More than three dozen IRS letter rulings allow late QOF self-certifications

Since 2018, taxpayers have been eligible for tax deferral and reduction benefits by reinvesting capital gain from a sale or exchange with an unrelated person into self-certified investment vehicles known as qualified opportunity funds (QOFs) that must reinvest at least 90% of their assets into business property or businesses located in a qualified opportunity zone (QOZ). Early in the program, the IRS and Treasury determined that any eligible entity (defined as a partnership or corporation for federal tax purposes, organized under a state, District of Columbia, or U.S. possession statute) could elect to be treated as a QOF by filing with the IRS a self-certification form attached to a timely filed federal income tax return. Self-certification forms for QOFs can thus be filed by a domestic partnership or corporation (including, for this purpose, certain entities organized under the laws of a U.S. possession) with a tax return filed by the statutory due date or, in the case of an entity that timely requests a return filing extension, by the extended due date for the tax return.

Despite this relatively simple self-certification requirement, the QOZ program is fairly complex, and many taxpayers and their representatives have filed tax returns without the requisite self-certification form. When an eligible entity seeking to qualify as a QOF for a particular year fails to timely file Form 8996, Qualified Opportunity Fund, with its timely filed federal income tax return (including extensions) for that year, the only option for that entity to become a self-certified QOF is to make an IRS letter ruling request for relief under Regs. Secs. 301.9100-1 through 301.9100-3. Those provisions establish the standard that the IRS will use to determine whether to grant an entity an extension of time to make a regulatory election, including to self-certify as a QOF.

Regs. Sec. 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic extensions) will be granted when the taxpayer provides evidence (including affidavits from the taxpayer and the taxpayer’s tax preparers and/or advisers) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the government’s interests. While a taxpayer is deemed to have acted reasonably and in good faith if, among other reasons, the taxpayer requests relief before the IRS discovers the failure to make the regulatory election, or failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election, the taxpayer will not be granted relief if the taxpayer (1) uses hindsight in requesting relief; (2) chose not to make the election despite being fully informed in all material respects of the required election and related tax consequences; or (3) is seeking to alter a return position for which an accuracy-related penalty has been or could be imposed at the time the taxpayer requests relief.

Nevertheless, in a growing number of IRS letter rulings addressing a wide variety of situations, the IRS has shown a willingness to work with taxpayers to allow late elections by eligible entities under Regs. Secs. 301.9100-1 and 301.9100-3 to (1) make a timely election under Regs. Sec. 1.1400Z2(a)-1(a)(2) to be certified as a QOF, as defined in Sec. 1400Z-2(d); and (2) for the taxpayers to be treated as a QOF, effective as of the month in which the entities received qualifying equity investments from taxpayers intended to benefit from favorable income tax treatment under Secs. 1400Z-2(a) through (c).

In six recent IRS letter rulings involving tax partnerships that each intended to be treated as QOFs for purposes of Sec. 1400Z-2(d)(1) during the month in which they received a taxdeferred investment from an eligible taxpayer, the partnerships failed to timely file Form 8996 with a timely federal income tax return due to a lawyer’s, an accountant’s, or a partnership representative’s error, resulting in their technical failure to self-certify as QOFs. On Sept. 30, 2022, the IRS released two letter rulings, each involving taxpayers that relied on qualified tax professionals to properly make or advise the taxpayers to make the QOF self-certification election. On Oct. 7, 2022, the IRS released one more letter ruling — arguably, its broadest yet on the topic of late elections by an eligible entity to become a QOF — involving a partnership representative and a member of the QOF, neither of whom had any educational or professional background that focused on taxation and who failed to make the QOF self-certification election because the taxpayer was unaware of the necessity for the election.

Then, in three further rulings released on Oct. 28, Nov. 11, and Nov. 18, 2022, the IRS excused various failures by taxpayers’ professional tax preparers and advisers to properly assist the eligible entities to self-certify as QOFs in their initial tax years. There are now at least 39 letter rulings released since May 2020 that have permitted late self-certification elections by eligible entities seeking to be classified as QOFs in various circumstances, reflecting the complex nature of the QOZ tax program and the federal government’s willingness to excuse these foot faults.

Letter Ruling 202239001 (released Sept. 30, 2022) concerned an eligible entity organized as a domestic, multimember limited liability company (LLC) whose managing member hired an attorney to consult on matters relating to the formation of the taxpayer and the requirements for the taxpayer to become a self-certified QOF. However, the lawyer did not advise the entity’s managing member as to the timing for filing the required Form 1065, U.S. Return of Partnership Income, with which Form 8996 is filed, and assumed that the entity’s manager was consulting with a tax preparer on that matter. The lawyer provided a signed affidavit to the IRS asserting the entity’s managing member was not experienced with Form 8996 and that, given the complexity of the QOF regulations, the scope of the lawyer’s discussion with the entity’s managing member could have included a discussion of the timing of the filing of the taxpayer’s Form 1065 and accompanying Form 8996. But this was not discussed with the entity’s manager, and the entity consequently failed to timely file Form 1065, with Form 8996 attached, for the entity’s intended first QOF tax year.

