Late QOF self-certification treated as timely after filing misunderstanding

Plain-English summary

A partnership was formed to invest in qualified opportunity zone property and operate as a qualified opportunity fund. Its members used an accountant who misunderstood the structure of two separate opportunity-fund investments and mistakenly believed a third party was filing the partnership's Forms 1065 and 8996. After the IRS sent a letter stating that the partnership's employer identification number was not tied to a QOF self-certification, the members discovered that returns and certifications for two years had not been filed. The accounting firm then filed the missing returns and certifications and corrected the members' ownership percentages through administrative adjustment requests. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government's interests. It treated the Form 8996 attached to the first year's late return as timely, thereby making the QOF self-certification election for that year, but expressed no opinion on whether the taxpayer or its investments otherwise qualified under the opportunity-zone rules.

Ruling snapshot

• Question: Could the partnership's late Form 8996 be treated as timely when its accountant misunderstood who was responsible for filing the QOF certification?
• Outcome: Approved for the first-year Form 8996 addressed in the ruling
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1(a)(2)(i) and 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                   Department of the Treasury
                                                            Washington, DC 20224


 Number: 202343023                                          Third Party Communication: None
 Release Date: 10/27/2023                                   Date of Communication: Not Applicable
 Index Number: 1400Z.02-00, 9100.00-00
                                                            Person To Contact:
                                                            ------------------------, ID No. -----------------
 --------------------                                       Telephone Number:
 -----------------------------                              --------------------
 --------------------------                                 Refer Reply To:
 ----------------------------------------                   CC:ITA:B08
                                                            PLR-102502-23
                                                            Date:
                                                            July 25, 2023




                                                LEGEND

                      Taxpayer              =   ---------------------------------------------
                      State                 =   ------------------
                      Accounting Firm       =   -------------------------------
                      Law Firm              =   ------------------------------------------------
                      Accountant            =   -------------------------
                      Member                =   ------------------------
                      Manager               =   ----------------------
                      Unrelated QOF         =   -------------------------------------------------------------
                      X%                    =   ---
                      Y%                    =   1
                      Date 1                =   -----------------------
                      Date 2                =   ---------------------
                      Date 3                =   --------------------------
                      Date 4                =   ----------------
                      Date 5                =   -------------------
                      Date 6                =   ---------------------------
                      Year 1                =   -------
                      Year 2                =   -------
                      Year 3                =   -------
                      Year 4                =   -------
                      Year 5                =   -------


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

PLR-102502-23                                2


This ruling responds to Taxpayer’s request for a letter ruling dated Date 1. Specifically,
Taxpayer requests an extension of time under sections 301.9100-1 and 301.9100-3 of
the Income Tax Regulations, to (1) make a timely election under section 1.1400Z2(d)-
1(a)(2)(i) to be certified as a qualified opportunity fund (QOF), as defined in section
1400Z-2(d) of the Internal Revenue Code, and (2) for Taxpayer to be treated as a QOF,
effective for its taxable year ended Date 3, effective as of the month Taxpayer formed,
as provided by section 1400Z-2(d) and section 1.1400Z2(d)-1(a) of the Income Tax
Regulations.


                                         FACTS

According to the affidavits and additional information provided to us, Taxpayer has
represented that the facts are as follows. Taxpayer is a limited liability company
organized under the laws of State and was formed on Date 2. Taxpayer is classified as
a partnership for U.S. federal income tax purposes and was formed for the purpose of
investing in qualified opportunity zone property and serving as a QOF.

Taxpayer has two members, Member and Manager. Member owns X% and Manager
owns Y%. Taxpayer owns partnership interests in qualified opportunity zone businesses
(QOZPI), which are managed by an unrelated manager. Taxpayer is managed by
Manager. Accountant is an employee of Accounting Firm. Accounting Firm has
prepared tax returns for Member since Year 4, and jointly for Member and Manager
since Year 5. Accountant prepared Year 1 and Year 2 Federal income tax returns for
Member and Manager.

Member invested in two QOFs, Unrelated QOF and Taxpayer. Unrelated QOF is not
managed by Manager. In Year 2 and Year 3, Member received a Form K-1 from
Unrelated QOF for its Year 1 and Year 2 tax years, respectively. In Year 2 and Year 3,
Taxpayer received a Form K-1 for the QOZPIs owned by Taxpayer for the Year 1 and
Year 2 tax years, respectively. Manager provided the foregoing Forms K-1 to
Accounting Firm.

Accountant did not understand that Member made two separate investments, one in
Unrelated QOF and one in Taxpayer. Accountant mistakenly believed that Member had
only one investment in Taxpayer, and that a third party was filing Forms 1065, U.S.
Return of Partnership Income and Form 8996, Qualified Opportunity Fund on behalf of
Taxpayer. Accountant did not realize that that Manager was responsible for filing
Taxpayer’s Form 1065 and including Form 8996. Member and Manager believed that
Accountant understood the investments and that all required reporting and filings had
been made.

Accordingly, Accountant failed to timely file Form 1065 and Form 8996 on behalf of
Taxpayer for Year 1 and Year 2. On Date 4, Member and Manager received letter 6502,

PLR-102502-23                                3

indicating that the employer identification number associated with Taxpayer was not
associated with an entity that filed the QOF required self-certification on Form 8996. In
consultation with Accounting Firm and Law Firm, Member and Manager determined that
the required Forms 1065 and Forms 8996 had not been filed with respect to Taxpayer
for Year 1 or Year 2. Member and Manager subsequently authorized Law Firm to file
this ruling request pursuant to sections 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations.

Accounting Firm filed Taxpayer's Forms 1065 with an attached Form 8996 for Year 1
and Year 2 on Date 5. Accounting Firm filed administrative adjustment requests with
respect to those years for Taxpayer on Date 6, to correct a mistake regarding Member’s
and Manager’s respective ownership percentages of Taxpayer.

Taxpayer represents that granting of the relief under section 301.9100-3 will not result in
a lower tax liability for the years affected by the election.


                                  LAW AND ANALYSIS

Section 1400Z-2(e)(4)(A) of the Internal Revenue Code directs the Secretary to
prescribe regulations for 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 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, 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 Taxpayer did
not file its Form 1065 and Form 8996 by the due date of its Federal income tax return
(including extensions) due to misunderstanding about who had the responsibility to file
the return.

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

PLR-102502-23                                 4

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

       (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. Consequently, the Form 8996

PLR-102502-23                                  5

attached to Taxpayer’s return for Year 1, filed Date 5, 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 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
that the Service 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 factual
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 the taxpayer meets the requirements under
section 1400Z-2 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 representatives.

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,




                                           Erika C. Reigle
                                           Senior Technician Reviewer, Branch 8
                                           Office of Associate Chief Counsel
                                           (Income Tax and Accounting)

PLR-102502-23               6


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