IRS Provides Procedure to Obtain Permission to Make Late §1.469-9(g)(3) Real Estate Professional Rental Grouping Election

The IRS, responding to a spate of Tax Court cases and applications for private letter rulings seeking relief under the late election provisions of Reg. §301.9100-3, has provided a procedure (Revenue Procedure 2011-34) granting automatic late election relief to certain taxpayers who meet the real property business requirements of §469(c)(7) to make the election required under §469(c)(7)(A) to treat all of the taxpayer’s interests in real property activities as a single activity.

Generally Reg. §1.469-9(g)(3) requires the taxpayer to attach this election to the first return to which the taxpayer wishes the grouping election to apply to. This election is generally needed for a taxpayer to get a real benefit of qualified real professional status, as the default treatment under §469(c)(A) of each rental as a separate activity makes it extremely difficult for a taxpayer to show sufficient hours of participation to meet the standard active participation tests found in Reg. 1.469-5T(a).

The IRS has granted relief, but only to taxpayers that have requested late election relief via the private letter ruling route before an exam commenced and who did so prior to the expiration of the statute of limitations for the first year for which the retroactive election would apply. The ruling liberalizes this process and removes the need to pay the user fee for the ruling.

To qualify for this relief the taxpayer must meet the following criteria:

“(1) the taxpayer failed to make an election under § 1.469-9(g) solely because the taxpayer failed to timely meet the requirements in §1.469-9(g);

(2) the taxpayer filed consistently with having made an election under § 1.469-9(g) on any return that would have been affected if the taxpayer had timely made the election. The taxpayer must have filed all required federal income tax returns consistent with the requested aggregation for all of the years including and following the year the taxpayer intends the requested aggregation to be effective and no tax returns containing positions inconsistent with the requested aggregation may have been filed by or with respect to the taxpayer during any of the taxable years;

(3) the taxpayer timely filed each return that would have been affected by the election if it had been timely made. The taxpayer will be treated as having timely filed a required tax or information return if the return is filed within 6 months after its due date, excluding extensions;

(4) the taxpayer has reasonable cause for its failure to meet the requirements in § 1.469-9(g).”

The taxpayer must represent that he/she meets all of the above requirements by signing a dated declaration, signed under penalties of perjury, that he/she meets all of the above requirements and must also state the reasonable cause being claimed. The statement is to be attached to an amended return for the most recent year, mailed to the service center where the taxpayer will file his/her current return. The statement must state at the top of the document “FILED PURSUANT TO REV. PROC. 2011-34.”

The IRS in the Revenue Procedure specifically mentions that reasonable cause standards are found at Reg. §301.9100-3(b)(1)(i)-(v), and notes such causes include having reasonably relied upon a tax professional, including one the taxpayer employs, and that the professional either failed to advise the taxpayer of the election or failed to make the election.

The IRS will notify taxpayers upon receipt of a completed application that meets the requirements of the procedure. Presumably that means the IRS will effectively have ruled the document, on its face, meets those requirements which, by extension, would mean that the IRS has deemed the stated “reasonable cause” to be adequate to grant relief. However, the ruling makes clear that the IRS is not precluded from finding that the taxpayer’s election, while meeting the procedural requirements, made representations on exam that prove to be untrue (that is, the IRS could examine and looks for facts to support the four representations made.

The procedure applies to all requests for relief received after June 13, 2011 and the National Office will decline to rule on all requests still pending as of June 13, 2011 and return the user fee that may have been paid.

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