Late-filing relief letting a partnership self-certify as a qualified opportunity fund after it missed the Form 8996 deadline

Plain-English summary

Qualified opportunity zones let investors defer and reduce tax on capital gains by putting the money into a qualified opportunity fund (QOF). To become a QOF, an entity self-certifies by filing Form 8996 with its timely federal income tax return; the form is due by the return's due date (including extensions). Here a limited partnership was formed to invest in opportunity zone property, but its manager mistakenly believed the partnership's return and Form 8996 were due on the same date as individual returns, so the partnership filed both late. After discovering the mistake, the partnership asked the IRS for a late-election extension under Treas. Reg. §§ 301.9100-1 and 301.9100-3. Because the QOF self-certification is a "regulatory election" (its timing is set by regulation, not by statute), the IRS can grant an extension when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. The IRS found both tests met and ruled that the Form 8996 the partnership already filed is treated as timely, so it can be a QOF effective from the month it was formed. The IRS pointedly did not decide whether the partnership actually qualifies as a QOF or whether any investment in it is a qualifying investment. This matters to opportunity-zone sponsors who blow the self-certification deadline: § 301.9100-3 offers a rescue, but only for the timing of the election, not the underlying qualification.

Ruling snapshot

• Question: May a partnership that missed the Form 8996 deadline get an extension under § 301.9100-3 to self-certify as a QOF effective from its formation month?
• Outcome: Approved (the late-filed Form 8996 is treated as timely; no opinion on whether the taxpayer actually qualifies as a QOF)
• Key authorities: IRC § 1400Z-2(d), (e)(4); Treas. Reg. §§ 1.1400Z2(d)-1, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202151003 Third Party Communication: None
Release Date: 12/23/2021 Date of Communication: Not Applicable
Index Number: 1400Z.02-00
Person To Contact:
---------------------------- ---------------------, ID No. -----------------
------------ Telephone Number:
-------------------------------- --------------------
------------------- Refer Reply To:
---------------------------------- CC:ITA:B05
PLR-113996-21
In Re: ---------------------------------------------------- Date:
------------------------------------------------------------ September 24, 2021

Legend

Taxpayer = ---------------------------------------------------------------------------------
General Partner = ---------------------------------------------------------
Entity = ---------------------------------------------------------
Date 1 = -------------------
Date 2 = -------------------
State A = -------------
Firm = ----------------------------
Firm 2 = -------------------------------------------------
Advisor = ----------------------------------
Manager = -----------------------
Date 4 = ------------------
Year 1 = -------
Year 2 = -------
Month 1 = -----------
Month 2 = --------

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

This ruling responds to Taxpayer’s request for a letter ruling dated Date 1. Specifically,
Taxpayer requests an extension under section 301.9100-1 and section 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 Taxpayer to be treated as a QOF,
PLR-113996-21 2

effective as of the month 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.

                                     FACTS

Taxpayer is a limited partnership, organized under the laws of State A on Date 2.
Taxpayer is an accrual method taxpayer with a tax year end December 31. Taxpayer
was organized for the purpose of investing in qualified opportunity zone property as
defined in section 1400Z-2(d)(2) of the Internal Revenue Code. Taxpayer is managed
by General Partner. Manager is the sole managing member of General Partner.
Taxpayer operates its wholly-owned subsidiary, Entity. In connection with the formation
of Taxpayer, Manager employed Firm and Advisor. Taxpayer decided not to solicit
funds from outside investors in Month 1 of Year 2. As a result, Taxpayer terminated its
relationships with Firm and Advisor. Taxpayer paused its operations in Month 2 of Year
2 due to COVID-19. Manager was 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 be treated as a QOF as of the month
Taxpayer was formed. However, Manager mistakenly thought that Taxpayer’s Form
8996 and Federal income tax return for Year 1 were due on the same date as individual
Federal income tax returns. As a result, Taxpayer failed to file its Federal income tax
return and Form 8996 by the due date. Upon discovering that the election had not been
timely filed, Manager filed Taxpayer’s Year 1 Federal income tax return and Form 8996
on Date 4. Taxpayer then enlisted Firm 2 to pursue relief under sections 301.9100-1
and 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 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 Manager’s failure to timely 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 section 301.9100-3(a), requests for
extensions of time for regulatory elections that do not meet the requirements of section
301.9100-2 (automatic extensions) must be made under the rules of section 301.9100-
PLR-113996-21 3

3. Additionally, requests for relief subject to section 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 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, failed to make the election, because after
exercising reasonable diligence (taking into account the taxpayer’ s experience and the
complexity of the return or issue), the taxpayer was unaware of the necessity for the
election, 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 –

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
PLR-113996-21 4

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 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 4, 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 all appropriate parties.
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 Taxpayer are qualifying investments as defined in
section 1.1400Z2(a)-1(b)(34) or whether the 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
PLR-113996-21 5

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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