IRS Private Letter Ruling Permits Taxpayer to Change Minimum Set-Aside Election on Form 8609
By A.J. Johnson
On February 27, 2026, the Internal Revenue Service issued Private Letter Ruling 202609015 (PLR-118742-25), in which the IRS granted a taxpayer an extension of time under §§301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to file an amended Form 8609, Low-Income Housing Credit Allocation and Certification, to correct a minimum set-aside election under Section 42(g)(1) of the Internal Revenue Code.
The ruling is important because the minimum set-aside election made on Form 8609 is explicitly irrevocable under Section 42(g)(1). However, the IRS determined that the taxpayer’s failure to elect the intended set-aside—the Average Income Test under Section 42(g)(1)(C)—was an unintentional error that qualifies for administrative relief. This article looks at the ruling, the legal framework supporting the relief, and the practical effects for LIHTC owners and practitioners.
Section 42(g)(1) requires each LIHTC project to meet one of three minimum set-aside tests to qualify as a "qualified low-income housing project." The taxpayer makes this election on IRS Form 8609, and once made, the election cannot be revoked. The three available elections are:
• The 20-50 Test (Section 42(g)(1)(A)): At least 20 percent of the residential units must be both rent-restricted and occupied by individuals whose income is 50 percent or less of the area median gross income (AMGI).
• The 40-60 Test (Section 42(g)(1)(B)): At least 40 percent of the residential units must be both rent-restricted and occupied by individuals whose income is 60 percent or less of AMGI.
• The Average Income Test (Section 42(g)(1)(C)): At least 40 percent (or 25 percent for projects described in Section 142(d)(6)) of the residential units must be both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation set by the taxpayer for each unit.
The Average Income Test, implemented through the Consolidated Appropriations Act of 2018, allows owners greater flexibility in setting income limits for individual units, provided that the average of the designated income limits across all low-income units does not exceed 60 percent of AMGI. Since its adoption, the Average Income Test has become increasingly popular, especially for mixed-income properties and projects aiming to serve a wider range of income levels.
The taxpayer in PLR 202609015 owned and operated a single-building LIHTC project. The building had been placed in service, and the taxpayer elected under Section 42(f)(1) to start the credit period in the year after the placed-in-service year.
The taxpayer’s contemporaneous documents showed that the taxpayer intended to make the Average Income minimum set-aside election under Section 42(g)(1)(C). However, when filing Form 8609, the taxpayer accidentally did not check the box for the Average Income election. The taxpayer’s authorized representative submitted a request for relief on September 17, 2025, asking the IRS for an extension of time to file an amended Form 8609 reflecting the intended election.
The IRS’s authority to grant extensions of time for regulatory and statutory elections is outlined in §§301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations. The minimum set-aside election under Section 42(g)(1) qualifies as a "regulatory election" because its due date is set by regulation—specifically, the election is made on Form 8609 as part of the first-year certification required under Section 42(l)(1).
Because the set-aside election does not qualify for the automatic extensions available under §301.9100-2, the taxpayer sought relief under the more general provisions of §301.9100-3. Relief under this section requires the taxpayer to meet a two-part test:
• Reasonable and Good Faith Action. The taxpayer must provide evidence proving that it acted reasonably and in good faith. The presence of contemporaneous documents showing the taxpayer’s intent to make a specific election is strong evidence of reasonable conduct.
• No prejudice to the government. Granting the relief must not harm the government's interests. In a set-aside election, switching from one election to another usually does not impact the amount of credit claimed, so the government’s interest is typically not affected.
In this case, the IRS determined that both parts of the test were satisfied. The taxpayer’s contemporaneous documents demonstrated the intent to choose the Average Income Test, and the accidental failure to check the correct box on Form 8609 was consistent with an administrative mistake rather than a deliberate change in position.
The IRS granted the taxpayer an extension to make the Section 42(g)(1)(C) election (the Average Income Test) by submitting an amended Form 8609 within 120 days of the date of the ruling letter (November 24, 2025). The amended Form 8609, along with a copy of the ruling letter, was to be filed with the IRS Philadelphia campus at the address listed in the Form 8609 instructions.
The IRS specifically limited its ruling to the procedural extension of time. It did not express an opinion on whether the project qualifies as a qualified low-income housing project or whether the building is eligible for credits under Section 42. The ruling is only binding on the particular taxpayer that requested it and cannot be cited or used as precedent under Section 6110(k)(3).
While private letter rulings cannot be cited as precedent, they offer valuable insights into the IRS’s administrative stance on specific issues. PLR 202609015 presents several key takeaways for the LIHTC industry.
The most important part of this ruling is that it shows the IRS is willing to treat the minimum set-aside election as a "regulatory election" that can qualify for §301.9100 relief, despite the language in Section 42(g)(1) stating the election is "irrevocable." This is a significant difference. The irrevocability rule stops a taxpayer from changing their election intentionally after it’s made, but it doesn’t stop the IRS from granting extra time to make the correct election if the taxpayer proves that the filing did not reflect their true intent.
The IRS’s analysis relied on the existence of recent documents showing the taxpayer’s intent to choose the Average Income Test. This highlights the importance of keeping clear records throughout the allocation and placement process. Relevant documents might include the original allocation application, regulatory agreements referencing the Average Income election, partnership or operating agreements detailing the intended set-aside, correspondence with the state allocating agency, and unit designation records reflecting the Average Income method.
Relief under §301.9100-3 is not automatic. It requires a formal private letter ruling request to the IRS, which involves preparing and submitting a detailed request letter, paying a user fee (currently $38,000 for a standard PLR request, with reduced fees available for certain smaller taxpayers under Rev. Proc. 2025-1), and signing a penalty of perjury statement. The cost and complexity of the PLR process emphasize the importance of getting the Form 8609 election right the first time.
This ruling reminds us that submitting the Form 8609 is a critical step in the LIHTC compliance process. The form includes the minimum set-aside election, the decision to start the credit period in the following year, and the building owner’s certification. Owners, developers, and their advisors should establish quality control procedures to ensure the form accurately reflects the intended elections before submitting it to the IRS. Special attention should be given to the Average Income Test election, a newer option that may be overlooked by those more familiar with the traditional 20-50 or 40-60 elections.
The IRS gave the taxpayer 120 days from the date of the ruling to file the amended Form 8609. This is a typical timeframe in §301.9100 relief rulings. Taxpayers who identify a set-aside election mistake should act quickly. The longer the delay between the original filing and the relief request, the harder it may be to prove that the taxpayer acted reasonably and in good faith—especially if the project has been operated under the initially elected set-aside rather than the one now claimed to be intended.
PLR 202609015 is a welcome development for LIHTC owners who might have accidentally made an error in their minimum set-aside election on Form 8609. The ruling shows that the IRS will consider §301.9100 relief in appropriate cases, provided the taxpayer can prove the mistake was truly accidental and that recent documentation supports the intended election. However, the ruling also highlights that the relief process is neither cheap nor automatic. The best approach remains prevention: careful review and verification of every Form 8609 before submitting it to the IRS.
Disclaimer: This article is for informational and educational purposes only and does not constitute legal or tax advice. Private letter rulings may not be cited or used as precedent under Section 6110(k)(3) of the Internal Revenue Code. Readers should consult with qualified legal and tax counsel regarding their specific circumstances.
© 2026 A.J. Johnson Consulting Services, Inc. All rights reserved.
Subscribe to our news articles to stay up to date.
We care about the protection of your data. Read our Privacy Policy.