Letter Ruling 202239009 (released Sept. 30, 2022) involved a domestic partnership that engaged a tax adviser to prepare the entity’s partnership federal income tax return for its first year of operation (i.e., the year in which the entity received tax-deferred investments from eligible taxpayers). During that initial year, the entity conducted no business activities and generated no revenues, although it did invest in QOZ property (QOZP). The tax adviser was given the task of preparing and timely filing the partnership’s federal income tax return, including all related forms and elections to self-certify the partnership as a QOF during its first year in existence, so that the partnership would be considered a QOF as of the month it was formed. Although the tax adviser was engaged to file a request for an automatic extension of time for the partnership’s federal income tax return for its initial tax year, due to an administrative error at the adviser’s accounting firm, the tax adviser failed to file for an automatic extension on behalf of the partnership. As a result, the entity failed to file Form 1065, along with Form 8996, on time for its intended first QOF tax year.

In Letter Ruling 202240003 (released Oct. 7, 2022), the entity was organized and owned by two members, a partnership representative and another member, neither of whom had any educational or professional background that focused on taxation. One or both of the members contributed tax-deferred capital to the entity in the same year it was organized under domestic law as an LLC, treated as a partnership for federal income tax purposes. The partnership representative, due to unfamiliarity with U.S. tax laws and procedures, assumed that the initial due date for the entity’s initial Form 1065, along with Form 8996, had been extended due to the COVID-19 pandemic, although it had not been. As a result, the entity’s partnership representative did not request a six-month filing extension of the entity’s federal income tax return for its initial year on Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. Although the entity’s partnership representative intended to obtain professional assistance in filing Form 1065 on behalf of the entity, it did not seek assistance until after the entity’s initial due date for filing a tax return or requesting an automatic filing extension had passed. Consequently, the entity’s federal partnership tax return (Form 1065), together with its Form 8996 election to self-certify as a QOF, for its first tax year were not filed on time.

In Letter Ruling 202243004 (released Oct. 28, 2022), the IRS addressed a request by a domestic LLC treated as a partnership for federal income tax purposes to retroactively self-certify as a QOF as of a month during the company’s first year of existence. In this case, the company had engaged an experienced tax professional to prepare its initial Form 1065, and the tax professional was aware of the company’s intention to be a QOF but mistakenly failed to attach Form 8996 to the company’s otherwise timely filed federal income tax return for its initial tax year. The taxpayer was not aware of the necessity to file Form 8996 and had trusted its tax adviser to properly make the QOF self-certification election on its behalf for the company’s initial QOF year. However, due to the adviser’s oversight, the Form 8996 was not attached to the U.S. Return of Partnership Income filed by the taxpayer’s accounting firm.

On Nov. 11, 2022, the IRS released Letter Ruling 202245004, in which another LLC, taxed as a partnership for federal income tax purposes, was organized for the purpose of being a QOF and investing, directly or through one or more subsidiaries (known as QOZ businesses, or QOZBs), in real estate properties located within one or more QOZ census tracts, but failed to timely self-certify on Form 8996 with respect to the tax year in which it first intended to elect QOF status (the “first QOF tax year”). The taxpayer seeking this ruling had hired a CPA at an accounting firm who had always provided accurate tax advice in the past on which the taxpayer had relied. However, the tax adviser experienced serious health complications while preparing the taxpayer’s federal income tax return for the first QOF tax year. As a result, the adviser mistakenly told the taxpayer that it did not need to self-certify as a QOF on Form 8996 until after the completion of the taxpayer’s real estate project in a QOZ. Since the taxpayer did not expect to complete its real estate project in the first QOF tax year, the taxpayer filed its federal income tax return for that year without the Form 8996 necessary to self-certify as a QOF during any year in which an eligible entity receives qualifying equity investments of tax-deferred capital gain under Sec. 1400Z-2(a)(1)(A) and Regs. Sec. 1.1400Z2(d)-1(a). The taxpayer ended its professional relationship with that tax adviser due to the adviser’s health issues. When the taxpayer subsequently engaged the services of another CPA at a different accounting firm to discuss the taxpayer’s self-certification as a QOF for the first QOF tax year, the new accountant informed the taxpayer of its need to have filed Form 8996 with a timely filed Form 1065 for the taxpayer’s first QOF tax year and advised the taxpayer to engage legal counsel to request an extension of time to file Form 8996 through a letter ruling request.

The IRS released Letter Ruling 202246007 on Nov. 18, 2022. In that ruling, the taxpayer had requested relief under Regs. Secs. 301.9100-1 and 301.9100-3 to be treated as self-certified as of the month in which it was formed as a tax partnership for the purpose of investing in QOZP as defined in Sec. 1400Z-2(d)(2). The taxpayer requesting relief had purchased land in a QOZ and engaged a third-party tax adviser to assist in structuring the taxpayer to meet the requirement to be a valid QOF. The taxpayer amended its operating agreement during the year in which it was formed to reflect the purpose of being a QOF and subsequently received contributions from an eligible taxpayer of deferred capital gains to be invested in QOZP. The taxpayer hired its longtime tax preparer to prepare and file the taxpayer’s federal income tax return, together with all related forms and elections to self-certify as a QOF within the meaning of Sec. 1400Z-2(d)(1) and be treated as a QOF during the applicable month in which it received the eligible taxpayer’s deferred capital gain investment under Sec. 1400Z-2(a)(1)(A). However, the taxpayer’s preparer was unaware of the requirement for the taxpayer to self-certify as a QOF by filing Form 8996 with the taxpayer’s timely filed federal income tax return for the first QOF tax year, so the tax preparer failed to file Form 8996 with the taxpayer’s Form 1065 for that year.

Immediately upon discovery of the filing errors, the entities in all six letter rulings described above requested an extension of time under Regs. Secs. 301.9100-1 and 301.9100-3: (1) to make a timely election under Regs. Sec. 1.1400Z2(a)-1(a)(2) to be certified as a QOF as defined in Sec. 1400Z-2(d); and (2) to be treated as a QOF, effective no later than the month in which an eligible taxpayer invested (potentially) taxdeferred capital in the applicable QOFs, as provided under Sec. 1400Z-2(d) and Regs. Sec. 1.1400Z2(d)-1(a).

The IRS issued all six requested rulings granting the QOFs an extension of time to file a timely Form 8996, due to the lawyer’s, accountant’s, and partnership representative’s respective errors, as it has in similar situations (encompassing a wide range of miscommunications, administrative oversights, and other errors) at least 39 times since 2020.

For other rulings in which the IRS permitted a late filing of Form 8996 as a result of a tax adviser’s or manager’s error, see Letter Ruling 202301002 (released Jan. 6, 2023), granting relief under Regs. Sec. 301.9100-3 to selfcertify the taxpayer as a QOF by filing Form 8996 for its initial tax year when an adviser misconstrued the taxpayer’s status as a disregarded entity, rather than a partnership, for federal income tax purposes and consequently failed to file a federal tax return and a Form 8996 for that tax year on behalf of the taxpayer. Also see Letter Ruling 202233011 (released Aug. 19, 2022), granting relief under Regs. Sec. 301.9100-3 for the taxpayer’s Form 8996 to be treated as timely filed for purposes of the QOF self-certification election and to be treated as a QOF effective as of the month the taxpayer was formed, after an accountant’s failure to timely file Form 8996 with a timely filed federal income tax return for the entity’s first year in which it received investments of eligible capital gain. Similar issues were addressed in Letter Rulings 202302001 (released Jan. 13, 2023); 202302002 (Jan. 13, 2023); 202230001 (July 29, 2022); 202229033 (July 22, 2022); 202223012 (June 10, 2022); 202217004 (April 29, 2022); 202215012 (April 15, 2022); 202214001 (April 8, 2022); 202213007 (April 1, 2022); 202209009 (March 4, 2022); 202206016 (Feb. 11, 2022); 202206015 (Feb. 11, 2022); 202205020 (Feb. 4, 2022); 202205021 (Feb. 4, 2022); 202204002 (Jan. 28, 2022); 202203007 (Jan. 21, 2022); 202202009 (Jan. 14, 2022); 202152017 (Dec. 30, 2021); 202152013 (Dec. 30, 2021); 202151003 (Dec. 23, 2021); 202149003 (Dec. 10, 2021); 202144010 (Nov. 5, 2021); 202141004 (Oct. 15, 2021); 202140012 (Oct. 8, 2021); 202123005 (June 11, 2021); 202120014 (May 21, 2021); and 202120010 (May 21, 2021).

In addition, Letter Ruling 202119003 (May 14, 2021) granted additional time to make a timely election to be treated as a QOF, including any necessary revisions to the entity’s operating agreement to satisfy the requirement that its purpose be to invest in QOZP. Similarly, Letter Rulings 202116011 (April 23, 2021); 202103013 (Jan. 22, 2021); and 202019017 (May 8, 2020) granted an extension of time for an entity to self-certify as a QOF on Form 8996.

Editor Notes

Alexander J. Brosseau, J.D., CPA, is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office.Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP. For additional information about these items, contact Mr. Brosseau at 202-661-4532 or abrosseau@deloitte.com.

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