IRS grants a tax-exempt controlled entity 45 days to make a late Section 168(h)(6)(F)(ii) election out of tax-exempt entity status

Plain-English summary

A limited liability company that elected to be taxed as a corporation, and that is wholly owned by a 501(c)(3) charity, counts as a "tax-exempt controlled entity" under section 168(h). That status can turn depreciable property it holds (here, a rehabilitated commercial building owned through a chain of partnerships) into "tax-exempt use property," which must be depreciated under the slower alternative depreciation system. Section 168(h)(6)(F)(ii) lets such an entity elect not to be treated as a tax-exempt entity, avoiding that slower depreciation. The entity intended to make the election, but its tax professional inadvertently left it off the return, and the entity also filed its first-year return late without getting an extension. It asked the IRS for relief under the section 301.9100-3 regulations. Finding that the entity acted reasonably and in good faith (it relied on its advisor, filed consistently as if the election had been made, and sought relief before the IRS caught the error) and that relief would not prejudice the government, the IRS granted 45 days to file the election statement. The ruling does not decide whether the entity is actually eligible to make the election.

Ruling snapshot

• Question: Will the IRS extend the deadline for a tax-exempt controlled entity to make a late election under section 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity?
• Outcome: Approved (45 days from the letter to file the election statement; eligibility to make the election not addressed)
• Key authorities: IRC § 168(h)(6)(F)(ii), (iii); IRC § 168(g), (h)(6)(A); IRC § 167(a); Treas. Reg. § 301.9100-7T; Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202145023 Third Party Communication: None
Release Date: 11/12/2021 Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.04-00,
9100.31-00, 168.00-00 Person To Contact:
---------------------
------------------------------------------------ ID No. -----------------
-------------------- Telephone Number:
------------------------- ---------------------
Refer Reply To:
------------------------------------ CC:ITA:B04
PLR-109132-21
Date:
August 10, 2021

                                               LEGEND

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

State = --------

Exempt Organization = --------------------------------------------------------

Partnership 1 = -------------------------------------------------------------

Partnership 2 = -----------------------------------

X = ---

Y = ---

Year 1 = -------

Year 2 = -------

Firm = -------------------------------

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

This letter responds to a request, dated April 15, 2021, for a private letter ruling granting
an extension of time to make an election under § 168(h)(6)(F)(ii) of the Internal
Revenue Code (Code) to Taxpayer, a tax-exempt controlled entity under
§ 168(h)(6)(F)(iii).

                                      FACTS

Based on the information submitted and representations made, the relevant facts are as
follows:

Taxpayer is organized under the laws of State and is a limited liability company that
elected to be treated as a corporation for Federal income tax purposes as of the date of
formation. Taxpayer uses the accrual method of accounting and the calendar year as its
taxable year. Taxpayer is wholly owned by Exempt Organization, 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 owns X percentage of Partnership 1, a limited liability company organized
under the laws of State and treated as a domestic partnership. Partnership 1 owns Y
percentage of Partnership 2, which is a limited liability company organized under the
laws of State treated as a domestic partnership. As a result, Taxpayer is an indirect
owner of Partnership 2. Partnership 2 was formed to acquire, rehabilitate, and lease a
vacant commercial property. The property was purchased in Year 1 and placed in
service in Year 2.

Taxpayer filed an untimely Year 1 Federal income tax return, as Taxpayer inadvertently
failed to obtain an extension of time to file its Year 1 federal income tax return. No
§ 168(h)(f)(F)(ii) election was filed with the Year 1 federal income tax return.

The Operating Agreement contemplates that Taxpayer would make the § 168(h)(f)(F)(ii)
election. Affidavits from legal counsel for Taxpayer provide that Taxpayer was advised
to make the § 168(h)(f)(F)(ii) election and that Taxpayer intended to follow this advice. A
miscommunication between Taxpayer and Taxpayer’s professional advisors resulted in
the § 168(h)(f)(F)(ii) election being inadvertently omitted from the Taxpayer’s Year 1
Federal income tax return.

