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In PLR 202127002, the IRS granted a partnership a 60-day extension to file an election to be treated as a real property trade or business (RPTOB) under IRC Section 163(j)(7)(B). In so finding, the IRS said the partnership acted reasonably and in good faith by relying on a tax advisor to make the RPTOB election correctly and that granting an extension would not prejudice the government's interests.

Facts

Taxpayer is a foreign partnership that was not required to file a US federal partnership income tax return for the tax year in question. Consequently, the tax advisor attempted to make the RPTOB election by including an election statement with the Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, filed by the corporate partner that holds an indirect interest in Taxpayer.

Taxpayer's parent company represented that it relied on a tax advisor to properly make an RPTOB election under Prop. Treas. Reg. Section 1.163(j)-9.

The external auditors for the Taxpayer and its parent raised the issue of the proper method for making the RPTOB election. Upon review, Taxpayer's parent and tax advisor determined that Taxpayer should have made the RPTOB election through a timely-filed federal partnership tax return and filed a request for an extension of time under Treas. Reg. Sections 301.9100-1 and 301.9100-3 to do so.

Law

The Tax Cuts and Jobs Act (TCJA) amended IRC Section 163(j) to reduce business interest expense deductions to the sum of (1) the taxpayer's business interest income, (2) 30% of the taxpayer's adjusted taxable income (ATI), and (3) the taxpayer's floor plan financing interest. This limitation, however, does not apply to certain excepted trades or businesses, including electing RPTOBs.

Under Prop. Treas. Reg. Section 1.163(j)-9(c)(1), a taxpayer can make an RPTOB election by attaching an election statement to its timely-filed original federal income tax return, including extensions. A partnership's election must be made on the partnership's return for the trade or business that the partnership conducts. Furthermore, Treas. Reg. Section 1.6031(a)-1(b)(5) permits a partnership to make the election on a separate return described in the regulation, if the partnership is not otherwise required to file a partnership return.

Treas. Reg. Sections 301.9100-1 and 301.9100-3 authorize the IRS to grant an extension of time to file a late regulatory election. Extensions will be granted when the taxpayer shows that (1) it acted reasonably and in good faith and (2) granting relief will not prejudice the interests of the government.

The factors for determining whether a taxpayer acted reasonably and in good faith are listed under Treas. Reg. Sections 301.9100-3(b)(1) and 301.9100-3(b)(3).

Under Treas. Reg. Section 301.9100-3(c)(1)(i) and (ii), the government's interests are prejudiced if (1) granting relief would result in the taxpayer having a lower tax liability in the aggregate for all tax years affected by the election than the taxpayer would have had if the election had been timely made or (2) the election would be closed by the period of limitations on assessment under IRC Section 6501(a) before the taxpayer's receipt of a ruling granting relief.

Analysis

The IRS first determined that the election at hand is a regulatory election under Treas. Reg. Section 301.9100-1(b) because it is "an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, procedure, notice or announcement published in the Internal Revenue Bulletin."

The IRS found that Taxpayer acted reasonably and in good faith because it (1) requested relief before the failure to make the election was discovered by the IRS and (2) reasonably relied on hired tax professionals that failed to correctly make the election.

In addition, the IRS found that granting an extension would not prejudice the interests of the government because the taxpayer would not have a lower tax liability and the tax year in question is not closed by the period of limitations.

The IRS granted a 60-day extension from the date of the PLR to file the RPTOB election.

Implications

PLR 202127002 is important for two reasons. First, the PLR addresses procedures on how to make the RPTOB election for a partnership not otherwise required to file a US partnership tax return. Second, the PLR indicates how the IRS will apply the late election relief rules under Treas. Reg. Section 301.9100-1 to late RPTOB elections.

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