QOF election relief granted after engagement-letter omission

Plain-English summary

A partnership was created to operate as a qualified opportunity fund, and its members discussed opportunity zone gain deferrals with their long-time accounting firm. A miscommunication caused the new partnership to be omitted from the firm's annual engagement letter and client system, so the firm tracked no filing deadline and filed neither Form 1065 nor Form 8996 for the first year. The omission was discovered at the next annual tax-planning meeting. The IRS found reasonable conduct, good faith, and no prejudice to the government and granted 60 days to file Form 8996 with the partnership return. The ruling expressly does not extend the deadline for Form 1065.

Ruling snapshot

• Question: May the partnership file a late Form 8996 after its accounting firm omitted the new entity from its engagement and filing system?
• Outcome: Approved, with 60 days to file Form 8996, but no extension for Form 1065
• 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: 202437002 Third Party Communication: None
Release Date: 9/13/2024 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-107832-24
Date:
June 14, 2024

                                           LEGEND

                  Taxpayer             =     ----------------------------------------------------------
                  Member 1             =     ----------------------------------------------------------
                  Member 2             =     -----------------------------------------------
                  State                =     -------------
                  Accounting Firm      =     --------------------
                  Date 1               =     --------------------------
                  Date 2               =     ----------------------------------------------------------
                  Date 3               =     ----------------------------------------------------------
                  Date 4               =     ----------------------------------------------------------
                  Date 5               =     ----------------------------------------------------------
                  Date 6               =     ----------------------------------------------------------
                                             ------
                  Year 1               =     -------
                  Year 2               =     ----------------------------------------------------------
                  Year 3               =     ----------------------------------------------------------
                  Year 4               =     -----------------------------
                  A                    =     ----------------------------------------------------------
                  B                    =     ----------------------------------------------------------
                  C                    =     -------------------------

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

This ruling responds to Taxpayer’s request for a letter ruling dated Date 6. Specifically,
Taxpayer requests an extension of time under sections 301.9100-1 and 301.9100-3 of

PLR-107832-24 2

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 ending Date 1, 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

Taxpayer is a limited liability company organized under the laws of State on Date 3.
Taxpayer is classified as a partnership for U.S. Federal income tax purposes and 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).
Member 1 owns an A% interest in Taxpayer and Member 2 owns a B% interest in
Taxpayer. 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 intended to self-certify as a QOF beginning Date 2, by filing the necessary
forms and elections with its partnership income tax return for the tax year ending Date

1. On Date 4, Member 1, Member 2, Taxpayer, and Accounting Firm exchanged email
   communications regarding the contribution of eligible gains to a QOF and how the
   deferral elections should be reported on the members’ income tax returns for the tax
   year ending Year 2. At this time, Accounting Firm indicated that the eligible gains were
   deferred and reported within the members’ returns in accordance with applicable
   guidance.

Member 1, Member 2, and Taxpayer previously engaged Accounting Firm to prepare
income tax returns for several individuals and affiliated business entities over C years.
Given this long-standing business relationship with Accounting Firm, Member 1,
Member 2, and Taxpayer developed routine communication practices for discussing
their evolving tax needs. One such practice was to conduct a meeting with Accounting
Firm after the close of every calendar year to discuss various tax preparation services
needed for the preceding year. Following these meetings, Accounting Firm issued an
engagement letter which set forth a list of specific entities for which Accounting Firm
would prepare income tax returns.

In continuation of their routine year-end communications, Member 1, Member 2, and
Taxpayer discussed their tax needs for the Year 1 tax year with Accounting Firm in early
Year 3. By executing an engagement letter, Member 1, Member 2, and Taxpayer
engaged Accounting Firm to prepare several business tax returns for the Year 1 tax
year. Due to an apparent miscommunication between Accounting Firm and Member 1,
Member 2, and Taxpayer, Accounting Firm inadvertently failed to include Taxpayer in
the list of entities for which Accounting Firm would prepare tax returns for the Year 1 tax
year. Since Year 1 was intended to be Taxpayer’s initial year tax return, the entity had
not yet been set up as a new client in Accounting Firm’s engagement management

PLR-107832-24 3

system, which caused Accounting Firm to overlook listing Taxpayer as a new entity
when drafting the engagement letter. As a result, Accounting Firm did not track the
applicable due date for Taxpayer’s initial year tax return, which should have been filed
by Date 5.

Due to their history working with Accounting Firm as their tax advisor, Member 1,
Member 2, and Taxpayer believed Accounting Firm would be aware of any new entities
they formed and the applicable filing obligations of those new entities. Furthermore,
given the communications on Date 4 concerning the members’ deferred gain
contributions into Taxpayer, Member 1, Member 2, and Taxpayer believed that
Accounting Firm was aware of Taxpayer’s existence, tax filing obligations, and
intentions to self-certify as a QOF for the Year 1 taxable year. In reasonably believing
Accounting Firm was aware of Taxpayer’s filing obligations, Member 1, Member 2, and
Taxpayer relied in good faith on their routine communications with Accounting Firm over
the course of their business relationship to identify changes in their business(es) and
new tax filing obligations.

Subsequently, in early Year 4, Member 1, Member 2, and Taxpayer met with
Accounting Firm to discuss tax return filing needs for the Year 3 tax year. At this
meeting, Member 1, Member 2, and Taxpayer discovered that Taxpayer was not on
Accounting Firm’s list of business entities intended to be included in the annual
engagement letter. They also learned that Taxpayer’s initial tax return for Year 1 had
not been filed due to the inadvertent omission from the engagement letter.

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. Taxpayer also represents that
(i) the period of limitations on assessment under section 6501(a) has not yet expired for
Taxpayer for the taxable year in which Form 8996 should have been attached to
Taxpayer's return and (ii) the period of limitations on assessment under section 6501(a)
has not expired for any other taxable years that would have been affected by the QOF
self-certification had it been timely made.

                              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

PLR-107832-24 4

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
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.

PLR-107832-24 5

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 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.

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. Furthermore, 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.

PLR-107832-24 6

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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