IRS grants extra time to elect out of tax-exempt-entity status so a housing project keeps its normal depreciation

Plain-English summary

A tax-exempt § 501(c)(3) housing charity owned a for-profit corporation, and that corporation was part of a partnership structure that built and operates a mixed-income (low-income housing tax credit) apartment project. Because a tax-exempt entity controlled the corporation, the corporation counts as a "tax-exempt controlled entity" under § 168(h). That normally forces part of the project's property to be treated as "tax-exempt use property," which must be depreciated slowly under the alternative depreciation system (ADS). The tax law lets such a corporation elect out, under § 168(h)(6)(F)(ii), so it is not treated as a tax-exempt entity, but the election must be filed with the tax return for the year the property is placed in service. Here the corporation always intended to make the election (the paperwork was drafted and put in the closing binder), but because of rolling placed-in-service dates, the retirement of the responsible partner at the tax-preparation firm, and staff turnover, the election was never actually filed. An investor spotted the omission after the return's extended due date. The taxpayer asked for relief under the "9100" regulations (Treas. Reg. § 301.9100-3). The IRS found the taxpayer acted reasonably and in good faith, relied on tax professionals, did not use hindsight, and asked for relief before the IRS discovered the miss, and that granting relief would not prejudice the government (total depreciation stays the same). It granted a 90-day extension to file the election effective for the relevant tax year.

Ruling snapshot

• Question: Should the IRS grant more time to make the § 168(h)(6)(F)(ii) election to not be treated as a tax-exempt entity, which the taxpayer intended but failed to file?
• Outcome: Approved (90-day extension granted under Treas. Reg. § 301.9100-3)
• Key authorities: IRC § 168(h)(6)(A), (F)(i)–(iii); Treas. Reg. § 301.9100-7T(a); 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: 202226007                                              Third Party Communication: None
Release Date: 7/1/2022                                         Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                               Person To Contact:
---------------------------                                    ---------------------------, ID No. ---------------
------------------------------------                           Telephone Number:
------------------------------------------------------------   --------------------
-----                                                          Refer Reply To:
----------------------                                         CC:ITA:B05
---------------------------                                    PLR-123147-21
                                                               Date:
                                                               April 01, 2022

FAX: ------------------

TY= -------

Legend

Taxpayer                            =        ------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
                                             -----------------------
Managing Member                     =        --------------------------------------------------------------------
                                    ---------------------------------------------------------
LLC                                 =        ------------------------------------------------------------------------
                                    ---------------------------------------------------------------------------------
                                    ----------------------------------
Development LLC                     =        ----------------------------------------
Partnership                         =        --------------------------------------------------------------------
                                    --------------------------------
Nominee                             =        ------------------------------------------------------------------------
                                    ---------------------------------------------------------------------------------
                                    -----------------------------
Investor                            =        ----------------------------
Project                             =        ---------------------
City                                =        --------------------------
Sole Shareholder                    =        --------------------------------------------------------------------
                                    ----------------------------
Tax Preparer                        =        --------------------------------------

PLR-123147-21                                  2

Partner 1                  =      --------------------------------------------------------------------
Partner 2                  =      ------------------------------------------------------------------------
Year 1                     =      -------
Year 2                     =      -------
Year 3                     =      -------
Date 1                     =      --------------------------
Date 2                     =      ---------------------------
Date 3                     =      --------------------------
Date 4                     =      ------------------
Date 5                     =      ----------------------
Tax Year                   =      --------------------
a percent                  =      --------------
b percent                  =      ----------------
c percent                  =      ------------------

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

This is in response to a Request for A Private Letter Ruling dated November 3, 2021,
filed by your authorized representative on behalf of Taxpayer. This request is filed
pursuant to Revenue Procedure 2021-1. Specifically, Taxpayer is requesting that the
Internal Revenue Service ("IRS") exercise its authority under § 301.9100-3 of the
Procedure and Administration Regulations (Regulations) to grant an extension of time
within which to file an election to not be treated as a tax-exempt controlled entity for
purposes of the tax-exempt use property rules ("§168(h)(6) Election") under
§ 168(h)(6)(F)(ii) of the Internal Revenue Code ("IRC").

