Partnership receives extra time for opportunity-zone deferral election

Plain-English summary

A partnership invested distributive shares of capital gains in a qualified opportunity fund within 180 days after the gain partnerships' return due date. Its tax adviser mistakenly concluded that the investments were too late and omitted the gain-deferral election from Form 8949 and Schedule D. The IRS found that the partnership reasonably relied on the adviser, acted in good faith, and was not using hindsight. It granted 45 days to make the election and directed the partnership to submit or amend Forms 8997 as appropriate. The conclusion refers to an election for Year 1, although the request and the rest of the ruling describe the omitted election as being for Year 2.

Ruling snapshot

• Question: May the partnership make a late election to defer gains invested in a qualified opportunity fund?
• Outcome: Approved, with 45 days to make the election
• Key authorities: IRC § 1400Z-2(a); Treas. Reg. §§ 1.1400Z2(a)-1, 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202346004                                            Third Party Communication: None
 Release Date: 11/17/2023                                     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:B04
                                                              PLR-103905-23
                                                              Date:
                                                              August 23, 2023




                                                   Legend

 Taxpayer           = --------------------------------------------------
 Tax Advisor        = ------------------------------------------------------------------------------------------
                      ------------------------------------
 Date 1             = -------------------
 Date 2             = ---------------------
 Date 3             = -------------------
 Date 4             = ----------------
 Date 5             = ---------------------------
 Date 6             = -----------------------
 Year 1               -------
 Year 2             = -------
 Year 3             = -------
 State Z            = ------------
 $A                 = ---------------
 $B                 = ------------
 $C                 = ------------
 The Gain           = ------------------------------------------------------------------------------------------
 LLCs                 ------------------------------------------------------------------------------------------
                      -------------------------------------------------------------------------
 Investment         = ----------------------------------------
 LLC

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

This letter responds to Taxpayer’s request dated Date 6, seeking a private letter ruling
granting relief to make a late regulatory election pursuant to Treas. Reg. §§ 301.9100-1
PLR-103905-23                                2

and 301.9100-3 of the Procedure and Administration Regulations. Specifically,
Taxpayer requests an extension of time to make an election to defer eligible gain
pursuant to section 1400Z-2(a)(1)(A) on Form 8949, Sales and Other Dispositions of
Capital Assets, and the Schedule D for Year 2, with respect to amounts invested in a
qualified opportunity fund (QOF), as defined in section 1400Z-2(d).

This letter ruling is being issued electronically in accordance with Rev. Proc. 2023-1,
2023-1 I.R.B.1. A paper copy will not be mailed to Taxpayer.

                                         FACTS

According to information submitted to us, Taxpayer is a limited liability company which
was organized in State Z on Date 1. Taxpayer is treated as a partnership for Federal tax
purposes, has a calendar tax year, and uses the cash receipts and disbursements
method of accounting. Taxpayer has three members.

During Year 2, Taxpayer held membership interests in five limited liability companies
(the Gain LLCs) which were treated as partnerships for Federal tax purposes. The due
date, without extensions, for the Year 2 tax returns of each of the Gain LLCs was Date

2. During Year 2, the Gain LLCs realized long-term capital gains. None of the Gain
LLCs elected to defer their long-term capital gains by investing such gains in a QOF.
The Gain LLCs issued Taxpayer Forms K-1 for Year 2, on which the Gain LLCs
allocated an aggregate total of $A of such long-term capital gains to Taxpayer.

On Date 3, less than 180 days after Date 2, Taxpayer invested $B of its distributive
Gain LLC capital gains into Investment LLC, a limited liability company which was
formed in Year 1 to be a QOF. On Date 4, also less than 180 days after Date 2,
Taxpayer invested another $C of its distributive Gain LLC capital gains into Investment
LLC.

Taxpayer engaged Tax Advisor to prepare its Federal income tax returns for the Year 2
tax year. Tax Advisor has provided tax advice and tax return preparation services to
Taxpayer since Taxpayer was organized. While Tax Advisor was preparing the tax
returns of Taxpayer, Taxpayer informed Tax Advisor of Taxpayer’s two investments of
$B and $C into Investment LLC during Year 2 and provided Tax Advisor with the
associated documentation. Taxpayer also informed Tax Adviser of its intention for such
investments to qualify for tax deferral as investments into a QOF. Tax Advisor
subsequently researched the filing requirements for investment in a QOF and came to
the mistaken conclusion that Taxpayer’s investments in Investment LLC were untimely
to qualify for deferral as an investment in a QOF. As a result, Tax Advisor failed to
prepare and include a Form 8949 (or record the investments on a Schedule D), for Year
2 with Taxpayer’s returns, which were filed on Date 5. Tax Advisor subsequently
discovered their mistake.
PLR-103905-23                                3

                                  LAW AND ANALYSIS

Section 1400Z-2(a)(1)(A) provides that in the case of gain from the sale to, or exchange
with, an unrelated person of any property held by the taxpayer, at the election of the
taxpayer, gross income for the tax year shall not include so much of such gain as does
not exceed the aggregate amount invested by the taxpayer in a QOF during the 180-
day period beginning on the date of such sale or exchange. In the case of a partner of a
partnership, if the partnership does not elect to defer some, or all, of the eligible gains
and the partner’s distributive share includes one or more gains that are eligible gains
with respect to the partner, the partner may elect under section 1400Z-2(a)(1)(A) and
the section 1400Z-2 regulations to defer some or all of such eligible gains. Treas. Reg.
§ 1.1400Z2(a)-1(c)(8)(ii). In general, if a partner’s distributive share includes eligible
gains, the 180-day period with respect to such eligible gains begins on the last day of
the partnership tax year in which the partner’s distributive share of the partnership’s
eligible gain is taken into account under section 706(a). Treas. Reg. § 1.1400Z2(a)-
1(c)(8)(iii)(A). A partner may, however, elect to treat the partner’s own 180-day period
with respect to the partner’s distributive share of that gain as being the same as the
partnership’s 180-day period or the 180-day period beginning on the due date for the
partnership’s tax return, without extensions, for the tax year in which the partnership
realized the eligible gain. Treas. Reg. § 1.1400Z2(a)-1(c)(8)(iii)(B).

