Company receives 60 days to make a late tax-exempt controlled entity election

Plain-English summary

A wholly owned limited liability company elected corporate tax status and intended to elect not to be treated as a tax-exempt controlled entity under section 168(h)(6)(F)(ii). Its later dissolution under state law changed its tax-year end and moved the return deadline earlier. The company's tax adviser mistakenly calculated the extended deadline using the former year end and filed the return and election late. The IRS found that the company intended to make the election from the outset, reasonably relied on a qualified tax professional, did not use hindsight, and would not prejudice the government. It granted 60 days to file an amended return with the election and a copy of the ruling. The IRS did not decide whether the company otherwise qualified to make the election.

Ruling snapshot

• Question: May the company make a late election not to be treated as a tax-exempt controlled entity for depreciation purposes?
• Outcome: Approved, with a 60-day filing period
• Key authorities: IRC § 168(h)(6)(F)(ii); Treas. Reg. §§ 301.9100-1, 301.9100-3, 301.9100-7T(a)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202443010
Third Party Communication: None
Release Date: 10/25/2024
Date of Communication: Not Applicable
Index Number: 168.00-00, 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:B04
In Re: PLR-103754-24
Date:
July 29, 2024

Taxpayer = ----------------------------
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State Z = -------------
Advisor = ---------------------
Tax Year End 1 = ------------------
Tax Year End 2 = ---------------
Fiscal Year 1 = -----------------------
Date 1 = ----------------
Date 2 = ---------------------------
Date 3 = -----------------------
Date 4 = -----------------------
Date 5 = -------------------
Date 6 = -----------------
Date 7 = ----------------------
Date 8 = ----------------------
Date 9 = -----------------------
Date 10 = -----------------------

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

This letter responds to Taxpayer’s request, dated Date 10, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make an election under §168(h)(6)(F)(ii) of the Internal Revenue Code (Code) to not be treated as a tax-exempt controlled entity.

FACTS

Taxpayer was organized as a wholly owned limited liability company under the laws of State Z, with a default federal tax classification as a disregarded entity. On Date 2, Taxpayer timely filed the Form 8832, Entity Classification Election to elect to be treated as a corporation for federal income tax purposes, effective as of Date 1. Taxpayer had

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an initial tax year end of Tax Year End 1. Taxpayer and Advisor discussed the need for Taxpayer to make a § 168 election to not be treated as a tax-exempt entity. Taxpayer relied upon Advisor for federal tax income tax advice and compliance.

On Date 3, Taxpayer liquidated and filed a certificate of dissolution with State Z. As a result of the dissolution under state law, Taxpayer’s tax year end changed from Tax Year End 1 to Tax Year End 2. The change in tax year end changed Taxpayer’s deadline to file its federal income tax return from Date 5 to Date 4. Taxpayer timely filed for an automatic extension of time to file by Date 4, thereby extending Taxpayer’s due date for Fiscal Year 1 federal income tax return to Date 7.

Advisor, due to administrative oversight, mistakenly believed that the extended due date for Taxpayer’s Fiscal Year 1 federal income tax return was Date 9. Advisor discovered the oversight during Date 6. Advisor, after discovering the oversight, immediately began to complete Taxpayer’s Year 1 federal income tax return, including the § 168 election. On Date 8, Advisor filed Taxpayer’s federal income tax return. Date 8 is after Date 7, the extended deadline to file Taxpayer’s Fiscal Year 1 federal income tax return; thus, Taxpayer’s § 168 election was not timely filed.

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 a 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 which is 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.

Section 168(h)(6)(F)(ii) allows a tax-exempt controlled entity to 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.

Section 301.9100-7T(a)(2)(i) of the Procedure and Administration Regulations (Regulations) provides that a §168(h)(6)(F)(ii) election must be made by the due date of

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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 of the Regulations provide the standards the Service 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 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 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

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(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. Taxpayer relied upon Advisor, a qualified tax professional, to make the § 168(h)(6)(F)(ii) election in Fiscal Year 1, but Advisor failed to submit the election with a timely submitted Fiscal Year 1 return. Taxpayer acted reasonably in and good faith, and the interests of the government will not be prejudiced by the granting of relief under Regulation
§ 301.9100-3.

The affidavits, from both Taxpayer and Advisor, filed in support of the request adequately explain the events that led to the failure and discovery of the error to file the election in a timely manner as required by Regulation § 301.9100-3(e)(2)-(3).

CONCLUSION

Based solely on the facts as represented and the applicable law, we conclude that the request for relief under Regulation § 301.9100-3 should be granted. Taxpayer is granted an extension of 60 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 Taxpayer an extension of time to make a
§168(h)(6)(F)(ii) election; however, this ruling does not address whether Taxpayer is otherwise eligible to make this requested election.

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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 Representation, on file, we are sending a copy of this letter to Taxpayer's authorized representatives. This letter is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-21 I.R.B. 859 and Rev. Proc. 2024-1, 2024-1 I.R.B. 1. A paper copy will not be mailed to Taxpayer.

Sincerely,

Angella L. Warren
Chief, Branch 4
Office of Associate Chief Counsel
(Income Tax & Accounting)

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