Extension Granted to Make Taxable Entity Election

Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact: * * *, ID No. * * *
Telephone Number: * * *

Index Number: 168.00-00, 9100.04-00, 7701.00-00, 9100.31-00, 7701.00-00, 9100.31-00
Release Date: 7/12/2019

Date: April 15, 2019

Refer Reply To: CC:PSI:B03 - PLR-127238-18

LEGEND:

X = * * *
Y = * * *
Affidavit 1 = * * *
Affidavit 2 = * * *
Affidavit 3 = * * *
Agreement = * * *
Date 1 = * * *
Date 2 = * * *
Date 3 = * * *
Partnership = * * *
Project = * * *
State = * * *
Tax Year = * * *

Dear * * *:

This letter is in response to a request for a private letter ruling dated September 6, 2018, and subsequent correspondence, submitted on behalf of X by its authorized representative, requesting that the Service grant X an extension of time under § 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 beginning Date 1, and for a ruling granting an extension of time for X to make an election under § 301.7701-3(c) of the Regulations to be treated as an association taxable as a corporation for federal tax purposes beginning Date 1.

FACTS

The information submitted states that X was formed as a limited liability company under the laws of State on or about Date 1. X uses the cash method as its overall method of accounting and has the calendar year as its taxable year. X has been wholly owned by Y, a tax-exempt entity described in § 501(c)(3), since its date of formation. X was formed to serve as the general partner of Partnership, a limited partnership formed on Date 2 pursuant to Agreement. X intended to be a Tax-Exempt Controlled Entity under § 168(h)(6)(F)(iii).

Partnership was formed to provide affordable housing and, in furtherance of such purpose, to acquire, rehabilitate, own, lease and manage Project. Project is a qualified low income housing project pursuant to § 42 of the Code. Project was placed in service on Date 3. Under § 5.9(ll) and (mm) of the Agreement, X, as the general partner of Partnership, is required to make the election under § 168(h)(6)(F)(ii) of the Code to not be treated as a tax-exempt controlled entity for purposes of the tax-exempt use property rules (“§ 168(h)(6)(F)(ii) election”). In order to make the foregoing election, X was required to make an entity classification election under § 301.7701-3(c) to be treated as an association taxable as a corporation for federal tax purposes (“entity classification election”).

X represents that at all times after the formation of Partnership it intended to make an election to be treated as an association taxable as a corporation for federal tax purposes effective Date 1, and that it intended to make a § 168(h)(6)(F)(ii) election effective for Date 1. However, X inadvertently failed to timely file a Form 8832, Entity Classification Election, and the § 168(h)(6)(F)(ii) election. Given that § 5.9(II) and (mm) of Agreement required the timely filing of the entity classification election and the § 168(h)(6)(F)(ii) election, there is no evidence that X is using hindsight in requesting relief.

X has submitted Affidavit 1, Affidavit 2, and Affidavit 3 to support its position. X represents that X has requested relief before the failure to make the §168(h)(6)(F)(ii) election and the entity classification election was discovered by the Service. X further represents that, during the pendency of the review of X's request, neither X nor Y's returns for the taxable years * * * have been or are being examined by a district director, or have been or are being considered by an appeals office or a federal court.

X represents that it will not have a lower tax liability for all tax years affected by the § 168(h)(6)(F)(ii) election and the entity classification election than it would have had if both elections had been timely made, and the taxable year in which the two elections should have been made is not closed under § 6501. X and Y represent that they will file all required returns and/or amended returns as necessitated by the grant of the requested extension of time to make regulatory elections and will recognize any formerly unreported income as applicable.

LAW

Section 167(a) provides generally 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)(A) provides that, for purposes of § 168(h), if any property which (but for this subparagraph) is not tax-exempt use property is owned by a partnership having a tax-exempt entity and a non-exempt entity as partners and any allocation to the tax-exempt entity is not a qualified allocation, then an amount equal to the tax-exempt entity's proportionate share of such property is treated as tax-exempt use property.

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). Under § 168(h)(6)(F)(iii)(I), a “tax-exempt controlled entity” means any corporation (without regard to that subparagraph and § 168(h)(2)(E) 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).

Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity can elect not to be treated as a tax-exempt entity for purposes of §§ 168(h)(5) and (6). Such an 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), the § 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) provides the manner in which the § 168(h)(6)(F)(ii) election is made.

Section 301.7701-3(a) provides that a business entity that is not classified as a corporation under §§ 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (an eligible entity) can elect its classification for federal tax purposes as provided in § 301.7701-3. An eligible entity with a single owner can elect to be classified as an association taxable as a corporation or to be disregarded as an entity separate from its owner.

