45-day extension to file a late Form 8996 after a firm/management-team mix-up

Plain-English summary

An LLC (taxed as a partnership) was formed to be a Qualified Opportunity Fund (QOF) as one of many entities in a single large development project. Because it formed late in the year and had no income, it did not otherwise have to file a partnership return, but it still needed to file Form 8996 (attached to a Form 1065) to self-certify as a QOF. A communication breakdown caused the return never to be filed: the accounting firm's engagement covered only the two entities that existed when the work order was signed, later-formed entities like this one were left off, and neither the project's Director of Finance nor a newly hired Controller realized the firm was not preparing this entity's return. The firm assumed someone else was handling it. When the error surfaced a year later, the firm advised the fund to seek relief. The fund requested an extension under Treasury Regulation § 301.9100-3. The IRS found it acted reasonably and in good faith and that relief would not prejudice the government, and granted 45 days to file the Year 1 return with a completed Form 8996 to self-certify as a QOF. The IRS did not rule on whether the entity actually qualifies as a QOF.

Ruling snapshot

• Question: Should the fund get an extension of time under § 301.9100-3 to file a late Form 8996 self-certifying as a QOF after a firm/management-team communication error?
• Outcome: approved (45-day extension to file the Year 1 return with Form 8996)
• Key authorities: IRC § 1400Z-2(d); Treas. Reg. §§ 1.1400Z2(d)-1(a)(2), 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                    Department of the Treasury
                                                             Washington, DC 20224


 Number: 202311004                                           Third Party Communication: None
 Release Date: 3/17/2023                                     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:B05
                                                             PLR-112367-22
                                                             Date:
                                                             December 16, 2022




                                                  LEGEND

                      Taxpayer                = --------------------------------------------------------------
                                                --------------
                      State                   = -------------
                      Main Project            = ---------------------------------
                      Firm                    = ------------------
                      Director of             = ----------------------
                      Finance
                      Controller              =   ----------------
                      Date 1                  =   -------------------
                      Date 2                  =   -------------------------
                      Date 3                  =   --------------------------
                      Year 1                  =   -------
                      Year 2                  =   -------
                      Year 3                  =   -------
                      Operating Entity        =   ----------------------------------------




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

This ruling responds to Taxpayer’s request for a letter ruling dated Date 1. Specifically,
Taxpayer requests an extension of time under sections 301.9100-1 and 301.9100-3 of
PLR-112367-22                               2

the Procedure and Administration Regulations, to (1) make a timely election under
section 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations 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, effective for its taxable
year ended Date 3, effective as of Date 2, as provided by section 1400Z-2(d) and
section 1.1400Z2(d)-1(a).


                                        FACTS

According to the affidavits and additional information provided to us, Taxpayer has
represented that the facts are as follows. Taxpayer is a limited liability company
organized under the laws of State and was formed on Date 2. Taxpayer is classified as
a partnership for U.S. federal income tax purposes and was formed for the purpose of
investing in qualified opportunity zone property and serving as a QOF.

Due to Taxpayer's formation on Date 2, the entity's Year 1 tax period was less than 30
days. Taxpayer received no gross income, nor did it pay or incur any amount treated as
a deduction or credit for federal tax purposes and was otherwise not required to file
Form 1065, U.S. Return of Partnership Income, for its Year 1 tax year. However,
Taxpayer needed to file Form 8996, Qualified Opportunity Fund, to certify as a QOF.
Therefore, Taxpayer needed to file a Form 1065 for the sole purpose of attaching and
filing its Form 8996.

Taxpayer is one entity in a larger group of entities, which were formed in Year 1 and
Year 2 as part of a single development project. These entities are collectively known as
the Main Project. Along with three other LLC's, Taxpayer is itself a member/partner of
Operating Entity, which is the operating entity of Main Project. A group of employees
(the "management team") jointly manage all entities in the Main Project
.
In July of Year 1, the Main Project retained Firm as its accounting firm. At that time,
Main Project was in a development phase, and several entities, including Taxpayer,
were not yet in existence. Therefore, Taxpayer and other entities, not yet developed,
were not included in the statement of work.

However, the partner who signed the statement of work was not the Main Project
representative who would be communicating with Firm going forward. Instead, the
Director of Finance, a position that is part of the management team, was tasked with the
duty to communicate with Firm regarding return preparation, and to provide Firm with
information when requested. Because the Director of Finance was neither involved with
the engagement of Firm nor the signing of the statement of work, he did not realize
Firm's representation was limited to the two entities in existence at the time the
statement of work was signed. The whole management team generally believed that
Firm was engaged to serve as the accounting firm for all entities in the Main Project,
especially those related to the Operating Entity.
PLR-112367-22                                3


Firm prepared Year 1 tax returns in the spring of Year 2 for the two Main Project entities
listed in the statement of work agreement. Firm had become aware of the existence of
Taxpayer as a partner of Operating Entity, and Firm prepared a Schedule K-1 for
Taxpayer as part of Operating Entity's Year 1 Form 1065. However, Taxpayer was not
listed in the statement of work, and the management team did not separately request
that a return be prepared for Taxpayer. Therefore, Firm mistakenly thought that the
Year 1 filing for Taxpayer was being handled internally or by another accounting firm.

While Firm was in the early stages of preparing the Year 1 returns, the Main Project
restructured its finance team. At the beginning of Year 2, the position of Controller was
added to the team and Controller was hired in February of Year 2. The Controller
position would report to the Director of Finance and take over the primary responsibility
of communicating with Firm regarding return preparation. The Controller assumed that
all arrangements with Firm related to return preparation for specific entities had been
made prior to him joining the Main Project. Consequently, the Controller never realized
that a Year 1 Form 1065 and Form 8996 needed to be filed for Taxpayer, and he did not
notice that Firm was not preparing these documents for Taxpayer. As a result of the
communication issues, Firm did not file a Year 1 Form 1065 for Taxpayer. The
Taxpayer, therefore, did not make a valid election to certify as a QOF on Form 8996.

In Year 3, the Director of Finance emailed Firm a list of entities for which the Main
Project would engage Firm to prepare Year 2 tax filings. Taxpayer was included on that
list. In response, Firm requested a copy of the Year 1 tax return for Taxpayer. Through
this email exchange, the Director of Finance learned that Firm had not filed a Year 1
Form 1065 for Taxpayer, nor had Firm filed a Form 8996.

Upon learning that the Year 1 Forms 1065 and 8996 were not timely filed, Firm advised
Taxpayer to file a private letter ruling request. Taxpayer then filed this ruling request
seeking extension of time to file Form 8996 for Taxpayer’s year ending Date 3, pursuant
to sections 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations. Taxpayer has not yet filed its Forms 1065 and 8996 for Year 1.


                                  LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) of the Internal Revenue Code directs the Secretary to
prescribe regulations for rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2)
of the Income Tax Regulations provides the rules for an entity to self-certify as a QOF.
Section 1.1400Z2(d)-1(a)(2)(i) provides that the entity electing to be certified as a QOF
must do so annually on a timely-filed return 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.
PLR-112367-22                                 4

To self-certify as a QOF, a taxpayer must file Form 8996, Qualified Opportunity Fund,
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 Firm did not file Taxpayer’s Form 8996 due to a communication error
between Firm and Main Project representatives. .

Because section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for an entity to
self-certify as a QOF, these elections are regulatory elections, as defined in section
301.9100-1(b).

Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner
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 extensions covered in section 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 the grant 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, 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 section 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.
PLR-112367-22                                  5


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, are closed by the period of limitations on assessment under section 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,
we grant Taxpayer an extension of 45 days from the date of this letter ruling to file a
Year 1 tax return to make the election to self-certify as a QOF under section 1400Z-2
and section 1.1400Z2(d)-1(a)(2)(i). The election is to be made on a completed Form
8996.

This ruling is based upon facts and representations submitted by 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.

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 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.
PLR-112367-22                                 6

A copy of this letter must be attached to any 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,



                                           Amy J. Pfalzgraf
                                           Branch Chief (Acting), Branch 5
                                           Office of Associate Chief Counsel
                                           (Income Tax and Accounting)



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