Opportunity fund received 60 days to make its election

Plain-English summary

A limited liability company taxed as a partnership was created to invest in opportunity-zone property and operate as a qualified opportunity fund. The company and its advisers expected an experienced accounting firm to file its first return and Form 8996, but a miscommunication omitted the company from the firm's engagement letter. No extension, Form 1065, or Form 8996 was timely filed. The IRS found reasonable reliance and no prejudice to the government, then granted 60 days to file Form 8996 with the tax return and make the intended qualified-opportunity-fund election. The ruling did not extend the Form 1065 deadline or decide whether the company and its investments met the substantive opportunity-zone requirements.

Ruling snapshot

• Question: Could the company make a late Form 8996 election to self-certify as a qualified opportunity fund?
• Outcome: approved, with 60 days to file Form 8996
• Key authorities: IRC § 1400Z-2; Treas. Reg. §§ 1.1400Z2(d)-1(a)(2)(i), 301.9100-1, and 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                 Department of the Treasury
                                                          Washington, DC 20224


 Number: 202412007                                        Third Party Communication: None
 Release Date: 3/22/2024                                  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-116597-23
                                                          Date:
                                                          December 20, 2023


                                              LEGEND

                      Taxpayer            =   ---------------------------------------------------
                      State               =   -------------
                      Accounting Firm     =   ------------------
                      Date 1              =   ----------------------
                      Date 2              =   ------------------
                      Date 3              =   --------------------------
                      Date 4              =   ---------------------
                      Year 1              =   -------
                      Year 2              =   -------


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

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 Date 2, as provided by section
1400Z-2(d) and section 1.1400Z2(d)-1(a) of the Income Tax Regulations.

PLR-116597-23                               2


                                         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. 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’s annual accounting period
is the calendar year and uses the accrual method of accounting. Year 1 is the first year
of Taxpayer’s operation and filing obligation.

Taxpayer knew Accounting Firm to be competent and sophisticated in handling Federal
income tax matters, including the handling and filing of Federal income tax returns and
self-certifications with respect to QOFs. Accounting Firm had been engaged to satisfy
tax compliance obligations of other entities controlled by Taxpayer’s members and
affiliates. Accounting Firm provided Taxpayer’s members and financial advisors with
general business, structuring, and investment guidance on the preferred methods of
forming a QOF as well as advice as to how to qualify as a QOF under IRS and Treasury
guidance.

Accounting Firm has prepared federal income tax returns for Taxpayer’s parent
company since Year 2. In Year 1, Taxpayer’s parent underwent a restructuring that
resulted in the creation of Taxpayer, which was formed for the purpose of qualifying as
a QOF, and the creation of another entity intended to be a qualified opportunity zone
business. Taxpayer has provisions in its operating agreement that state that its purpose
is to be a QOF and to invest in “qualified opportunity zone property” as defined in
section 1400Z-2(d)(1).

Accounting Firm was included on emails and videoconference meetings with
representatives of Taxpayer regarding the structuring of this transaction in a way that
would enable it to qualify as a QOF. Tax legal counsel for Taxpayer noted on one of
these calls that Taxpayer needed to elect QOF status effective as of Year 1, and
Accounting Firm agreed that this was correct. Based on these communications with
Accounting Firm, Taxpayer believed that Accounting Firm would prepare and file Year 1
tax returns for Taxpayer. As such, Taxpayer’s financial advisors believed that
Accounting Firm had filed an extension for the Year 1 tax return for Taxpayer prior to
Date 4 and that Accounting Firm would prepare its tax return, including Form 8996 for
Taxpayer to self-certify as a QOF for the taxable year ending Date 3.

Based on discussions with Taxpayer’s financial advisors, Accounting Firm prepared an
engagement letter for new entities for which Accounting Firm would prepare Year 1 tax
returns. There was, however, a miscommunication between Accounting Firm and
Taxpayer, and Taxpayer was not included on the list of entities in that engagement
letter. As a result, while Accounting Firm timely filed extensions for the Year 1 tax

PLR-116597-23                                3

returns with respect to the entities for which it was engaged, Accounting Firm did not file
extensions for the Year 1 tax returns for Taxpayer, and Taxpayer’s election to self-
certify as a QOF for the Year 1 tax year was not timely filed.

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 miscommunication between Accounting Firm and
Taxpayer.

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-116597-23                                 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 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
Form 8996 to make the election to self-certify as a QOF under section 1400Z-2 and
section 1.1400Z2(d)-1(a)(2)(i). The election must be made on a completed Form 8996
attached to the Taxpayer’s tax return. This letter ruling grants an extension of time to file
a Form 8996. This letter ruling does not grant an extension of time to file Taxpayer’s
Form 1065.

PLR-116597-23                                            5

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. Further, we also express
no opinion on whether any interest owned by Taxpayer qualifies as qualified opportunity
zone property, as defined in section 1400Z(d)(2), or whether such interest 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 Powers 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)


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