Taxpayer should have made its election under § 168(h)(6)(F)(ii) on a timely-filed return
for Year 1, but due to a lack of communication, Taxpayer failed to obtain an extension
for its Taxable Year 1 Federal income tax return and failed to timely make the election.
However, from the materials submitted, it is clear that Taxpayer at all times
intended to make the election under § 168(h)(6)(F)(ii) and filed all applicable returns as
if the election had been timely made. Upon discovering its failure to make the election

under § 168(h)(6)(F)(ii), Taxpayer promptly filed a request for relief under § 9100 to
obtain an extension of time in which to make the election.

                               APPLICABLE LAW

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.

Under § 301.9100-7T(a)(2)(i) of the Procedure and Administration Regulations, a
§ 168(h)(6)(F)(ii) election must be made by the due date of the tax return for the first
taxable year for which the election is to be effective. Section 301.9100-7T(a)(3)(i)
provides that the § 168(h)(6)(F)(ii) election must be made by attaching a statement to
the tax return for the taxable year for which the election is to be effective. Per
§ 301.9100-7T(a)(3)(ii), a copy of the election must also be attached to the income tax
returns of the tax-exempt shareholders of the tax-exempt controlled entity.

Section 301.9100-1(c) provides that the Commissioner of Internal Revenue has the
discretion to grant a reasonable extension of time to make a regulatory election. Per
§ 301.9100-1(b), the term “regulatory election” includes any election the due date for
which is prescribed by a regulation. 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.

The Service uses standards set forth in §§ 301.9100-1 through 301.9100-3 to determine
whether to grant an extension of time to make a regulatory election. Under § 301.9100-
3(a), the Service will grant requests for extensions of time for regulatory elections (other

than automatic extensions of time covered in § 301.9100-2) when the taxpayer provides
evidence (including affidavits) to establish 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) 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 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, and the tax professional
  failed to make, or advise the taxpayer to make, the election.

Per § 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 fully informed 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.

Section 301.9100-3(c)(1) provides that the Service will grant a reasonable extension of
time only when doing so will not prejudice the interests of the Government. Section
301.9100-3(c)(1)(i) states 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
may be prejudiced if the taxable year in which the regulatory election should have been
made, or any taxable years 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.

                                   ANALYSIS

The representations made and information provided by Taxpayer establishes that
Taxpayer acted reasonably and in good faith. Taxpayer has shown that it intended to
make the § 168(h)(6)(F)(ii) election and would have but for the inadvertent mistake by

its tax professional on whom Taxpayer reasonably relied. In addition, Taxpayer has filed
its returns and calculated its tax due as if the election had been timely made. Taxpayer
requested this relief before failure to make the election 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 did
not affirmatively choose not to make the § 168(h)(6)(F)(ii) election and is not using
hindsight in requesting relief.

In addition, an extension of time granted to Taxpayer will not prejudice the interests of
the Government. Based on representations made by the Taxpayer, granting the request
for relief will not provide Taxpayer with a lower tax liability in the aggregate for all
taxable years to which the election applies than Taxpayer would have had if the election
was timely made. As such, granting an extension to make the § 168(h)(6)(F)(ii) election
does not prejudice the interests of the Government.

                                  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 and Taxpayer’s
§ 168(h)(6)(F)(ii) election will be deemed timely as provided below. Taxpayer is granted
an extension of 45 days from the date of this ruling to file the § 168(h)(6)(F)(ii) election
statement with the appropriate service center containing the information required in
§ 301.9100-7T(a)(3). Taxpayer must attach a copy of this ruling letter to the election
statement. In addition, a copy of this ruling letter should be attached to the next Federal
tax return filed by Taxpayer. 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 ruling contained in this letter is based upon information and representations
submitted by Taxpayer, accompanied by a penalty of perjury statement 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 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, this ruling grants an extension of time to make a
§ 168(h)(6)(F)(ii) election; however, this ruling does not address whether taxpayer is
eligible to make the election.

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. 2020-28, 2020-21
I.R.B. 859. A paper copy will not be mailed to Taxpayer.

                                  Sincerely,



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