Low-income-housing entity gets more time to file two late elections (corporate classification and opting out of tax-exempt-entity depreciation rules)

Plain-English summary

An entity owned entirely by a 501(c)(3) charity serves as the managing
member of a partnership that builds and operates low-income housing
(claiming Section 42 tax credits). The entity meant to make two elections
but missed both deadlines. First, it wanted to be classified as an
association taxable as a corporation (Form 8832). Second, because the
charity owns it, the entity is a "tax-exempt controlled entity," which
would force slower depreciation on the housing under the tax-exempt-use
rules of Section 168(h); the entity wanted to elect out of that treatment
under Section 168(h)(6)(F)(ii). It asked for late relief under the
§ 301.9100 regulations. The IRS found the failures were inadvertent, that
the entity acted reasonably and in good faith, requested relief before
the IRS caught the errors, and that the government would not be harmed. It
granted 120 days to file each late election. The relief does not decide
whether the entity actually qualifies to make the elections.

Ruling snapshot

• Question: Should an entity get more time to file a late entity-
  classification election and a late § 168(h)(6)(F)(ii) election?
• Outcome: Approved (120 days to file each election)
• Key authorities: IRC § 168(h)(6); Treas. Reg. §§ 301.7701-3,
  301.9100-1, 301.9100-3, 301.9100-7T

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202306004
Release Date: 2/10/2023
Index Number: 9100.00-00, 9100.04-00, 9100.31-00

Third Party Communication: None
Date of Communication: Not Applicable

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

Refer Reply To:
CC:PSI:B03
PLR-109745-22
Date:
November 09, 2022

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

Y = ----------------------------------------------------------------------------------------
-----------------------

Partnership = ----------------------------------------------------------------------------------------
----------------------

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

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

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

Date 3 = -----------------------

Date 4 = -------------------

Year = -------

Agreement = ----------------------------------------------------------------------------------------
----------------------------------------------------------------------

a = --------

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

   This ruling is in response to a letter dated May 6, 2022, and subsequent

correspondence submitted on behalf of X by its authorized representative, requesting
an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations for X to file an election under § 301.7701-3 to be classified as an
association taxable as a corporation for federal tax purposes (Entity Classification
Election), and to file an election under § 168(h)(6)(F)(ii) of the Internal Revenue Code
(Code) to not be treated as a tax-exempt controlled entity (Section 168(h)(6)(F)(ii)
Election) (together, the Elections).

                                       Facts

   Based on the information submitted, X was formed under the laws of State on

Date 1. X represented that it is an entity eligible to elect to be classified as an
association taxable as a corporation for federal tax purposes. However, X failed to
timely file a Form 8832, Entity Classification Election, electing to be classified as an
association for federal tax purposes effective Date 2 as contemplated by the
Agreement.

   Y, a tax-exempt organization described in § 501(c)(3), is the sole owner of X.

Because Y owns more than 50 percent in value of the stock of X, X is a tax-exempt
controlled entity within the meaning of § 168(h)(6)(F)(iii).

   X owns a% of Partnership. X represented that Partnership is classified as a

partnership for federal tax purposes. X's sole business operation is to serve as the
managing member of Partnership. Partnership was formed to acquire, construct, and
operate property in a manner that qualifies for federal low-income housing tax credits
under § 42 of the Code. Partnership acquired the property during Year and portions of
the property were placed in service on Date 3 and Date 4.

   X represented that it intended to make a § 168(h)(6)(F)(ii) Election, electing to

not be treated as a tax-exempt controlled entity for Year as contemplated by the
Agreement, but failed to timely file the election.

   X submitted three affidavits in support of its representations and ruling requests.

X represented that it did not affirmatively choose to decline making the Elections and
did not use hindsight in requesting relief. X also represented that X requested relief
before the Internal Revenue Service discovered the failure to make the Elections.

   Further, X represented that it will not have a lower tax liability for all tax years

affected by the Elections than X would have had if the Elections had been timely made,
and the taxable year in which the Elections should have been made are not closed
under § 6501(a).

                                 Law and Analysis

Entity Classification Election

    Section 301.7701-3(a) provides that a business entity that is not classified as a

corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (an eligible entity) can
elect its classification for federal tax purposes as provided in § 301.7701-3. An eligible
entity with a single owner can elect to be classified as an association taxable as a
corporation or to be disregarded as an entity separate from its owner.