Treas. Reg. § 301.9100-1(a) provides that the Commissioner of the Internal Revenue
Service (Service) has discretion to grant a reasonable extension of time to make a
regulatory election. Treas. Reg. § 301.9100-1(b) defines the term “regulatory election”
as including any election the due date for which is prescribed by a regulation published
in the Federal Register. A taxpayer eligible to defer gain pursuant to section 1400Z-
2(a)(1) must make an election on its Federal income tax return for the tax year in which
the gain would be included if not deferred. Treas. Reg. § 1.1400Z2-1(a)(2). The election
must be made in the manner prescribed by the Service in guidance published in the
Internal Revenue Bulletin or in forms and instructions (see §§ 601.601(d)(2) and
601.602 of this chapter). Taxpayers electing to defer gain pursuant to section 1400Z-
2(a)(1) must attach Form 8949 and the Schedule D with their timely filed Federal
income tax return for the year of deferral. Thereafter, taxpayers must attach Form 8997,
Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, in each
subsequent year of continued deferral. Also, eligible gains in a partner’s distributive
share are subject to the 180-day investment period described in Treas. Reg. §
1.1400Z2(a)-1(c)(8)(iii). Therefore, the election by a partner of a partnership under
section 1400Z-2(a)(1) to defer eligible gain invested in a QOF is a regulatory election
eligible for relief under Treas. Reg. § 301.9100-3.

Treas. Reg. §§ 301.9100-1 through 301.9100-3 provide the standards that the Service
will use to determine whether to grant an extension of time to make a regulatory
election. Treas. Reg. § 301.9100-3(a) provides that requests for extensions of time for
regulatory elections (other than automatic changes covered in Treas. Reg. § 301.9100-
PLR-103905-23                                 4

2) will be granted when the taxpayer acted reasonably and in good faith and granting
relief will not prejudice the interests of the Government.

Treas. Reg. § 301.9100-3(b)(1) provides that a taxpayer is 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;
       (iii)   Failed to make the election because, after exercising reasonable
       diligence, the taxpayer was unaware of the necessity for the election;
       (iv)    Reasonably relied on the written advice of the Service; or
       (v)     Reasonably relied on a qualified tax professional, and the professional
       failed to make, or advise the taxpayer to make, the election.

Under Treas. Reg. § 301.9100-3(b)(2), a taxpayer will not be considered to have
reasonably relied on a qualified tax professional if the taxpayer knew or should have
known that the professional was not –
      (i)    Competent to render advice on the regulatory election; or
      (ii)   Aware of all relevant facts.

Under Treas. Reg. § 301.9100-3(b)(3), 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 requires 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.

Treas. Reg. § 301.9100-3(c) 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.
Treas. Reg. § 301.9100-3(c)(1)(i).
PLR-103905-23                                 5


                                      CONCLUSION

Based on the material submitted, we conclude that Taxpayer’s failure to make an
election to defer gain on Form 8949 and the Schedule D for Year 2 for amounts
invested in a QOF was due to Taxpayer’s reliance on the advice given and services
provided by Tax Advisor, a qualified tax professional employed by Taxpayer for the
purpose of providing tax advice and preparation services related to Taxpayer’s tax
returns. Taxpayer’s reliance on Tax Advisor was reasonable. Taxpayer and its members
employed Tax Advisor since the year Taxpayer was organized and relied upon Tax
Advisor for accurate and complete tax reporting. Taxpayer informed Tax Advisor of
each of the investments in Investment LLC along with documentary evidence, as well as
Taxpayer’s intention for such investments to qualify for tax deferral as investments into
a QOF under sections 1400Z-1 and 1400Z-2. Taxpayer is not using hindsight in
requesting relief. Lastly, Taxpayer requested relief before the failure to make the
election was discovered by the Service.

Therefore, we conclude that Taxpayer acted reasonably and in good faith, the interests
of the Government will not be prejudiced by the granting of relief under Treas. Reg. §
301-900-3. Accordingly, based solely on the facts and information submitted, and the
representations made in the ruling request, we grant Taxpayer an extension of 45 days
from the date of this letter ruling to make a gain deferral election pursuant to section
1400Z-2(a)(1)(A) on Form 8949 and Schedule D for Year 1, with respect to amounts
invested in Investment LLC. Additionally, Taxpayer should properly submit or amend, as
appropriate, Form 8997 for each tax year it is required to be filed with Taxpayer’s timely
filed tax return, in accordance with this letter ruling.

This ruling addresses the granting of Treas. Reg. § 301.9100-3 relief as applied to the
election to defer gain on Form 8949 and the Schedule D for Year 2. Specifically, we
have no opinion, either express or implied, concerning whether any investments made
into Investment LLC are qualifying investments as defined in Treas. Reg. §
1.1400Z2(a)-1(b)(34) or whether Investment LLC 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 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.

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.
PLR-103905-23                                  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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.



                                       Sincerely,




                                       Mon L. Lam
                                       Senior Counsel, Branch 4
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)


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