Section 301.7701-3(b)(1) provides that except as provided in § 301.7701-3(b)(3), unless the entity elects otherwise, a domestic eligible entity is (i) a partnership if it has two or more members; or (ii) disregarded as an entity separate from its owner if it has a single owner.

Section 301.7701-3(c)(1) provides, in part, that an eligible entity may elect to be classified other than as provided under § 301.7701-3(b), or to change its classification, by filing Form 8832, Entity Classification Election, with the service center designated on Form 8832.

Section 301.7701-3(c)(1)(iii) provides that an election under § 301.7701-3(c)(1)(i) will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form. The effective date specified on Form 8832 cannot be more than 75 days prior to the date on which the election is filed and cannot be more than 12 months after the date on which the election is filed. If an election specifies an effective date more than 75 days prior to the date on which the election is filed, it will be effective 75 days prior to the date it was filed.

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 the election. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of § 301.9100-2.

Section 301.9100-1(b) defines the term “regulatory election” as including any election the due date for which is prescribed by a regulation. Because the due date of § 168(h)(6)(F)(ii) election is prescribed in § 301.9100-7T, that election is a regulatory election. In addition, because the due date of the entity classification election is prescribed in § 301.7701-3(c), that election is a regulatory election.

Section 301.9100-3(a) provides that requests for relief subject to § 301.9100-3 will be granted when the taxpayer provides evidence, including affidavits described in § 301.9100-3(e), to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of the 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 —

Under § 301.9100-3(b)(3), a taxpayer is considered to have not acted reasonably and in good faith if the taxpayer —

Section 301.9100-3(c)(1) provides that the Service will grant a reasonable extension of time only when the interests of the Government will not be prejudiced by the granting of the 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. Under § 301.9100-3(c)(1)(ii), 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 affected by the election had it been timely made, are closed by the period of limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section.

ANALYSIS

The information and representations submitted indicate that X at all times intended from the outset to make the § 168(h)(6)(F)(ii) election and the entity classification election, and that X's failure to make the § 168(h)(6)(F)(ii) election and the entity classification election was inadvertent. X represents that X has requested relief before the failure to make both elections was discovered by the Service. There is no evidence that X is using hindsight in requesting relief.

Further, based on the facts presented and the representations made, X will not have a lower tax liability for all tax years affected by the § 168(h)(6)(F)(ii) election and the entity classification election than X would have had if both elections had been timely made, and the taxable year in which the § 168(h)(6)(F)(ii) election and the entity classification election should have been made is not closed under § 6501(a). We conclude that X has acted reasonably and in good faith. Further, the interests of the Government will not be prejudiced by the granting of relief.

X requests an extension of time, under §§ 301.9100-1 and 301.9100-3 to file the §168(h)(6)(F)(ii) election and the entity classification election to be treated as an association taxable as a corporation for federal tax purposes under § 301.7701-3. Based solely on the above facts and representations, we conclude that X has met the requirements of §§ 301.9100-1 and 301.9100-3 with respect to obtaining an extension of time to file both the § 168(h)(6)(F)(ii) election and the entity classification election.

CONCLUSION

Based solely on the facts as represented and the applicable law, we conclude that the requirements of § 301.9100-3 have been met. Accordingly, X is granted an extension of time of 120 days from the date of this letter to file an original or amended return for Tax Year. X must attach the aforementioned § 168(h)(6)(F)(ii) election and the information set forth in § 301.9100-7T(a)(3) to the original or amended return. X also must attach a copy of this letter to the original or amended return. Pursuant to § 301.9100-7T(a)(3)(ii), a copy of this letter and the § 163(h)(6)(F)(ii) election statement must also be attached to the federal income tax returns of each of the tax-exempt members or beneficiaries of X.

In addition, based on the facts submitted and representations made, we conclude that X has satisfied the requirements of §§ 301.9100-1 and 301.9100-3 with respect to the entity classification election. Accordingly, X is granted an extension of time of 120 days from the date of this letter to elect to be treated as an association taxable as a corporation for federal tax purposes effective Date 1. The election should be made by filing a properly executed Form 8832 with the appropriate service center. A copy of this letter should be attached to the election.

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. Further, we express no opinion concerning the assessment of any interest, additions to tax, additional amounts or penalties for failure to file timely income tax return with respect to any taxable year.

The rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party. 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.

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 powers of attorney on file with this office, we are sending copies of this letter to X's authorized representatives.

Sincerely,

Associate Chief Counsel
(Passthroughs & Special Industries)

By: Caroline E. Hay
Assistant to the Branch Chief, Branch 3
Office of Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes