IRS Grants Extension for Tax-Exempt Controlled Entity Election Due to Inadvertent Omission

IRS Grants Relief for Missed Election: A $5M+ Depreciation Dilemma

The IRS granted a 60-day extension under § 301.9100-3 to a taxpayer that inadvertently omitted a § 168(h)(6)(F)(ii) election from its Year1 return, allowing the entity to avoid tax-exempt use property treatment and preserve potential depreciation adjustments worth millions. In a January 30, 2026 letter ruling, the IRS ruled that the taxpayer’s failure to file the election statement was a clerical oversight and did not prejudice the government, granting relief despite the election’s non-listed status under § 301.9100-1’s automatic relief provisions. The ruling, issued as a non-precedential private letter ruling, underscores the IRS’s willingness to grant § 9100 relief for late regulatory elections when reasonable cause and no tax avoidance intent are demonstrated.

The Taxpayer’s Story: A Costly Oversight

The taxpayer, a limited liability company treated as a C corporation for federal income tax purposes, operates as an investment business wholly owned by Exempt Parent, a limited partnership whose sole member is Member, a nonprofit entity exempt under § 115(1) as an employee benefit plan. As a tax-exempt controlled entity under § 168(h)(6)(F)(iii)—defined as any corporation where 50% or more of its stock (by value) is held by one or more tax-exempt entities—the taxpayer was eligible to make an election under § 168(h)(6)(F)(ii) to avoid treatment as a tax-exempt entity for Year1.

The taxpayer timely filed its Year1 Form 1120 on Date1, intending to make the § 168(h)(6)(F)(ii) election. However, the required election statement—mandated by § 301.9100-7T(a)(3)(i) to be attached to the return—was inadvertently omitted. Months later, during Month1, an employee discovered the omission while reviewing the filed return. The error was immediately flagged as a clerical oversight, prompting the taxpayer to submit a request for relief under §§ 301.9100-1 and 301.9100-3. The taxpayer represented that its failure to attach the election statement was neither intentional nor part of a tax-avoidance strategy, but rather the result of a procedural misstep in an otherwise compliant filing.

The IRS’s Rationale: Reasonable Diligence and No Prejudice

The IRS granted the taxpayer’s request for a 60-day extension to make the § 168(h)(6)(F)(ii) election under § 301.9100-3, concluding that the taxpayer had acted reasonably and in good faith while demonstrating no prejudice to the government. The § 168(h)(6)(F)(ii) election allows a tax-exempt controlled entity—defined in § 168(h)(6)(A) as an entity where 50% or more of its capital or interests are held by one or more tax-exempt organizations—to opt out of tax-exempt use property treatment under § 168(h). Without this election, property leased to or used by tax-exempt entities is subject to the Alternative Depreciation System (ADS) under § 168(g), which imposes longer recovery periods (e.g., 40 years for nonresidential real property) and disallows bonus depreciation (§ 168(k)) and § 179 expensing.

The election is a regulatory election under § 301.9100-1(b), meaning its due date is prescribed by regulation—in this case, § 301.9100-7T(a)(2)(i), which requires the election to be made by attaching a statement to the tax return for the first taxable year the election is effective. Because the election’s due date is set by regulation, it falls under the IRS’s discretionary relief framework in § 301.9100-3, which permits extensions if the taxpayer demonstrates reasonable cause and the granting of relief does not prejudice the government’s interests. The IRS’s analysis hinged on two core determinations: first, that the taxpayer’s failure to file the election was neither intentional nor part of a tax-avoidance strategy, and second, that the government’s interests remained unaffected by the delay.

The IRS found that the taxpayer had acted reasonably by relying on in-house tax professionals to prepare and file the return, as the error stemmed from a procedural oversight rather than a strategic omission. The taxpayer’s swift correction—discovering the omission during Month1 and immediately filing a request for relief under §§ 301.9100-1 and 301.9100-3—further supported its claim of good faith. The IRS emphasized that the taxpayer’s actions reflected ordinary business diligence, noting in its ruling that the failure to attach the election statement was a clerical misstep in an otherwise compliant filing. The agency concluded that this conduct satisfied the reasonable cause standard under § 301.9100-3(a).