                                          FACTS

Taxpayer is a domestic corporation. Taxpayer's annual accounting period ends on
December 31 of each year. Taxpayer maintains its accounting books and files its
federal income tax returns on an accrual basis. Sole Shareholder is the sole
shareholder of Taxpayer. Sole Shareholder's annual accounting period ends on
December 31 of each year. Sole Shareholder maintains its accounting books and files
its federal income tax returns on an accrual basis.

Taxpayer owns a percent of Managing Member. LLC also owns a percent of Managing
Member. Managing Member's annual accounting period ends on December 31 of each
year. Managing Member is b percent owner and the managing member of Partnership.
Nominee owns c percent Partnership. Partnership owns and operates a mixed income
housing project ("Project") located in City.

Sole Shareholder is a tax-exempt entity under IRC §501(c)(3), formed in Year 1 in City.
Its mission is to develop and operate housing projects for persons of low income. In
Year 1, Sole Shareholder formed Taxpayer, as its wholly owned corporation. In Year 2,

PLR-123147-21                                3

Taxpayer filed its initial Year 1 Form 1120, U.S. Corporation Income Tax Return and
continued its filing of Form 1120 each year thereafter.

In Year 1, Taxpayer and LLC formed Managing Member, a partnership for U.S. federal
income tax purposes. In Year 1, Managing Member and Nominee, an unrelated party,
formed Partnership to own and operate Project, a mixed-income housing project in City.
Project was constructed and is rented to mixed-income tenants. Project operates in a
manner necessary to qualify for federal low-income housing tax credits as provided
under IRC § 42.

Because Project was nearing a predictable placed-in-service date, in Year 2 Taxpayer
engaged Tax Preparer. An Accountant's Certificate Regarding the §168(h)(6) Election
("Certificate"), was signed by Partner 1, a partner in Tax Preparer on Date 1. Certificate
was circulated at the closing of Project in Year 2 to Taxpayer and the Managing
Member of the Partnership, is part of the Partnership's company records, and was
incorporated into Partnership's closing binder.

An election notice regarding the §168(h)(6) Election ("Election Notice"), dated Date 2
and addressed to the IRS was also part of Partnership's closing binder. Election Notice
was inadvertently not sent out to the IRS when it was signed on Date 2. Certificate
discussed Taxpayer's intention to make a §168(h)(6) Election, which was to take effect
on or before Date 2. However, Project experienced rolling placed in service dates
throughout Year 3 and was finished being placing in service on Date 3. Although the
initial plan had been to make the §168(h)(6) Election on Taxpayer's tax return for the tax
year immediately preceding Tax Year, filing the §168(h)(6) Election with the IRS was
not necessary until Taxpayer's Tax Year return.

Taxpayer did not have any previous experience filing the §168(h)(6) Election. Partner
1, the Tax Preparer partner in charge of Tax Preparer's engagement team assisting Tax
Preparer with tax preparation, retired from the firm before the return was due for Tax
Year. Due to the delay in the Project being placed in service and transition of the return
to a new preparation team, the §168(h)(6) Election was inadvertently not included with
Taxpayer's tax return for the year prior to Tax Year nor was the §168(h)(6) Election
made with the return for Tax Year.

Taxpayer's Form 1120 returns for all tax years prior to Tax Year were reviewed and
approved by both the Chief Financial Officer ("CFO") and Asset Manager of
Development LLC, an affiliate of the Managing Member, and thereby, also an affiliate of
Partnership, prior to their filing. Both prior to and in response to the discovery of the
error, Managing Member experienced executive turnover. Taxpayer's Form 1120 return
for the tax year prior to Tax Year and for Tax Year were reviewed and approved by the
then-Director of Finance of LLC prior to their filing. During the relevant time period,
none of the appropriate parties at the Taxpayer, Managing Member, or Development
LLC were aware that a §168(h)(6) Election must be included with the tax return of a
corporate, tax-exempt-controlled partner in the tax year that Project is placed in service.

PLR-123147-21                                 4

The CFO, Chief Operating Officer (the "COO"), and President have been in place at
Managing Member since before Year 1 and through to the present; the Asset Manager
exited Development LLC during the first quarter of Year 3 and had been responsible for
reviewing, approving, and signing tax returns during the Asset Manager's time with
Development LLC. The Director of Finance of Development LLC held the role from the
first quarter of Year 3 through Date 5. The Director of Finance assumed some of the
responsibilities of the Asset Manager, including tracking and reviewing tax returns.

Development LLC's Director of Finance reviews and approves the tax returns prior to
filing. Development LLC's Chief Operating Officer has more than thirteen years in
development and managing low-income housing tax credit project properties.

Partnership has, at all times, depreciated its site improvements for Project using the 150
percent declining balance method of depreciation, and its furniture, fixtures and
equipment property using the double declining balance method of depreciation.

The erroneous omission of the §168(h)(6) Election from Taxpayer's Tax Year Form
1120 was brought to Taxpayer's attention by Investor, an investor in Partnership, on
Date 4, after the extended due date of Taxpayer's return for Tax Year.

As a result of the error, Partnership would be required to treat a portion of the Project's
fixed assets as tax-exempt use property, subject to the alternative depreciation system
of depreciation. Taxpayer requests a ruling granting an extension of time to make the
election under IRC §168(h), to ninety (90) days from the date of the ruling. If this
request is granted, Taxpayer will continue to utilize the present depreciation methods
used on Partnership's Forms 1065. Taxpayer will file an amendment with the IRS to
include the §168(h)(6) Election for Tax Year.

From well before Project was placed in service, Taxpayer's intent was to timely file the
§168(h)(6) Election. Failure to make the election was inadvertent. The submission
notes that Certificate, providing that the §168(h)(6) Election was to be made by
Taxpayer in conjunction with the filing of its tax return for the tax year prior to Tax Year,
was signed by a Tax Preparer partner on Date 1; is part of Partnership's company
records; and is incorporated into Partnership's closing binder with a copy of the Election
Notice dated Date 2 and addressed to the IRS. Certificate discussed Taxpayer's
intention to make the §168(h)(6) Election, which was to take effect on or before Date 2.
Date 2 was intended to coincide with Project's placed-in-service date. As stated above,
Project experienced rolling placed in service dates and was actually finished placing in
service on Date 3.

In Election Notice, which requires Taxpayer to make the §168(h)(6) Election not to be
treated as a tax-exempt entity, was drafted and addressed to the IRS, though
inadvertently never sent. This omission has not been raised by the IRS in an audit.

PLR-123147-21                                 5

To guard against future similar errors, Taxpayer's affiliates have updated and improved
staffing and practices with respect to reviewing tax issues: Development LLC has hired
a new Director of Finance and new accounting staff; Development LLC holds weekly
calls to review open tax issues, which include the Chief Operating Officer of
Development LLC; Development LLC has improved its overall internal tracking methods
in order to help to prevent any similar errors on future elections.

Taxpayer represents that the interests of the Government would not be prejudiced
under the standards set forth in §301.9100-3(c)(1)(ii) of the Regulations because the
relief sought here will only allow Taxpayer to depreciate its property as a non-tax-
exempt controlled entity, with total depreciation across all years remaining consistent
using the same depreciation method taken pursuant to its tax returns. In addition,
Taxpayer represents that its intent was to timely make the §168(h)(6) Election. Failure
to make the election was inadvertent, the evidence of which is consistently reflected in
the underlying Project documents as described above.

In support of this ruling request, Taxpayer has submitted an affidavit from Partner 2, a
knowledgeable representative of Tax Preparer.

Taxpayer requests that the Internal Revenue Service issue a ruling granting a 90-day
extension of time pursuant to §§ 301.9100-1 and 3 to make a §168(h)(6) Election, and
to allow Taxpayer's election to be effective as of Tax Year.

                           APPLICABLE LAW AND ANALYSIS

Section 168(h)(6)(A) provides that, for purposes of § 168(h), if any property that 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 shall be treated as tax-exempt use property.

Section 168(h)(6)(F)(i) of the Income Tax Regulations provides generally that any tax-
exempt controlled entity shall be treated as a tax-exempt entity for purposes of
§§ 168(h)(5) and (6). Section 168(h)(6)(F)(iii)(I) provides that a tax-exempt controlled
entity is any corporation if 50 percent or more (in value) of the stock is held by 1 or more
tax-exempt entities.

