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INDIVIDUALS

Sec. 1400Z-2: Special rules late-filed Form 1065 and Form 8996 to
Over the last several for capital gains invested in be considered timely filed.
opportunity zones
Finally, in IRS Letter Ruling
years, the popularity Several taxpayers recently requested 202233011, the accounting firm and tax
of residential rental letter rulings related to missing the adviser knew that the client intended to
apps, such as Airbnb, deadline to file Form 8996, Qualified invest an eligible gain in a QOF but did
Opportunity Fund, and self-certify in the not realize that the client had created
has grown rapidly. initial year of a qualified opportunity a partnership intended to be the QOF
fund (QOF). In IRS Letter Ruling and intended for the firm to prepare the
202223012, the LLC manager engaged partnership tax return. This was dis-
that Elizabeth was entitled to summary Firm 1 to prepare its tax return. Firm 1 covered after the initial due date of the
judgment, reversing the deficiency. was divided into two parts, the consult- partnership tax return. The IRS again
After consolidating the cases, the ing team and the tax compliance team. allowed the taxpayer to file a late Form
Tax Court granted summary judgment The manager provided to the consulting 1065 and Form 8996 to self-certify as
in favor of Elizabeth, agreeing with team of Firm 1 the operating agreement a QOF.
the IRS. that included the company’s purpose, All of these taxpayers intended to
The Tax Court focused on two of the emphasizing the taxpayer’s intent to self-certify as a QOF in the initial
four criteria in former Sec. 71(b)(1)76 qualify as a QOF. The tax compliance returns. The error was discovered
that define deductible alimony payments. team of Firm 1 completed and timely relatively close to the original filing
First, Andrew’s obligation to make filed the taxpayer’s Form 1065, U.S. deadline, which fitted nicely into the
payments would continue if Elizabeth Return of Partnership Income, but did not requirements for the Service to deter-
had died before the final payment was include Form 8996 in the tax return. In mine that the taxpayer acted reasonably
due. Second, the MTA designated the year 2, the tax compliance team became and in good faith and that the grant
payments as not includible in Eliza- aware of the omission. The IRS deter- of the relief would not prejudice the
beth’s gross income and not deductible mined that the taxpayer had acted rea- government’s interests. Different facts
by Andrew. sonably and in good faith and granted and circumstances may not receive the
Based on this and the need for the the relief to file an amended return to same determination.
two decisions to be consistent, the Tax make the election under Sec. 1400Z-2
Court granted summary judgment in and file Form 8996. Sec. 1402(a): Net earnings
the IRS’s favor in Andrew’s case. On In IRS Letter Ruling 202230001, from self-employment
appeal, the Eighth Circuit affirmed the LLC manager, intending to be a Over the last several years, the popular-
the decision. QOF, used two firms to prepare vari- ity of residential rental apps, such as
The outcome might have been dif- ous real estate partnership returns. The Airbnb, has grown rapidly. Individual
ferent if the MTA had been crafted manager engaged and intended for Firm taxpayers can use these apps to earn
differently. The Eighth Circuit com- 1 to prepare Form 1065 of the LLC, income by renting a spare bedroom, a
mented, “Rather surprisingly, given the which required Form 8996. Due to a guest house, or even a second property.
overall sophistication of the document” miscommunication, Firm 1 thought that There has been plenty of debate regard-
and the substantial state court litigation Firm 2 was preparing the return, and an ing the characterization of these rental
between the parties that followed, the extension for Form 1065 was not filed; activities as passive or nonpassive under
MTA “contained no provision clarify- thus, Form 1065 and Form 8996 were Sec. 469(c). However, whether the activ-
ing (designating) that the payments not filed by the due date, and the elec- ity is passive or nonpassive does not
in question were not includable in tion to self-certify as a QOF on Form affect whether the activity is included
Elizabeth’s gross income and allowable 8996 was not timely made. Form 1065, or excluded from net earnings from
as a deduction to Andrew.” Further, the including Form 8996, was filed after the self-employment.
MTA did not unambiguously state that discovery. The Service again determined In a memorandum released Dec. 23,
Andrew had no liability to make pay- that the taxpayer had acted reason- 2021, the IRS Office of Chief Counsel
ments after Elizabeth’s death. ably and in good faith and allowed the advised on issues related to whether

76. Sec. 71, which was repealed by the TCJA, generally does not apply to divorce or separation instruments signed after Dec. 31, 2018.

44 March 2023 The Tax Adviser