayer further represents that granting of the relief under
PLR-126319-20 3

section 301.9100-3 will not result in a lower tax liability for the years affected by the
election.

                               LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) of the Internal Revenue Code directs the Secretary to
prescribe regulations for rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2)
of the Income Tax Regulations provides that the rules for an entity to self-certify as a
QOF. Section 1.1400Z2(a)-1(a)(2)(i) provides that the entity electing to be certified as a
QOF must do so annually on a timely filed return 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 tax return (including extensions). The information provided
indicates that the taxpayer did not file its Form 8996 by the due date of its income tax
return (including extensions) due to Accountant’s failure to timely file the return and the
Form 8996 by the S-Corporation Deadline.

Because section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for an entity to
self-certify as a QOF, these elections are regulatory elections, as defined in section
301.9100-1(b).

Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner
will use to determine whether to grant an extension of time to make a regulatory
election. Section 301.9100-3(a) provides that requests for extensions of time for
regulatory elections (other than automatic extensions covered in section 301.9100-2)
will be granted when the taxpayer provides evidence (including affidavits) to establish
that the taxpayer acted reasonably and in good faith and the grant of relief will not
prejudice the interests of the Government.

Under section 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 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, section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have
acted reasonably and in good faith if the taxpayer—
PLR-126319-20 4

   (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 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 (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 the taxpayer has acted reasonably and in good faith, and that the granting
of relief would not prejudice the interests of the government. Accordingly, based solely
on the facts and information submitted, and the representations made in the ruling
request, Taxpayer has satisfied the requirements of the regulations for the granting of
relief and Taxpayer's Form 8996, filed on Date 5, is considered timely filed.

This ruling is based upon facts and representations submitted by the 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.
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. Specifically, we express no opinion, either express or implied, concerning
whether any investments made into the taxpayer are qualifying investments as defined
in section 1.1400Z2 (a)–1(b)(34) or whether the taxpayer meets the requirements under
PLR-126319-20 5

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 and Accounting)

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