Opportunity-zone fund gets 45 days to file a late self-certification after its advisor missed the extension deadline

Plain-English summary

A Qualified Opportunity Fund (QOF) lets investors defer and reduce tax on capital gains they
roll into businesses located in designated opportunity zones. To become a QOF, an entity must
"self-certify" by filing Form 8996 with its timely tax return (including extensions) for the year.
Here, a limited liability company taxed as a partnership was formed to be a QOF and was funded
with capital gains from a real estate sale. It hired an advisor to prepare and timely file its return,
the QOF certification, and a Form 7004 extension request. Because of an administrative error,
the advisor never filed the Form 7004, so when the return and Form 8996 were filed later they
were late and the certification did not take effect. The advisor discovered the problem only after
a late-filing notice arrived for a related entity. The fund asked the IRS for relief under the Section
301.9100-3 regulations. The IRS found it acted reasonably and in good faith and granted 45 days
to file the Form 8996, which will be treated as timely, certifying the fund as a QOF as of the month
it was funded. The IRS did not rule on whether the fund actually meets the QOF requirements or
whether any investments qualify.

Ruling snapshot

• Question: May an entity get an extension of time to file a late Form 8996 self-certifying as a Qualified Opportunity Fund, where its advisor failed to file the Form 7004 extension?
• Outcome: approved (45-day extension; late Form 8996 treated as timely)
• Key authorities: IRC § 1400Z-2(d); Treas. Reg. §§ 1.1400Z2(d)-1(a), 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202309008                                             Third Party Communication: None
 Release Date: 3/3/2023                                        Date of Communication: Not Applicable
 Index Number: 1400Z.02-00, 9100.00-00
                                                               Person To Contact:
 -----------------                                             --------------------------, ID No. ----------------
 ---------------------------                                   -----------------
 ------------------------------------                          Telephone Number:
 --------------------------------                              --------------------
                                                               Refer Reply To:
                                                               CC:ITA:B04
                                                               PLR-112107-22
                                                               Date:
                                                               December 02, 2022



                                                   LEGEND

 Taxpayer         =        -------------------------------------------
 Advisor          =        --------------------------
 Year 1           =        -------
 Year 2           =        -------
 Date 1           =        -----------------------
 Date 2           =        --------------------------
 Date 3           =        ---------------------
 Date 4           =        ---------------------------
 Date 5           =        --------------------------
 State Z          =        --------------

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

This letter responds to Taxpayer's request dated -------------------, seeking a private letter
ruling granting relief to make a late regulatory election pursuant to Treas. Reg. §§
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.
Specifically, Taxpayer requests an extension of time to file Form 8996, Qualified
Opportunity Fund, to (1) self-certify as a qualified opportunity fund (QOF), as defined in
section 1400Z-2(d) of the Internal Revenue Code (Code) and (2) to be treated as a
QOF, effective as of the month the Taxpayer was funded, as provided under section
1400Z-2(d) and Treas. Reg. § 1.1400Z2(d)-1(a).

This letter ruling is being issued electronically in accordance with Rev. Proc. 2022-1,
2022-1 I.R.B.1. A paper copy will not be mailed to Taxpayer.

                                                    FACTS

Taxpayer has represented that the facts are as follows. Taxpayer, a partnership
organized as a limited liability company under the laws of State Z, was formed to be a
QOF in Year 1 for the purpose of investing in qualified opportunity zone property as
defined in section 1400Z-2(d)(2). On Date 1, the members of Taxpayer sold real estate
and on Date 2 they funded the Taxpayer with the capital gain proceeds of such sale.

During Year 2, Taxpayer's representatives communicated with Advisor regarding the
preparation of Taxpayer's Federal income tax return for Year 2. The information
provided indicates that Advisor was tasked with the preparation and timely filing of
Taxpayer's Federal income tax return and all related forms and elections to self-certify
Taxpayer as a QOF, and to treat Taxpayer as a QOF as of the month Taxpayer was
funded, on Date 2.

According to the affidavits and representations provided to us, Taxpayer and Advisor
were aware of the requirement to file Form 8996 with the Taxpayer's Federal income
tax return for Year 2 in order for the Taxpayer to self-certify QOF status and to be
treated as a QOF as of the month Taxpayer was funded. Advisor was retained by
Taxpayer so that Taxpayer could comply with the Form 8996 requirements and Advisor
was expected to file Form 7004, Application for Automatic Extension of Time To File
Certain Business Income Tax, Information, and Other Returns, in order to request an
automatic extension of time for Taxpayer's Federal income tax return for Year 2.
However, due to an administrative error, Advisor failed to file Taxpayer's Form 7004 for
Year 2 by Date 3, the default due date. As such, when Advisor filed Taxpayer's Federal
income tax returns and Form 8996 on Date 4, the returns were not timely filed.

On or around Date 5, Taxpayer received a late-filing notice from the Internal Revenue
Service (the Service) for a separate related entity for which Advisor was also engaged
to prepare returns. At that time, Advisor reviewed all of Taxpayer's filings and
discovered that Taxpayer's Form 7004 had not been timely filed. Shortly thereafter,
Advisor learned that Taxpayer's self-certification as a QOF was not effective as a result
of the late filing and informed Taxpayer's representatives of this fact.

                                  LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for the
certification of QOFs. Treas. Reg. § 1.1400Z2(d)-1(a)(2)(i) 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
tax return (including extensions). The information provided indicates that the Taxpayer
did not file its Form 8996 by the due date of its income tax return due to Advisor's failure
to file for an extension on Form 7004 by Date 3.

Treas. Reg. §§ 301.9100-1 through 301.9100-3 provide the standards that the Service
will use to determine whether to grant an extension of time to make a regulatory
election. Treas. Reg. § 301.9100-3(a) provides that requests for extensions of time for
regulatory elections (other than automatic changes covered in Treas. Reg. § 301.9100-
2) will be granted when the taxpayer acted reasonably and in good faith and granting
relief will not prejudice the interests of the Government.

Treas. Reg. § 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 reasonable 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 professional
               failed to make, or advise the taxpayer to make, the election.

Under Treas. Reg. § 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 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.

Treas. Reg. § 301.9100-3(c) provides that the 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

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, Taxpayer has
satisfied the requirements of the regulations for the granting of relief, and Taxpayer's
late-filed Form 8996, certifying the Taxpayer as a QOF as of the month the Taxpayer
was funded, will be considered timely filed provided it is received by the appropriate
service center no later than 45 days from the date of this letter ruling.

This ruling is based upon facts and representations submitted by the Taxpayer and
accompanied by a penalty of perjury statement executed by an appropriate party. 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.

This ruling addresses the granting of Treas. Reg. § 301.9100-3 relief as applied to the
election to self-certify the Taxpayer as a QOF by filing Form 8996 for Year 2.
Specifically, we have no opinion, either express or implied, concerning whether any
investments made into Taxpayer are qualifying investments as defined in Treas. Reg. §
1.1400Z2(a)-1(b)(34) or whether 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 representatives.

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,



                                                   Mon L. Lam
                                                   Senior Counsel, Branch 4
                                                   (Income Tax & Accounting)

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