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity may elect to not be treated as a
tax-exempt entity. Such an election is irrevocable and will bind all tax-exempt entities
holding an interest in the tax-exempt controlled entity.

Because Sole Shareholder is a tax-exempt entity which owns all of the membership
interests of Taxpayer, Taxpayer is a tax-exempt controlled entity within the meaning of §
168(h)(6)(F)(iii)(I). As such, Taxpayer is eligible to make the § 168(h)(6) election.

PLR-123147-21                                 6

Under § 301.9100-7T(a)(2)(i) of the Regulations, an election under § 168(h)(6)(F)(ii)
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 301.9100-1(a) of the Regulations provides that the Commissioner of Internal
Revenue has discretion to grant a reasonable extension of time to make a regulatory
election. Section 301.9100-1(b) defines the term "regulatory election" as including any
election the due date for which is prescribed by a regulation. The election allowed by
§ 168(h)(6)(F)(ii) election is a regulatory election.

Sections 301.9100-1 through 301.9100-3 of the Regulations provide the standards that
the Service 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 changes covered in § 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 granting relief will not prejudice the
interests of the Government.

Section 301.9100-3(b)(1) of the Regulations provides 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
Internal Revenue 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 Internal Revenue 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.

Under § 301.9100-3(b)(3) of the Regulations, 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 could be
imposed under § 6662 of the Code 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

PLR-123147-21                                  7

(iii) uses hindsight in requesting relief. If specific facts have changed since the original
deadline that make the election advantageous to a taxpayer, the Internal Revenue
Service will not ordinarily grant relief.

Section 301.9100-3(c) of the Regulations provides that the Internal Revenue Service
will grant a reasonable extension of time only when the interests of the Government will
not be prejudiced by the granting of relief. 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.

                                       CONCLUSION

From the materials submitted, including the affidavits submitted by Taxpayer and other
relevant parties, it is clear that Taxpayer at all times intended to make a § 168(h)(6)
Election. Upon discovering its failure, Taxpayers promptly sought an extension of time
in which to file the election.

Based on the materials submitted, our office concludes that Taxpayer's failure to make
the § 168(h)(6) Election with its original return for Tax Year was inadvertent and based
upon its reliance of tax professionals. In addition, Taxpayer is not using hindsight in
requesting relief. Moreover, Taxpayer requested relief before the failure to make the
election was discovered by the IRS. Taxpayer has acted reasonably and in good faith.
Finally, the interests of the Government will not be prejudiced by the granting of relief
under § 301.9100-3.

Based solely on the facts as represented and the applicable law, we conclude that the
requirements of §§ 301.9100-1 and 301.9100-3 of the Regulations have been met.
Taxpayer is granted an extension of 90 days from the date of this ruling to file the
§ 168(h)(6) Election statement with the appropriate service center containing the
information required in § 301.9100-7T(a)(3) for that election to be effective for Tax Year.
Taxpayer must attach a copy of this letter to its § 168(h)(6) Election statement. The
letter ruling should be attached for all subsequent returns (and amended returns) for all
taxable years to which this ruling is relevant. Pursuant to § 301.9100-7T(a)(3)(ii) of the
Regulations, a copy of that election statement should be attached to the federal income
tax returns of all tax-exempt shareholders or holders of membership interests in
Taxpayer.

This ruling is based upon information and representations submitted by the taxpayer
and accompanied by a penalty of perjury statement signed by an appropriate party.
Although this office has not verified any of the material submitted in support of the
request for ruling, it is subject to verification on examination.

PLR-123147-21                                  8

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.

Enclosed is a copy of the letter showing the deletions proposed to be made when it is
disclosed under § 6110 of the Code. If you have any questions concerning this matter,
please contact the individual whose name and telephone number appear at the
beginning of the letter.

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.

                                       Sincerely,

                                       Erika C. Reigle
                                       Senior Technician Reviewer, Branch 5
                                       Office of Chief Counsel
                                       (Income Tax & Accounting)

Enclosure (1)

cc: