Tax-exempt-controlled company receives 60 days for late depreciation election

Plain-English summary

A taxable corporation was wholly owned by a section 501(c)(3) organization and therefore was a tax-exempt controlled entity for depreciation purposes. Through a partly owned subsidiary, it held property that otherwise could be treated as tax-exempt use property and depreciated under the alternative depreciation system. The corporation intended to elect under section 168(h)(6)(F)(ii) not to be treated as a tax-exempt entity, but its outside tax adviser omitted the election statement from the return. The IRS found that the corporation reasonably relied on the adviser, acted in good faith, and sought relief before the IRS discovered the omission. It granted 60 days to file an amended return making the irrevocable election. The ruling does not decide whether the corporation otherwise qualifies to make the election.

Ruling snapshot

• Question: May the tax-exempt-controlled corporation make a late election not to be treated as a tax-exempt entity for depreciation purposes?
• Outcome: Approved, with 60 days to file an amended return
• Key authorities: IRC §§ 167 and 168(h)(6)(F); Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-7T

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202315007                                              Third Party Communication: None
Release Date: 4/14/2023                                        Date of Communication: Not Applicable
Index Number: 168.00-00
                                                               Person To Contact:
-----------------------                                        ---------------------, ID No. -----------------
---------------------------------------------                  Telephone Number:
----------------------------                                   --------------------
--------------                                                 Refer Reply To:
--------------------------                                     CC:ITA:B04
In Re:                                                         PLR-116375-22
                                                               Date:
                                                               January 17, 2023




Taxpayer                        = -------------------------------------------------------------------------
                                  ---------
Exempt Organization             = ----------------------------------------

Subsidiary Z                    = ----------------------------

Firm 1                          = ------------

State                           = --------
X                               = -----------------------

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

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

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

Date 4                          =
                                     --------
Year 1                          = --------

Year 2                          = ------
PLR-116375-22                                2


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



      This letter responds to Taxpayer’s request, dated Date 1, requesting an extension
      of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
      Regulations to make an election under §168(h)(6)(F)(ii) of the Internal Revenue
      Code (Code) to not be treated as a tax-exempt controlled entity as of Date 2.

                                            FACTS

      Taxpayer was organized as a limited liability company under the laws of State on
      Date 3 Taxpayer is a wholly owned subsidiary of Exempt Organization, a tax-
      exempt organization described in § 501(c)(3). For federal tax purposes Taxpayer
      was treated as a disregarded entity. Taxpayer made an election on Form 8832,
      Entity Classification Election, to be classified as an association taxable as a
      corporation effective Year 1 and has been subject to tax as a C corporation since
      that year. Exempt Organization owns more than 50 percent in value of the stock of
      Taxpayer, therefore, Taxpayer is a “tax-exempt controlled entity” within the
      meaning of §168(h)(6)(F)(iii).

      Taxpayer owns X percentage of Subsidiary Z, a limited liability company formed
      under the laws of State. In Year 1, Subsidiary Z acquired and placed in service a
      property that was eligible to be depreciated for federal income tax purposes.
      Subsidiary Z expected that its direct and indirect owners, including Taxpayer, would
      make timely elections under §168(h)(6)(F)(ii) to not be treated as tax-exempt entity,
      as required by Subsidiary Z’s operating agreement.

      Taxpayer does not have any separate tax personnel or specialized tax compliance
      experience and relies on outside advisors for federal and state tax compliance and
      consulting. Firm 1 has been the sole tax advisor for Taxpayer and was engaged to
      provide federal and state tax compliance services for Taxpayer for Year 1.
      Taxpayer engaged Firm 1 to prepare its federal income tax return, including the
      §168(h)(g)(F)(ii) election, for Year 1. Firm 1 filed Taxpayer’s Year 1 tax return;
      however, Firm 1 did not fill out the § 168(h)(6)(F)(ii) election, thus a §
      168(h)(6)(F)(ii) election was not made.

      In Year 2, Firm 1 reviewed its own records and could not locate the election
      statement. Firm 1 contacted Taxpayer on Date 4 to receive a copy of the election
      form. Taxpayer also could not find a copy of their election form. Thus, Taxpayer
      and Firm 1 concluded that Taxpayer’s election form must not have been filed with
      the Year 1 tax return.
PLR-116375-22                               3

    From the materials submitted, it appears that Taxpayer intended to make the
    election under § 168(h)(6)(F)(ii) for Year 1 and Firm 1 acknowledges that Taxpayer
    expected Firm 1 to make a timely § 168(h)(6)(F)(ii) election when Firm 1 filed
    Taxpayer’s Year 1 tax return. Taxpayer has always acted as if the election was
    timely made in Year 1 and seeks permission under § 301.9100 to obtain an
    extension of time in which to make the § 168(h)(6)(F)(ii) election.

    Taxpayer makes the following representations. Taxpayer is not under audit nor is
    being considered by an appeals officer or federal court for any tax year in which
    the § 168(h)(6)(F)(ii) election should have been made or for any tax year affected
    by that election. Taxpayer is not seeking to alter a return position for which an
    accuracy-related penalty has been or could be imposed under § 6662. Taxpayer is
    not using hindsight in requesting the relief sought. The requested relief will not
    result in a lower tax liability (in the aggregate for all tax years affected by the §
    168(h)(6)(F)(ii) election) than Taxpayer would have had if the §
    168(h)(6)(F)(ii) election had been timely made.

                                     APPLICABLE LAW

    Section 167(a) of the Code generally provides for a depreciation deduction for
    property used in a trade or business. Under § 168(g), the alternative depreciation
    system must be used for any tax-exempt use property as defined in §168(h).
    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).

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

    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). In the case of tiered partnerships and other entities,
    § 168(h)(6)(E) applies similar rules.

    Under § 168(h)(6)(F)(ii), 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.

    Under § 301.9100-7T(a)(2)(i) of the Procedure and Administration Regulations, a
    §168(h)(6)(F)(ii) election 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 301.9100-7T(a)(3)(i)
PLR-116375-22                               4

    provides that the § 168(h)(6)(F)(ii) election must be made by attaching a statement
    to the tax return for the taxable year for which the election is to be effective.

    Section 301.9100-1(c) provides that the Commissioner of Internal Revenue has the
    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 for which a regulation prescribes the due date. The § 168(h)(6)(F)(ii)
    election is a regulatory election.

    Sections 301.9100-1 through 301.9100-3 provide the standards 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 a request for an extension of time for a
    regulatory election (other than automatic extensions of time 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) 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 due 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 tax professional
               failed to make, or advise the taxpayer to make, the election.

    Under § 301.9100-3(b)(3), a taxpayer will not be considered to have not 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
PLR-116375-22                                5

       (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 Service will grant a reasonable
    extension of time only when doing so will not prejudice the interests of the
    Government. 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.

                                          ANALYSIS

    The facts submitted by Taxpayer indicate that Taxpayer intended at the outset to
    make the § 168(h)(6)(F)(ii) election, that its failure to make the election on a timely-
    filed return was inadvertent, and that Taxpayer is not using hindsight in requesting
    relief. Taxpayer relied upon Firm 1, a qualified tax professional, to make the §
    168(h)(6)(F)(ii) election in Year 1, but Firm 1 failed to submit the election with the
    Year 1 return. Moreover, Taxpayer requested this relief before failure to make the
    election was discovered by the Service. Finally, Taxpayer acted reasonably in and
    good faith, and the interests of the government will not be prejudiced by the
    granting of relief under §301.9100-3.

    The affidavits, from both Taxpayer and Firm 1, filed in support of the request
    adequately explain what led to the failure to file the election in a timely manner as
    required by §301.9100-3(e)(2)-(3).


                                        CONCLUSION

    Based solely on the facts as represented and the applicable law, we conclude that
    the request for relief under § 301.9100-3 should be granted. Taxpayer is granted an
    extension of 60 days from the date of this letter to file an amended return making
    the election under § 168(h)(6)(F)(ii). Taxpayer must attach a copy of this ruling
    letter to its amended return. If Taxpayer files its amended return electronically, it
    may satisfy this requirement by attaching a statement to its amended return that
    provides the date and control number of this letter ruling.

    This ruling is based upon information and representations submitted by Taxpayer.
    While this office has not verified any of the material submitted in support of the
    request for a ruling, it is subject to verification on examination.

    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, this ruling grants an extension of time to make
PLR-116375-22                                        6

    a §168(h)(6)(F)(ii) election; however, this ruling does not address whether taxpayer
    is eligible to make the election.

    This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
    that it may not be used or cited as precedent.

    Pursuant to the Form 2848, Power of Attorney and Declaration of Representation,
    on file, we are sending a copy of this letter to Taxpayer's authorized
    representatives. This letter is being issued electronically in accordance with Rev.
    Proc. 2020-29, 2020-21 I.R.B. 859 and Rev. Proc. 2023-1, 2023-1 I.R.B. 1. A
    paper copy will not be mailed to Taxpayer.


                                                          Sincerely,




                                                          Mon L. Lam
                                                          Senior Counsel, Branch 4
                                                          Office of the Associate Chief Counsel
                                                          (Income Tax & Accounting)


    cc: -----------------------------------------------
        -------------------------------------------