Late opportunity fund certification allowed

Plain-English summary

A partnership was formed to invest in qualified opportunity zone property and operate as a qualified opportunity fund. Its accounting firm timely filed the first partnership return but omitted Form 8996, which was required to self-certify the entity as a fund beginning in its formation month. The taxpayer represented that it had relied on competent tax professionals and that granting relief would not reduce its tax liability for the affected years. The IRS granted 60 days to attach a completed Form 8996 to an amended return or administrative adjustment request. The ruling allows the late election but does not determine whether the taxpayer, its investments, or the underlying property otherwise satisfy the opportunity-zone rules.

Ruling snapshot

• Question: May the partnership make a late 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, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202435003
Third Party Communication: None
Release Date: 8/30/2024
Date of Communication: Not Applicable
Index Number: 1400Z.02-00, 9100.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:ITA:B08
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PLR-101126-24
Date:
June 03, 2024

LEGEND

Taxpayer = --------------------------------------------------
State = -------------------
Law Firm = -------------------------------
Accounting Firm = -------------------
Date 1 = -----------------------
Date 2 = ---------------------
Date 3 = --------------------------
Date 4 = --------------
Date 5 = --------------------
Date 6 = ----------------
Date 7 = --------------------------
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,
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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.

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 cash method of accounting. Year 1 is the first year of Taxpayer’s operation and filing obligation.

Taxpayer had hired Law Firm to assist with the formation and organization of Taxpayer as a QOF. Law Firm provides income tax accounting and tax preparation services to clients through Accounting Firm. Accordingly, around Date 4, Law Firm provided information to Accounting Firm so that it could draft Taxpayer’s return. This information included Taxpayer’s intent to qualify as a QOF and invest in qualified opportunity zone businesses (QOZBs) and the QOZBs’ purchase of qualified opportunity zone business property. 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).

Taxpayer knew Accounting Firm to be competent and sophisticated in handling Federal income tax matters, as the firm has provided tax preparation services to Taxpayer’s manager both individually and for his related business entities since Date 5. Taxpayer understood that Accounting Firm would prepare and file tax returns for Taxpayer as part of ongoing tax and accounting services, including the preparation and filing of its initial partnership tax return and tax-related documentation to qualify as a QOF.

Taxpayer relied solely and completely on the professional advice of Accounting Firm to prepare and file its return with all necessary information and attachments. On Date 6, Accounting Firm timely prepared and filed Taxpayer’s Year 1 return, including Form 1065, without including Form 8996 because Accounting Firm was unaware that this was a required component of the return at the time.

During Year 2, Accounting Firm discovered that Form 8996 should have been included with Taxpayer’s Form 1065 for Year 1 so that Taxpayer could qualify as a QOF for the month of its formation. Accounting Firm subsequently informed Taxpayer on Date 7 that Form 8996 was not timely filed with its Form 1065 for Year 1 to self-certify Taxpayer as a QOF as of the month of its formation. After Taxpayer became aware of the consequences of failing to timely file the Form 8996, Taxpayer engaged the services of Law Firm to submit a request for relief pursuant to 301.9100-1 and 301.9100-3.
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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 8996 by the due date of its federal income tax return (including extensions) due to an error on the part of Accounting Firm.

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 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—
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(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.

CONCLUSION

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 amended tax return or administrative adjustment request (as applicable).

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
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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 also express no opinion on whether any property owned by the qualified opportunity zone businesses is qualified opportunity zone business property. 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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