IRS grants late-filing relief for a fund to self-certify as a Qualified Opportunity Fund after its accountant missed the return

Plain-English summary

An LLC taxed as a partnership was formed to be a Qualified Opportunity Fund (QOF), the vehicle that lets an investor defer capital-gains tax by reinvesting the gain in a business located in a designated low-income "opportunity zone." To become a QOF, an entity must self-certify by filing Form 8996 with a timely filed tax return. Here the fund's manager, who is not a tax professional, relied on his accounting firm to prepare and file the partnership return (Form 1065) and Form 8996, but the senior tax manager never filed the return, never requested an extension, and never entered the entity into the firm's tracking system, so the QOF election was missed. Once the manager discovered the lapse he promptly had the returns prepared and filed the late Form 8996. The fund then asked the IRS for relief under the "9100" regulations (Treas. Reg. § 301.9100-3), which let the IRS treat a missed regulatory election as timely when the taxpayer acted reasonably and in good faith and granting relief will not prejudice the government. Because the manager reasonably relied on a qualified tax professional who failed to make the election, the IRS granted relief and treated the late Form 8996 as timely, so the fund is self-certified as a QOF for the year in question. As usual, the ruling grants only the extension of time and gives no opinion on whether the fund actually qualifies as a QOF. The lesson: a QOF election missed because a CPA dropped the ball can typically be rescued through 9100 relief.

Ruling snapshot

• Question: Should the IRS grant an extension of time under Treas. Reg. § 301.9100-3 to treat a late-filed Form 8996 (QOF self-certification) as timely?
• Outcome: Approved (relief granted; late Form 8996 treated as timely filed)
• Key authorities: IRC § 1400Z-2; Treas. Reg. § 1.1400Z2(d)-1(a)(2)(i); 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: 202321003                                              [Third Party Communication:
Release Date: 5/26/2023                                        Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
                                                               Person To Contact:
----------------------------------------                       ----------------------, ID No. -----------------
--------------------------------                               Telephone Number:
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--------------------------------------------                   Refer Reply To:
--------------------------------------------------             CC:ITA:B05
                                                               PLR-117362-22
                                                               Date:
                                                               March 02, 2023

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TY:

LEGEND

 Taxpayer                       =     -----------------------------------------------------------------
 Manager                        =     ---------------------
 P                              =     -----------------------------
 SM                             =     --------------
 LLC                            =     -------------------------------------------
 AF                             =     --------------
 Law Firm                       =     ----------------------
 State                          =     -------------
 Year 1                         =     -------
 Year 2                         =     -------
 Year 3                         =     -------
 Year 4                         =     -------
 Month A                        =     -----------
 Month B                        =     ---------
 Month C                        =     -----------
 Month D                        =     ------------
 Date 1                         =     --------------------------
 Date 2                         =     -----------------------
 Date 3                         =     ------------------
 Date 4                         =     --------------------------
 Date 5                         =     -----------------
 Date 6                         =     ---------------------
 Date 7                         =     --------------------
 Date 8                         =     -----------------------

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

This letter responds to Taxpayer's request dated Date 1 for an extension of time under
§ 301.9100-3 of the Procedure and Administration Regulations to file a Form 8996,
Qualified Opportunity Fund, for Taxpayer to make an election to self-certify Taxpayer as
a Qualified Opportunity Fund (QOF) under § 1400Z-2(d) of the Internal Revenue Code
(Code) and § 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations for Year 3.

                                          FACTS

The information and affidavits submitted reflect the following facts.

Taxpayer is a limited liability company formed pursuant to the laws of State on Date 2.
Taxpayer is a partnership for federal income tax purposes with an annual accounting
period ending Date 3 and reports income using the cash receipts and disbursements
method of accounting. The principal purpose of Taxpayer, according to its operating
agreement, is to operate as a QOF by investing exclusively in direct or indirect
investments in qualified opportunity property. Taxpayer owns an interest in LLC, whose
principal purpose is to operate a qualified opportunity zone business. Manager, who
manages Taxpayer, holds interests in other businesses. Taxpayer represents that it is
eligible to make an election to be recognized as a QOF for Year 3.

AF, an accounting firm, has prepared and filed Manager's individual income tax returns
since Year 1. P is a partner at AF and SM, a senior tax manager at AF, was
responsible for preparing Manager's returns.

During Month A, Year 3, Manager engaged Law Firm to assist with the formation of
Taxpayer. Law Firm advised Manager on how to invest in a QOF, formed Taxpayer,
and prepared Taxpayer's operating agreement.

Manager is not trained in taxation nor return preparation, and is not a professional
accountant or attorney. Manager was not informed about the election a taxpayer could
make to self-certify itself as a QOF, and he was not aware of the method for making
such election. Moreover, Manager relied upon AF to prepare Taxpayer's initial Year 3
Form 1065, U.S. Return of Partnership Income, and Form 8996.

During Month A, Year 3, SM acknowledged to Manager that Taxpayer's "opportunity
zone return" would be filed and that the gain realized by Manager in Year 2 would be
deferred for federal income tax purposes. In Month C, Year 3, Manager provided SM
with Taxpayer's formation documents and a bank statement showing Manager's
investment in Taxpayer of gain deferred from Year 2. AF in turn used that information
to prepare Manager's Year 2 individual tax return by its extended due date. In an email
to Manager dated Date 4, SM raised the issue of whether a separate accountant would
be taking care of filing Manager's "OZ Fund" and ensuring that a Form 8996 would be
filed with Taxpayer's Year 3 return. Manager responded by indicating he had no
certified public accountant for the opportunity zone fund, apart from legal counsel, and
he asked SM if he would assist Manager with the "tax paperwork." As of Date 5, SM did
not prepare Taxpayer's initial Form 1065 or a Form 7004, Application for Automatic
Extension of Time to File Certain Business Income Tax, Information and Other Returns
by their Date 6 due date.

During the summer months of Year 4, AF requested information from Manager's
business entities, including the Schedule K-1 from Taxpayer, in order to prepare
Manager's Year 3 individual return by its extended due date. Manager requested
Taxpayer's financial information from Law Firm. On Date 7, Law Firm provided
Manager with financial records for Taxpayer and inquired whether Taxpayer included a
Form 8996 with a timely filed Form 1065 for Year 3.

Thereafter, between Month B and Month C, Year 4, Manager realized that SM failed to
file Taxpayer's Year 3 Form 1065 and immediately instructed AF to prepare the
Taxpayer's federal tax returns, including Form 8996. P indicated that in addition to
SM's failure to confirm that he would prepare Taxpayer's Form 1065 for Year 3, SM did
not enter Taxpayer's information into AF's return preparation tracking system.

On Date 8 Taxpayer filed a Form 1065 and Form 8996 for Year 3 and elected Month D
as Taxpayer's first effective month as a QOF. Manager subsequently engaged Law
Firm to prepare a request for a private letter ruling that would give Taxpayer permission
to make an untimely election to self-certify itself as a QOF for Year 3.

                                  LAW AND ANALYSIS

Section 13823(a) of Public Law 115-97, commonly known as the Tax Cuts and Jobs Act
of 2017, added provisions to the Code authorizing taxpayers to defer eligible capital
gain through reinvesting the funds into state-designated population census tracks in
low-income communities, known as Qualified Opportunity Zones. Section 1400Z-
2(e)(4)(A) of the Code directs the Secretary to prescribe regulations to carry out the
statute's purposes, including 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 forms or instructions, or in
publications or guidance of the Service, 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).

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

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations 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 § 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 § 301.9100-3(b) of the Procedure and Administration Regulations, a taxpayer is
deemed to have acted reasonably and in good faith if, among other circumstances not
relevant here, the taxpayer requests relief before the failure to make the regulatory
election is discovered by the Service, or although exercising reasonable diligence
(taking into account the taxpayer's experience and the complexity of the return or
issue), the taxpayer was unaware of the necessity for an election. A taxpayer may also
establish that it acted in good faith if the taxpayer reasonably relied on a qualified tax
professional and the tax professional failed to make, or advise the taxpayer to make, the
election. § 301.9100-3(b)(1)(v).

A taxpayer is deemed not to have acted reasonably and in good faith pursuant to the
provision in § 301.9100-3(b)(3) of the Procedure and Administration Regulations if the
taxpayer—

  (i) seeks to alter a return position for which an accuracy-related penalty has been or
  could be imposed under § 6662 of the Code at the time the taxpayer requests relief,
  and the new position requires or permits a regulatory election for which relief is
  requested;

  (ii) was 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) of the Procedure and Administration Regulations 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.

Section 301.9100-3(c)(1)(i) of the Procedure and Administration Regulations 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) of the Procedure and Administration Regulations 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 § 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 will not prejudice the interests of the Government. Taxpayer reasonably relied on
a qualified tax professional who failed to file timely Taxpayer's Year 3 Form 1065 and
Form 8996. Accordingly, based solely on the facts and information submitted, and the
representations made in the ruling request, Taxpayer has satisfied the requirements for
the granting of relief. Consequently, the Form 8996 attached to Taxpayer's return for
Year 3, filed Date 8, is considered timely filed, and Taxpayer has thereby made the
election under § 1400Z-2 and § 1.1400Z2(d)-1(a)(2)(i) to self-certify as a QOF for Year

3. Taxpayer should submit a copy of this letter ruling to the Service Center where
Taxpayer files its returns along with a cover letter requesting that the Service associate
this ruling with the Year 3 return.

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
§ 1.1400Z2(a)-1(b)(34) of the Income Tax Regulations or whether Taxpayer meets the
requirements under § 1400Z-2 of the Code 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 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.

The rulings contained in this letter are based upon information and representations
submitted by 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 request for rulings, it is subject to verification on examination.

                                           Sincerely,



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


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