Tax-exempt controlled entity gets 60 more days to elect out of tax-exempt treatment after its preparer misclassified it

Plain-English summary

An LLC was part-owned by tax-exempt organizations, which made it a "tax-exempt
controlled entity" under section 168(h). That status can force slower
depreciation on property the entity uses through a partnership, here a
partnership that develops and operates multi-family housing. Section
168(h)(6)(F)(ii) lets such an entity elect not to be treated as a tax-exempt
entity, and the partnership agreement required the LLC to make that election.
The LLC's return preparer wrongly assumed the LLC was still a single-member
disregarded entity, so it never filed the return or the election, even though
the partnership itself filed consistently with the election having been made.
The LLC asked the IRS for more time under the section 301.9100 relief rules. The
IRS found the LLC acted reasonably and in good faith and that relief would not
prejudice the government, and granted 60 days to file a return making the
section 168(h)(6)(F)(ii) election.

Ruling snapshot

• Question: Should the entity get more time to make the section 168(h)(6)(F)(ii) election not to be treated as a tax-exempt entity after its preparer misclassified it?
• Outcome: Approved (60-day extension granted)
• Key authorities: IRC § 168(h)(6)(F)(ii); Treas. Reg. §§ 301.9100-1, 301.9100-3; Treas. Reg. § 301.9100-7T

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202330008                                            [Third Party Communication:
 Release Date: 7/28/2023                                      Date of Communication: Month DD, YYYY]
  9100.04-00, 168.00-00, 9100.00-00
                                                              Person To Contact:
 -----------------------------------------------              -----------------------, ID No. -----------------
 -------------------------------                              Telephone Number:
 --------------------------------------------                 --------------------
 ------------------------------                               Refer Reply To:
 ----------------------------                                 CC:ITA:B05
                                                              PLR-121197-22
                                                              Date:
                                                              April 28, 2023




Legend:
 Taxpayer                                    = --------------------------------------
                                               -----------------
 Date 1                                      = -----------------------
 Date 2                                      = -----------------------
 Date 3                                      = ----------------------
 State                                       = -------------
 Corporation                                 = --------------------------------------
                                               ------------------------------
                                             = --------------------------------------
 Partnership                                   --------------------------------------
                                               -------------
 Tax-Exempt Entity A                         = --------------------------------------
                                               ------------------------------
 Tax-Exempt Entity B                         = --------------------------------------
                                               -------------------------
 Year 1                                      = -------
 Firm                                        = -------------------------
 X%                                          = --------
 Y%                                          = ------
 Z%                                          = ------
 A%                                          = --------


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

This letter responds Taxpayer’s request for a letter ruling dated Date 1. Taxpayer
requests an extension of time to make an election under § 168(h)(6)(F)(ii) of the Internal
Revenue Code (Code) to Taxpayer, a tax-exempt controlled entity under Code
§ 168(h)(6)(F)(iii) for Year 1.
PLR-121197-22                                2


                                         FACTS

Taxpayer was formed as a limited liability company under the laws of State on Date 2.
Taxpayer uses the accrual method as their overall method of accounting and uses the
calendar year as their taxable year. Taxpayer was previously a disregarded entity
wholly owned by Corporation, a domestic corporation. Corporation was X% owned by
Tax-Exempt Entity A, a tax-exempt organization. Subsequently, as of Date 3, Taxpayer
was Y% owned by Corporation and Z% owned by Tax-Exempt Entity B, a tax-exempt
organization.

Taxpayer owned A% of Partnership. Partnership was organized to develop, finance,
construct, own, and operate multi-family residential units. Under Partnership’s operating
agreement, Taxpayer was required to make an election under Code § 168(h)(6) so that
any depreciable property would not be limited due to a portion of the property being
treated as tax-exempt use property. All parties involved in the creation of Partnership
agreed and acknowledged that a Code § 168(h)(6)(F)(ii) election would be made by
Taxpayer, by the due date (including extensions) of the tax return for the first tax year
that the election applies.

Tax-Exempt Entity A engaged Firm to prepare Taxpayer’s Year 1 federal income tax
return. Firm mistakenly failed to prepare Taxpayer’s Year 1 federal income tax return
due to the tax return preparer’s assumption that Taxpayer was a single member limited
liability corporation disregarded for federal income tax purposes.

As a result, Taxpayer’s Year 1 federal income tax return was not timely filed and the
Code § 168(h)(6)(F)(ii) election was not made. Shortly thereafter, Firm learned that Tax-
Exempt Entity B had become a part owner in Taxpayer and that Taxpayer was no
longer a disregarded entity of Corporation as of Date 3. At that time, it was discovered
that the extension to file a federal income tax return for Taxpayer was not timely filed
which resulted in the missed Code § 168(h)(6)(F)(ii) election. Partnership’s tax return
was filed inconsistent with Taxpayer’s filed return since Partnership’s federal income tax
return for Year 1 was filed in accordance with a proper Code § 168(h)(6)(F)(ii) election.
According to the information provided to us, Partnership’s return was filed consisted
with the contractual agreement and intent of the parties which reflected that a Code §
168(h)(6)(F)(ii) election would be made by Taxpayer.

Subsequently, Taxpayer hired Firm to file a Private Letter Ruling Request, requesting
an extension of time within which to property make the Code § 168(h)(6)(F)(ii) election
for the Taxpayer for Year 1.




                          APPLICABLE LAW AND ANALYSIS
PLR-121197-22                                 3


Code § 168(h)(6)(A) provides that, for the purposes of Code § 168(h), if any property
that is not tax-exempt property is owned by a partnership having both a tax-exempt
entity and a non-tax-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 shall be treated as tax-exempt use property.

Code § 168(h)(6)(F)(i) generally provides that any tax-exempt controlled entity shall be
treated as a tax-exempt entity for purposes of §§ 168(h)(5) and (6). Section
168(h)(6)(F)(iii)(I) provides that a tax-exempt controlled entity is any corporation if 50%
of more (in value) of the stock is held by 1 or more tax-exempt entities. Because Tax-
Exempt Entity B is the owner of Z% in value of Taxpayer’s stock, and Tax-Exempt Entity
A is the X% owner of Corporation, which in turn owns Y% in value of Taxpayer’s stock,
Taxpayer is a tax-exempt controlled entity under that section.

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity may elect to not be treated as a
tax-exempt entity. Such an election is irrevocable and binds 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
(Regulations), an election under § 168(h)(6)(F)(ii) 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 301.9100-1(a) of the Regulations provides that the Commissioner of Internal
Revenue has 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 the due date for which is prescribed by a regulation. The election allowed by §
168(h)(6)(F)(ii) is a regulatory election.

Sections 301.9100-1 through 301.9100-3 of the Regulations provide the standards that
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 requests for extensions of time
for regulatory elections (other than automatic changes describe in § 301.9100-2) will be
granted when the taxpayer provides evidence (including through affidavits) to establish
that the taxpayer acted reasonably and in good faith, and that granting relief will not
prejudice the interests of the Government.

Sections 301.9100-3(b)(1) of the Regulations provides that a taxpayer will be 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;
PLR-121197-22                                 4


       (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 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 of the Regulations, 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 required 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.

Section 301.9100-3(c) of the Regulations 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, based solely on
the facts and information submitted, and the representations made in the ruling request,
we grant Taxpayer an extension of 60 days from the date of this letter ruling to file a
federal income tax return for Year 1 to make an election under Code § 168(h)(6)(F)(ii).

This ruling is based on the information and representations submitted on behalf of
Taxpayer and accompanied by penalty of perjury statement signed by the appropriate
parties. Although this office has not verified any of the material submitted in support of
the request for ruling, it is subject to verification on examination.
PLR-121197-22                                  5

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.

Enclosed is a copy of the letter showing the deletions proposed to be made when it is
disclosed under § 6110 of the Code. If you have any questions concerning this matter,
please contact the individual whose name and telephone number appear at the
beginning of the letter. 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,



                                                   Kyle C. Griffin
                                                   Senior Counsel, Branch 5
                                                   Office of Chief Counsel
                                                   (Income Tax and Accounting)



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