IRS grants more time for a real-property business election

Plain-English summary

A foreign limited liability company treated as a partnership wanted to elect out of the Section 163(j) business-interest limit for its qualifying real-property trades or businesses. Its tax adviser tried to make the election by attaching a statement to a related corporation's Form 5471 because the partnership otherwise had no U.S. return filing requirement. The adviser later determined that the election should instead have been attached to a partnership return filed for the taxpayer. The IRS found that the taxpayer acted reasonably and in good faith by relying on its tax professional and that late relief would not prejudice the government. It granted 60 days from the ruling date to file the election statement, without deciding whether the businesses actually qualified for the election.

Ruling snapshot

• Question: Could the partnership receive additional time to make the Section 163(j)(7)(B) real-property trade or business election on the proper return?
• Outcome: Approved.
• Key authorities: IRC § 163(j)(7)(B); Prop. Treas. Reg. § 1.163(j)-9; Treas. Reg. §§ 1.6031(a)-1(b)(5) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202127002
Release Date: 7/9/2021

Third Party Communication: None
Date of Communication: Not Applicable

Index Number: 9100.00-00

Person To Contact:
------------------, ID No. -----------------

Telephone Number:

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Refer Reply To:
CC:ITA:B03
PLR-121693-20

Date:
March 29, 2021

TY: -----------------------------------------------------

LEGEND:

Taxpayer = -----------------------------------------------------------------------------

Parent = -------------------------------------------

Entity A = ------------------------------------------------

Entity B = -----------------------------------------

Entity C = ------------------------------------------

Advisor = ----------------------

X = --------------------------------------------------------------------------

Country A = ------------------------------------

Country B = ---------------------

State = -------------

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

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

n1 = -----

n2 = ---

n3 = -----

n4 = ---

PLR-121693-20 2

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

This responds to a letter ruling request dated September 28, 2020, submitted on behalf
of Taxpayer. Taxpayer requests an extension of time under §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to file an election
statement, pursuant to § 1.163(j)-9 of the Proposed Income Tax Regulations, published
in the Federal Register on December 28, 2018 (83 F.R. 67490), for the taxable year
ending Date 1.

FACTS

Taxpayer represents the facts are as follows:

Taxpayer is a limited liability company formed under the laws of Country A engaged in
the business of x. Taxpayer is treated as a partnership for U.S. federal income tax
purposes. Pursuant to certain management agreements, Parent and its affiliates
generally manage the operations of Taxpayer’s real property trades or business. Parent
also has general authority over Taxpayer’s tax matters, including deciding whether to
make tax elections.

Parent owns n1 percent of a disregarded entity, Entity A, which owns a n2 percent
interest in Entity B. Entity B is a State limited liability company that is treated as a
partnership for U.S. federal income tax purposes. Entity B owns, through two
disregarded entities, n3 percent of the stock of Entity C. Entity C is a corporation
formed under the laws of Country B. Entity C owns, through a disregarded entity, a n4
percent interest in Taxpayer.

Parent engaged Advisor to prepare Taxpayer’s tax return for the taxable year ending
Date 1 and to provide advisory services on tax matters including the application of
section 163(j) of the Internal Revenue Code. Advisor then determined that for the
taxable year ending Date 1, Taxpayer should make an election to be an electing real
property trade or business (RPTOB election) under section 163(j)(7)(B) for each of its
real property trades or businesses. Parent agreed with this determination and
represents that it relied on Advisor to properly make the RPTOB election under the
procedures outlined in Prop. Reg. § 1.163(j)-9.

Taxpayer represents that it did not have gross income that was effectively connected
with a U.S. trade or business in the taxable year ending Date 1. Taxpayer also
represents that it was not otherwise required to file a U.S. partnership tax return for the
taxable year ending Date 1. Consequently, Advisor attempted to make the RPTOB
election by including an election statement with the Form 5471, Information Return of
U.S. Persons With Respect to Certain Foreign Corporations, filed by Entity B with
respect to Entity C for the taxable year ending Date 1.

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During Date 2, Parent’s external auditors raised the issue of the proper method for
making an election under section 163(j)(7)(B). Upon review, Parent and Advisor
determined that Taxpayer should have made the RPTOB election by attaching an
election statement to a timely filed U.S. partnership tax return for Taxpayer for the
taxable year ending Date 1, including extensions, as required by Prop. Reg. § 1.163(j)-
9(d) and § 1.6031(a)-1(b)(5) of the Income Tax Regulations. Parent therefore instructed
Advisor to prepare and file this request.

LAW

Section 163(j) generally limits the amount of business interest expense that a taxpayer
can deduct in the current taxable year to the sum of: (1) the taxpayer’s business interest
income for the taxable year; (2) 30% of the taxpayer’s adjusted taxable income for the
taxable year; and (3) the taxpayer’s floor plan financing for the taxable year. However,
section 163(j)(7) provides that this limitation does not apply to certain excepted trades
or businesses, including electing real property trades or businesses.

