Late Form 8996 opportunity-fund self-certification treated as timely after CPA's filing mistake

Plain-English summary

A newly formed LLC, taxed as a partnership, was set up to be a Qualified
Opportunity Fund (QOF), an investment vehicle that offers capital-gains tax
breaks for putting money into designated low-income Opportunity Zones. To become
a QOF, the entity has to self-certify by attaching Form 8996 to a timely filed
tax return. The LLC's CPA wrongly concluded the entity had no filing requirement
for its first year, so he filed neither the partnership return, the Form 8996,
nor an extension by the deadline. After catching the error months later, the
preparer filed the delinquent return with the Form 8996, and the taxpayer asked
the IRS for relief under section 301.9100. The IRS found the taxpayer reasonably
relied on a qualified tax professional who failed to make the election, acted in
good faith, and that granting relief would not prejudice the government. It ruled
that the Form 8996 is treated as timely filed, so the entity is certified as a
QOF effective as of the date it was organized. The IRS expressed no view on
whether the entity actually meets the substantive requirements to be a QOF.

Ruling snapshot

• Question: Should a late-filed Form 8996 self-certifying as a qualified opportunity fund be treated as timely filed under section 301.9100 relief?
• Outcome: Approved (relief granted; Form 8996 treated as timely, QOF election effective as of the organization date)
• Key authorities: IRC § 1400Z-2(d); Treas. Reg. § 1.1400Z2(d)-1(a)(2); Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202329003                                             Third Party Communication: None
 Release Date: 7/21/2023                                       Date of Communication: Not Applicable
 Index Number: 1400Z.01-00, 9100.00-00
                                                               Person To Contact:
 ---------------------------------------                       ------------------------, ID No. ---------------
 ----------------------------                                  Telephone Number:
 ---------------------                                         --------------------
 ------------------------------                                Refer Reply To:
                                                               CC:ITA:B05
                                                               PLR-120475-22
                                                               Date:
          TY: -------                                          April 21, 2023




Taxpayer                  =        ---------------------------------------
Submission Date           =        -----------------------
Date 2                    =        ---------------------------
Date 1                    =        --------------------------
State Z                   =        --------------------
Year 1                    =        -------
Members                   =         ------------------------------------------
                          --------------------------------------------------
Counsel                   =        --------------------
Tax Preparer              =        --------------------------------------------------------------
Year 2                    =        -------




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

This ruling responds to Taxpayer’s request for a letter ruling requested on Submission
Date. Taxpayer requests relief under sections 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations. Specifically, Taxpayer requests that its
Form 8996, Qualified Opportunity Fund, filed on Date 2 with its Form 1065, US Return
of Partnership Income, be treated as timely filed for purposes of making an election: (1)
to self-certify as a qualified opportunity fund (QOF), as defined in section 1400Z-2(d) of
the Internal Revenue Code and section 1.1400Z2(d)-1(a) of the Income Tax
Regulations, and (2) for Taxpayer to be treated as a QOF effective as of Date 1, as
provided by section 1400Z-2(d) and section 1.1400Z2(d)-1(a).
PLR-120475-22                                 2


                                           FACTS

Taxpayer was organized as a limited liability company under the laws of State Z in Year
1 and is treated as a partnership for Federal income tax purposes. Taxpayer’s
Operating Agreement was entered into on Date 1 in Year 1, with contributions from its
Members. Taxpayer’s organization and Operating Agreement were drafted by Counsel,
a partner in a law firm.

Taxpayer’s overall method of accounting is the cash receipts and disbursements
method of accounting, and Taxpayer has a December 31 tax year end. Taxpayer was
formed as a qualified opportunity fund within the definition found in section 1400Z-2(d)
and to hold qualified opportunity zone partnership interests (within the meaning of
section 1400Z-2(d)(2)(A)(ii)) in a qualified opportunity zone business (QZOB) as defined
in section 1400Z-2(d)(3). .

According to the affidavits and information provided to us, the Members engaged the
services of Tax Preparer, a certified public accountant (CPA) with decades of tax
experience, to handle the tax filings for Taxpayer, including filing Taxpayer’s first Form
1065, U.S. Return of Partnership Income, for the Year 1 tax year (due March 15, Year
2, unless on extension), along with the self-certification Form 8996, Qualified
Opportunity Fund.

Tax Preparer, with a clear understanding of the filing requirements and despite agreeing
to handle the tax filings of Taxpayer, failed to timely file the Form 1065 by March 15 of
Year 2 (and thus did not file Form 8996 by March 15 of Year 2). Tax Preparer also did
not file timely a Form 7004, Application for Automatic Extension of Time to File Certain
Business Income Tax, Information and Other Returns. Tax Preparer mistakenly
concluded that Taxpayer did not have a filing requirement for Year 1.

In late May of Year 2, Tax Preparer realized the error in not either timely filing by March
15 or filing an extension for Taxpayer. Tax Preparer consulted with Counsel, and they
incorrectly concluded that the Taxpayer could file relief for late filing as an attachment to
a late-filed Form 1065. In September of Year 2, Tax Preparer realized that the late filing
relief could not be obtained without a private letter ruling request and approval.

On Date 2, Tax Preparer filed on Taxpayer’s behalf the delinquent return for Year 1
(Form 1065, along with Form 8996). Soon thereafter, Taxpayer submitted this letter
ruling requesting relief under section 301.9100-3.

                                   LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for rules for the
certification of QOFs. Section 1.1400Z2(d)-1(a)(2) 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
PLR-120475-22                                3

be certified as a QOF must do so 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.

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 Tax Preparer did not file Taxpayer’s Form 8996 due to the Tax Preparer’s
mistaken understanding regarding filing requirements, thus resulting in Tax Preparer’s
failure to timely file or file for an extension of time to file the Form 1065 and the Form
8996.

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
PLR-120475-22                                 4

       (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.

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. Taxpayer has satisfied the
requirements for the granting of relief under section 301.9100-3(b). Accordingly, based
solely on the facts and information submitted, and the representations made in the
ruling request, the Form 8996 attached to Taxpayer’s return for Year 1 is considered
timely filed, and Taxpayer has thereby made the election under section 1400Z-2 and
section 1.1400Z2(d)-1(a)(2)(i) to self-certify as a QOF for Year 1 as of Date 1.
Taxpayer should submit a copy of this letter ruling to the Service Center where
Taxpayer files its returns along with a cover letter requesting the Service to associate
this ruling with the Year 1 return.

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 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. Further, we also express
no opinion on whether any interest owned in any entity by Taxpayer qualifies as
qualified opportunity zone property, as defined in section 1400Z-2(d)(2), or whether
PLR-120475-22                                  5

such entity would be treated as a qualified opportunity zone business, as defined in
section 1400Z-2(d)(3). 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.

                                       Sincerely,



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


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