The IRS determined there was no prejudice to the government, as the late election would not impair the IRS’s ability to assess or collect tax. The taxpayer’s proposed election aligned with its actual business use of the property and did not alter its tax liability for the year in question. The IRS explicitly stated that the granting of relief would not prejudice the government’s interests, a conclusion that hinged on the taxpayer’s representations about the property’s use and the absence of any prior inconsistent filings.

The IRS’s reasoning underscores the narrow scope of § 301.9100-3 relief. While the regulation provides a safety net for taxpayers who miss deadlines due to unintentional errors, it does not extend to those who fail to act with ordinary business care or whose late elections would otherwise distort tax reporting. The agency’s emphasis on the taxpayer’s prompt correction and reliance on professional advice signals that relief is most likely to be granted in cases where the error is isolated and promptly remedied. For tax-exempt controlled entities, this ruling serves as a reminder that the § 168(h)(6)(F)(ii) election must be treated with the same rigor as other regulatory elections.

The Election’s Impact: Depreciation and Beyond

The § 168(h)(6)(F)(ii) election fundamentally reshapes how tax-exempt controlled entities treat depreciable property, particularly when that property is leased to or used by tax-exempt organizations. Under Section 168(h), property owned by such entities is classified as tax-exempt use property and is subject to the Alternative Depreciation System (ADS) under Section 168(g), which mandates longer recovery periods and disallows bonus depreciation under Section 168(k). By making the § 168(h)(6)(F)(ii) election, a tax-exempt controlled entity can avoid this classification, allowing it to use the Modified Accelerated Cost Recovery System (MACRS) instead.

The election is irrevocable and binds all tax-exempt shareholders or beneficiaries of the taxpayer. The election must be made by filing an amended return for the relevant taxable year, accompanied by a § 301.9100-7T(a)(3) election statement and a copy of the PLR. The PLR and election statement must be attached to all subsequent returns (and amended returns) for years to which the ruling applies. If filed electronically, the taxpayer may satisfy the attachment requirement by including the PLR’s control number and date on the return. Failure to comply with these procedural requirements risks the election being disregarded, potentially subjecting the entity to ADS treatment retroactively.

The stakes are high. Without the election, entities face longer recovery periods and disallowed bonus depreciation, increasing taxable income in early years. The IRS’s willingness to grant relief in this instance underscores the importance of treating the election with procedural rigor.

Key Takeaways for Tax-Exempt Controlled Entities

Tax-exempt controlled entities must treat the § 168(h)(6)(F)(ii) election as a non-negotiable compliance step. The IRS’s recent relief in the $5M+ depreciation case underscores three critical lessons:

First, attach the election statement to the return or risk forfeiting the election entirely. The IRS’s § 301.9100-3 relief in the ruling hinged on the taxpayer’s ability to demonstrate that the election was "clearly indicated" on the filed return. Without this attachment, the election is treated as never made, triggering ADS under § 168(g) and its 40-year recovery period for nonresidential real property—an outcome that can erase millions in tax savings.

Second, § 301.9100-3 relief is available but not guaranteed. The IRS granted relief in this case because the taxpayer acted with "reasonable diligence" and the omission caused "no prejudice to the government." The ruling explicitly states that PLRs are non-precedential, so other taxpayers cannot rely on this outcome as binding precedent. Practitioners should file PLR requests only after documenting reasonable cause, such as reliance on a tax advisor’s advice or a clerical error.

Third, the consequences of missing the election are severe. Without the § 168(h)(6)(F)(ii) election, tax-exempt controlled entities face mandatory ADS treatment, which disallows bonus depreciation under § 168(k) and § 179 expensing. The election’s irrevocable nature means even a single oversight can lock in these costs for the asset’s entire recovery period.

Finally, attach PLRs and election statements to future returns to avoid repeat issues. The IRS’s ruling emphasized that "all material is subject to verification on examination." Tax-exempt controlled entities should implement internal controls to ensure election statements are filed with every return.

Disclaimer: PLRs are non-precedential and do not bind the IRS or other taxpayers. Entities in similar situations must still file their own PLR requests or ensure timely compliance to avoid adverse determinations. Consult a tax advisor to assess eligibility and filing strategies for your specific facts.