On December 28, 2018, the Treasury Department issued proposed regulations
regarding the limitation on the deduction for business interest expense. REG-106089-
18, 2018-16 I.R.B. 492. Prop. Reg. § 1.163(j)-9 sets forth the procedures by which a
taxpayer may elect for its qualifying real property trade or business to be an electing
real property trade or business. Specifically, Prop. Reg. § 1.163(j)-9(c)(1) states that a
taxpayer makes such an election by attaching an election statement to its timely filed
original Federal income tax return, including extensions. Prop. Reg. § 1.163(j)-9(c)(4)
specifies that an election for a partnership must be made on the partnership’s return for
the trade or business that the partnership conducts. Taxpayers may apply the proposed
regulations, in their entirety, for taxable years beginning after December 31, 2017 and
before November 13, 2020.

Section 1.6031(a)-1(b)(5) provides that, for a partnership not otherwise required to file a
partnership return, if an election that only the partnership may make is required to be
made by or for the partnership, a return on the form prescribed for the partnership return
must be filed for the partnership.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner uses
to determine whether to grant an extension of time to make a regulatory election.
Section 301.9100-2 provides automatic extensions of time for making certain elections.
Section 301.9100-3 provides extensions of time for making elections that do not meet
the requirements of § 301.9100-2.

Section 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable

PLR-121693-20 4

extension of time to make a regulatory election, or a statutory election (but no more than
six months except in the case of a taxpayer who is abroad) under all subtitles of the
Internal Revenue Code except subtitles E, G, H and I.

Section 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which § 301.9100-2 expressly permits automatic
extensions. Requests for extensions of time for regulatory elections will be granted
when the taxpayer provides evidence (including affidavits described in the regulations)
to establish to the satisfaction of the Commissioner 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) states that a taxpayer will be 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, including a tax professional
employed by the taxpayer, and the tax professional failed to make, or advise the
taxpayer to make the election.

Under § 301.9100-3(b)(3), a taxpayer will not be considered 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 section 6662 at the time the taxpayer requests relief (taking
into account § 1.6664-2(c)(3)) and the new position requires or permits 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 a taxpayer, the Service will not ordinarily grant relief.

PLR-121693-20 5

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. Section 301.9100-3(c)(1)(i) provides, in part, that the interests of
the government are prejudiced if granting relief would result in the 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, in part, 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 years that would have been affected by
the election had it been timely made, are closed by the period of limitations on
assessment under section 6501(a) before the taxpayer’s receipt of a ruling granting
relief.

ANALYSIS

Taxpayer's election is a regulatory election, as defined under § 301.9100-1(b), because
the due date of the election is prescribed in Prop. Reg. § 1.163(j)-9. The Commissioner
has the authority under §§ 301.9100-1 and 301.9100-3 to grant an extension of time to
file a late regulatory election.

Taxpayer in this case has represented that it requested relief before the failure to make
the regulatory election was discovered by the Service, that it reasonably relied on its
hired tax professionals, and that the tax professionals failed to make the election. Thus,
under §§ 301.9100-3(b)(1)(i) and (v), Taxpayer will be deemed to have acted
reasonably and in good faith. Taxpayer has also represented that none of the
circumstances listed in § 301.9100-3(b)(3) apply.

Based on the facts of the case Taxpayer provided, granting an extension of time to file
the election will not prejudice the interests of the government under § 301.9100-3(c)(1).
Taxpayer has represented that granting relief would not result in a lower tax liability in
the aggregate for all taxable years affected by the election than Taxpayer would have
had if the election had been timely made (taking into account the time value of money).
Furthermore, Taxpayer has represented that the taxable year in which the regulatory
election should have been made and any taxable years that would have been affected
had it been timely made, are not closed by the period of limitations on assessment.

CONCLUSION

In the present situation, the requirements of §§ 301.9100-1 and 301.9100-3 have been
satisfied. The information and representations made by Taxpayer establish that
Taxpayer acted reasonably and in good faith. Furthermore, granting an extension will
not prejudice the interests of the Government under § 301.9100-3(c)(1). Accordingly,
Taxpayer is granted an extension of time until 60 days following the date of this ruling to
file an election statement in accordance with the procedures set forth in Prop. Reg. §
1.163(j)-9 for the taxable year ending Date 1 electing for Taxpayer’s qualifying real

PLR-121693-20 6

property trades or businesses to be electing real property trades or businesses under
section 163(j)(7)(B).

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.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling, including whether Taxpayer’s real property trades or
businesses qualify for the RPTOB election.

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.

A copy of this ruling 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative. Enclosed is a copy of the letter ruling
showing the deletions proposed to be made in the letter when it is disclosed under
Section 6110 of the Code.

Sincerely,

Brinton T. Warren
Chief, Branch 3
(Income Tax & Accounting)

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