Tax-exempt controlled corporation received more time to make a depreciation election

Plain-English summary

A corporation wholly owned by a Section 501(c)(3) organization was a tax-exempt controlled entity and the managing member of a partnership. The corporation intended to elect under Section 168(h)(6)(F)(ii) not to be treated as tax exempt for the tax-exempt-use-property rules, and it specifically asked its adviser to make that election. The adviser failed to obtain a filing extension, so the corporation's return was late and the election could not be made on a timely return. The IRS found that the failure was inadvertent, that the corporation was not using hindsight, and that relief would not prejudice the government. It granted 45 days to file an amended return with the election, without deciding whether the corporation otherwise qualifies to make it.

Ruling snapshot

• Question: May the tax-exempt controlled corporation make a late election not to be treated as tax exempt under IRC § 168(h)(6)(F)(ii)?
• Outcome: Approved, with 45 days to file an amended return containing the election
• Key authorities: IRC §§ 167, 168(h)(6); Treas. Reg. §§ 301.9100-1, 301.9100-3, 301.9100-7T

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202418007                                              Third Party Communication: None
 Release Date: 5/3/2024                                         Date of Communication: Not Applicable
 Index Number: 9100.00-00, 168.00-00
                                                                Person To Contact:
 ---------------------------                                    --------------------------, ID No. ----------------
 ---------------------------                                    -----------------
 ----------------------------------                             Telephone Number:
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                                                                Refer Reply To:
                                                                CC:ITA:B04
                                                                PLR-115774-23
                                                                Date:
                                                                February 07, 2024




                                                    LEGEND

 Taxpayer                             =   ---------------------------
 Exempt Organization                  =   --------------------------------
 Partnership                          =   -----------------------------------
 Advisor                              =   ------------------------------
 Year 1                               =   -------
 Date 1                               =   -------------------
 State Z                              =   ------------




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 make a timely election under § 168(h)(6)(F)(ii) of the
Internal Revenue Code (Code) to Taxpayer, a tax-exempt controlled entity under §
168(h)(6)(F)(iii).
PLR-115774-23                                 2


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

Taxpayer is a domestic corporation incorporated under the laws of State Z. Taxpayer
uses the calendar year as its annual accounting period. Exempt Organization, a tax-
exempt organization under § 501(c)(3) of the Code, wholly owns Taxpayer. Taxpayer
therefore is a tax-exempt controlled entity within the meaning of § 168(h)(6)(F)(iii) of the
Code.

Taxpayer is the managing member of Partnership. The operating agreement of
Partnership provides that Taxpayer will not be a tax-exempt controlled entity and that it
will make an election under section 168(h)(6)(F)(ii).

Taxpayer engaged Advisor to prepare its Year 1 federal income tax return and
specifically requested that Advisor file a section 168(h)(6)(F)(ii) election for Year 1.
However, due to an administrative error, Advisor inadvertently failed to file an extension
to file the tax return by the due date, Date 1. As a result, Taxpayer’s return was not
timely filed. When Taxpayer’s return was filed, Taxpayer did not include the election
with its return, pending the outcome of this ruling request, as it would not have been
valid as a result of having not been timely filed by the due date of the return.


                                    APPLICABLE LAW

Section 167(a) of the Code generally provides for a depreciation deduction for property
used in a trade or business. Under § 168(g), the alternative depreciation system must
be used for any tax-exempt use property as defined in § 168(h). Section 168(h)(6)(F)(i)
provides generally that any tax-exempt controlled entity is treated as a tax-exempt entity
for purposes of § 168(h)(6).

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

Under § 168(h)(6)(F)(iii)(I), a corporation (without regard to that subparagraph and §
168(h)(2)(E) constitutes a "tax-exempt controlled entity" if 50 percent or more (in value)
of the corporation's stock is held by one or more tax-exempt entities (other than a
foreign person or entity). In the case of tiered partnerships and other entities, §
168(h)(6)(E) applies similar rules.
PLR-115774-23                                       3


Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity can elect not to be treated as a
tax-exempt entity. Once made, the election is irrevocable and will bind 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, a §
168(h)(6)(F)(ii) election 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 301.9100-7T(a)(3)(i)
provides that the § 168(h)(6)(F)(ii) election must be made by attaching a statement to
the tax return for the taxable year for which the election is to be effective.

Section 301.9100-1(c) provides that the Commissioner of Internal Revenue has the
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 for which
a regulation prescribes the due date. The § 168(h)(6)(F)(ii) election is a regulatory
election.

Sections 301.9100-1 through 301.9100-3 provide the standards 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 a request for an extension of time for a regulatory
election (other than automatic extensions of time covered in § 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 granting relief will not prejudice the
interests of the government.

Section 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 Internal Revenue Service (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 due 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 tax professional
                 failed to make, or advise the taxpayer to make, the election.

Under § 301.9100-3(b)(3), a taxpayer will not be considered to have not 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 or permits a regulatory election for which relief is
                    requested;
PLR-115774-23                                  4

       (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)(1) provides that the Service will grant a reasonable extension of
time only when doing so will not prejudice the interests of the Government. 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.


                                         ANALYSIS

The facts submitted by Taxpayer indicate that Taxpayer intended at the outset to make
the § 168(h)(6)(F)(ii) election, that its failure to make the election on a timely-filed return
was inadvertent, and that Taxpayer is not using hindsight in requesting relief. Moreover,
Taxpayer requested this relief before failure to make the election was discovered by the
Service. Finally, Taxpayer acted reasonably in and good faith, and the interests of the
government will not be prejudiced by the granting of relief under § 301.9100-3.


                                       CONCLUSION

Based solely on the facts as represented and the applicable law, we conclude that the
request for relief under § 301.9100-3 should be granted. Taxpayer is granted an
extension of 45 days from the date of this letter to file an amended return making the
election under § 168(h)(6)(F)(ii). Taxpayer must attach a copy of this ruling letter to its
amended return. If Taxpayer files its amended return electronically, it may satisfy this
requirement by attaching a statement to its amended return that provides the date and
control number of this letter ruling.

This ruling is based upon information and representations submitted by Taxpayer. While
this office has not verified any of the material submitted in support of the request for a
ruling, it is subject to verification on examination.

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, this ruling grants an extension of time to make a §
168(h)(6)(F)(ii) election; however, this ruling does not address whether taxpayer is
eligible to make the election.
PLR-115774-23                                 5

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

Pursuant to the Form 2848, Power of Attorney and Declaration of Representative, on
file, we are sending a copy of this letter to Taxpayer's authorized representative.


                                       Sincerely,




                                       Lisa Mojiri-Azad
                                       Senior Technician Reviewer
                                       Branch 4
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)




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