   Section 301.7701-3(b)(1) provides that except as provided in § 301.7701-3(b)(3),

unless the entity elects otherwise, a domestic eligible entity is (i) a partnership if it has
two or more members; or (ii) disregarded as an entity separate from its owner if it has a
single owner.

    Section 301.7701-3(c)(1)(i) provides, in part, that an eligible entity may elect to

be classified other than as provided under § 301.7701-3(b), or to change its
classification, by filing Form 8832 with the service center designated on Form 8832.

    Section 301.7701-3(c)(1)(iii) provides that an election made under § 301.7701-

3(c)(1)(i) will be effective on the date specified by the entity on Form 8832 or on the
date filed if no such date is specified on the election form. The effective date specified
on Form 8832 cannot be more than 75 days prior to the date on which the election is
filed and cannot be more than 12 months after the date on which the election is filed.

Section 168(h)(6)(F)(ii) Election

  Section 167(a) of the Code provides generally for a depreciation deduction for

property used in a trade or business. However, under § 168(g)(1), the alternative
depreciation systems must be used for any tax-exempt use property as defied in
§ 168(h).

   Section 168(h)(6)(A) provides that, for purposes of § 168(h), if (1) 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 non-tax-exempt entity as partners,
and (2) 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 a 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).

   Section 168(h)(6)(F)(ii) provides that, for purposes of § 168(h)(6) 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.

   Sections 301.9100-1 through 301.9100-3 provide the standards the

Commissioner will use to determine whether to grant an extension of time to make the
election. Section 301.9100-2 provides automatic extensions of time for making certain
elections. Section 301.9100-3 provides extensions of time for making regulatory
elections that do not meet the requirements of § 301.9100-2.

  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.

    Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3

will be granted when the taxpayer provides evidence (including affidavits described in
§ 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer
acted reasonably and in good faith, and the grant of the relief will not prejudice the
interests of the Government.

                                    Conclusions

  Based solely on the facts submitted and representation made, we conclude that

X has satisfied the requirements of §§ 301.9100-1 and 301.9100-3 for granting an
extension of time to file its Entity Classification Election. As a result, X is granted an
extension of time of 120 days from the date of this letter to file Form 8832 with the
appropriate service center to elect to be classified as an association for federal tax
purposes effective Date 2. A copy of this letter ruling should be attached to the Form
8832.

    We also conclude that X has satisfied the requirements of §§ 301.9100-1 and

301.9100-3 for granting an extension of time to file its § 168(h)(6)(F)(ii) Election. X
intended to make a § 168(h)(6)(F)(ii) Election to be treated as a taxable entity but failed
to make an election on a timely filed tax return. This failure was inadvertent and X did
not use hindsight in requesting relief. Moreover, X requested relief before the Internal
Revenue Service discovered the failure to make the election. Finally, X acted
reasonably and in good faith and the interests of the Government will not be prejudiced
by the granting of relief under § 301.9100-3. As a result, X is granted an extension of
time of 120 days from the date of this letter 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) for that election to be effective for Year. X must attach a copy of
this letter ruling to its § 168(h)(6)(F)(ii) Election statement.

    These rulings are contingent on X filing, within 120 days of the date of this letter,

all required returns for all open years consistent with the requested relief. A copy of this
letter ruling should be attached to X's federal tax returns for the tax years affected.
Alternatively, if X files its tax returns electronically, it may satisfy this requirement by
attaching a statement to its returns that provides the date and control number of this
letter ruling.

   Except as specifically set forth above, we express or imply no opinion concerning

the federal tax consequences of the facts of this case under any other provision of the
Code and the regulations thereunder. In addition, § 301.9100-1(a) provides that the
granting of an extension of time for making an election is not a determination that the
taxpayer is otherwise eligible to make the election.

  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 rulings requested, it is subject to verification on
examination.

  These rulings are directed only to the taxpayer requesting them. Section

6110(k)(3) of the Code provides that they may not be used or cited as precedent.

    Pursuant to a power of attorney on file with this office, we are sending a copy of

this letter to X's authorized representative.

                                   Sincerely,

                                   Associate Chief Counsel
                                   (Passthroughs & Special Industries)

                                    /s/ Margaret Burow
                               By: __________________________
                                  Margaret Burow
                                  Senior Counsel, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosure
Copy for § 6110 purposes

cc: