Late opportunity fund self-certification treated as timely

Plain-English summary

A partnership was formed to operate as a qualified opportunity fund and hold an interest in an opportunity zone business. Its members mistakenly believed no first-year return was needed because the partnership had no revenue or expenses. Two tax preparers also made conflicting assumptions about who would file the partnership's extension, so neither Form 7004 nor a timely Form 8996 was filed. The partnership later filed its return with Form 8996 and promptly requested relief. The IRS found that it acted reasonably and in good faith and treated the attached Form 8996 as timely filed, while declining to decide whether the partnership or its investments otherwise met the opportunity zone requirements.

Ruling snapshot

• Question: Could a Form 8996 filed with a late first-year partnership return be treated as timely for qualified opportunity fund self-certification?
• Outcome: Approved, with the previously filed Form 8996 treated as timely
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1(a), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202341009                                              Third Party Communication: None
 Release Date: 10/13/2023                                       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-103902-23
                                                                Date:
                                                                July 18, 2023
          TY: -------




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

                                                     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 has a December 31 tax year end.
PLR-103902-23                                2

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
(QOZB) as defined in section 1400Z-2(d)(3). The QOZB, classified as a partnership for
Federal income tax purposes, was formed to acquire, develop, and lease real estate,
and to invest in real estate in a designated opportunity zone.

According to the affidavits and information provided to us, the Members engaged the
services of Tax Preparer 1, a certified public accountant (CPA) with decades of tax
experience, to handle the Members’ individual tax filings. The Members also provided
Tax Preparer 1 with information regarding the formation of Taxpayer.

Sometime in early Year 2, Tax Preparer 1 informed the Members that it did not have the
skills or experience to prepare Taxpayer’s return, not being familiar with QOFs or
QOZBs, and would therefore not be able to assist in filing returns for Taxpayer. Tax
Preparer 1 recommended Tax Preparer 2, a CPA at a different firm, to assist in filing
returns for Taxpayer.

Meanwhile, the Members knew that all their information would not be ready for timely
filing of their individual tax returns and thus requested that Tax Preparer 1 prepare the
necessary extensions for their Federal and state individual income tax returns. Tax
Preparer 1 filed the necessary extensions.

Tax Preparer 2 accepted the engagement to file Taxpayer’s return after the original
filing date of Taxpayer’s return. Tax Preparer 2 later agreed to accept the engagement
to file the Members’ individual Federal and state returns, by which point the Members’
individual returns were on extension.

Later in Year 2, as Tax Preparer 2 began to work on Taxpayer’s return and on the
Members’ individual returns then on extension, Tax Preparer 2 discovered that the prior
firm and Tax Preparer 1 had not filed a Form 7004, Application for Automatic Extension
of Time to File Certain Business Income Tax, Information and Other Returns. Form
7004 would have provided an extension for 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 2 informed the Members that it was likely the Internal Revenue Service
would view the Form 8996 as not timely filed, as no extension had been filed for
Taxpayer’s Form 1065. This was the first time that Taxpayer was aware (that its
Members were aware) that an extension and/or a Form 8996 was required, and that its
election as a QOF could be jeopardized by the failure to file the Form 8996 timely.

Late in Year 2, Tax Preparer 2 filed on the Taxpayer’s behalf the late return for Year 1,
the Form 1065, along with the Form 8996.
PLR-103902-23                                3

The Members erroneously assumed that no return was necessary for Taxpayer, as it
did not have any revenue or expenses for Year 1, and thus inadvertently failed to file
timely the Form 1065 (and thus did not file timely the Form 8996 ), or file timely a Form
7004, Application for Automatic Extension of Time to File Certain Business Income Tax,
Information and Other Returns. Tax Preparer 1 apparently assumed the Members
would timely file Form 7004 for Taxpayer, extending the time to file, while Tax Preparer
2 apparently assumed Tax Preparer 1 had already filed for an extension of time to file
for Taxpayer.

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
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).

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
PLR-103902-23                                 4

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.

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, including affidavits 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
PLR-103902-23                                  5

Center where Taxpayer files its returns along with a cover letter requesting the Service
associate this ruling with the Year 1 return.

This ruling is based upon facts and representations submitted on behalf of the Taxpayer
by one of the Members and Tax Preparer 1 and Tax Preparer 2 and accompanied by a
penalty of perjury statement executed by each of the appropriate parties. 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
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.
PLR-103902-23                                 6

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,



                                       Christina M. Glendening
                                       Senior Counsel, Branch 5
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)


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