PLR 200152010: REIT and subsidiary granted time to resend rejected election form

Plain-English summary

A real estate investment trust and its wholly owned subsidiary prepared and mailed Form 8875 to elect taxable REIT subsidiary status effective January 1, 2001. The Postal Service returned the form because the mailing was short $1.14 in postage, so it was not filed by the deadline. The IRS granted the companies up to 45 days from the ruling date to resubmit the form for the intended effective date. The ruling addressed only timely filing and did not decide whether the parent qualified as a REIT. The IRS also left the aggregate tax liability condition for the director's office to examine on audit.

Ruling snapshot

• Question: Could the companies resubmit a taxable REIT subsidiary election after the original mailing was returned for insufficient postage?
• Outcome: Approved: resubmit Form 8875 within 45 days of the ruling.
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1 and 301.9100-3; Announcement 2001-17.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200152010
Washington, DC 20224
Release Date: 12/28/2001
Index Numbers: 856.07-00, 9100.00-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:FIP:3 / PLR-125489-01
Date:
September 24, 2001

LEGEND

Company A
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Company B
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Firm
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Date 1
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Date 2
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Date 3
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Date 4
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Date 5
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Date 6
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City X
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a
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b
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Dear

This ruling responds to a letter dated May 4, 2001, submitted on behalf of Company A and Company B, requesting an extension of time under § 301.9100-1 of the Procedure and Administration Regulations to make an election under § 856(l) of the Internal Revenue Code to treat Company B as a taxable REIT subsidiary of Company A.

FACTS
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Company B was organized as a holding company on Date 1 to lease, through its a wholly owned subsidiaries, hotels from its owner, Company A. Company B is a wholly- owned subsidiary of Company A. Company A is a corporation that has elected status as a real estate investment trust (REIT). Company A was formed on Date 2, and currently owns b hotels.

The Tax Relief Extension Act of 1999, P.L. 106-170, included a change to the REIT provisions of § 856(d) which allows a REIT to earn, through a taxable REIT subsidiary, otherwise impermissible tenant service income with respect to certain lodging facilities so long as the property is operated on behalf of such subsidiary by a person who is an eligible independent contractor. The change was effective for tax years beginning after December 31, 2000.

The election under § 856(l) is made on Form 8875, “Taxable REIT Subsidiary Election,” and the effective date of the election cannot be more than two months and 15 days prior to the date of filing the election. Officers of both the REIT and the taxable REIT subsidiary must jointly sign the form. Therefore, to treat Company B as a taxable REIT subsidiary as of January 1, 2001, a Form 8875 would have had to have been filed with the Internal Revenue Service Center in Ogden, UT, on or before March 15, 2001.

A Form 8875 was prepared during late Date 3, by the Controller of Company B and Vice-President and Controller of Company A, who then forwarded the form to Firm, which provides tax consulting and tax return preparation services to both Company A and Company B. Firm reviewed the Form 8875, made some revisions to the information on the form and returned it to Company B on or about Date 4. Firm had also included a properly addressed envelope for mailing the Form 8875 to the Ogden Service Center. The return address on the envelope was that of the Firm’s City X office. On Date 5, the Executive Vice-President and Chief Financial Officer of Company A signed the form on behalf of Company A, and the President of Company B signed on behalf of Company B. On that same date, the form was placed in the envelope provided by Firm and mailed by certified mail, return receipt requested. The mailing was prepared by the administrative staff of Company A and Company B, which used its own private postage meter machine to determine the appropriate amount of postage for mailing through the U.S. Post Office.

On Date 6, the envelope containing the Form 8875 was returned to Firm marked “RETURNED TO SENDER-- REFUSED-- Postage Due $ 1.14.” The envelope also showed the Date 5 postmark from the local Post Office. The employee of Company A and Company B who had prepared the mailing had erred in the calculation of the necessary postage and was short $1.14 of postage. As a result of this inadvertent error, the Form 8875 was not timely filed with the Service. Consequently, Firm submitted a private letter ruling request under § 301.9100 to request an extension of time to file the Form 8875 to elect to treat Company B as a taxable REIT subsidiary of Company A.

LAW AND ANALYSIS
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Section 856(l) of the Code provides that a REIT and a corporation (other than a REIT) may jointly elect to treat such corporation as a taxable REIT subsidiary. To be eligible for treatment as a taxable REIT subsidiary, § 856(l)(1) provides that the REIT must directly or indirectly own stock in the corporation, and the REIT and the corporation must jointly elect such treatment. The election is irrevocable once made, unless both the REIT and the subsidiary consent to its revocation. In addition, § 856(l) specifically provides that the election, and any revocation thereof, may be made without the consent of the Secretary.

In Announcement 2001-17, 8 I.R.B. 716, the IRS announced the availability of new Form 8875, Taxable REIT Subsidiary Election. According to the Announcement, this form is to be used for tax years beginning after 2000 for eligible entities to elect treatment as a taxable REIT subsidiary. The instructions to Form 8875 provide that the subsidiary and the REIT can make the election at any time during the tax year. However, the effective date of the election depends upon when the Form 8875 is filed. The instructions further provide that the effective date on the form cannot be more than two months and 15 days prior to the date of filing the election, or twelve months after the date of filing the election. In addition, if no date is specified on the form, the election is effective on the date the form is filed with the IRS. Form 8875 is filed with the IRS Service Center in Ogden, UT.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election (defined in § 301.9100-1(b) as an election whose due date is prescribed by regulations or by a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin), or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Section 301.9100-3(a) through (c)(1)(i) sets forth rules that the Internal Revenue Service generally will use to determine whether, under the facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of § 301.9100-2. Section 301.9100-3(b) provides that subject to paragraphs (b)(3)(i) through (iii) of § 301.9100-3, when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the Service, the taxpayer will be deemed to have acted reasonably and in good faith; and § 301.9100-3(c) provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made (taking into account the time value of money).

CONCLUSION

Based on the information and representations submitted, we conclude that Company A and Company B have satisfied the requirements for granting a reasonable extension of time to elect under § 856(l) to treat Company B as a taxable REIT 4 PLR-125489-01

subsidiary of Company A as of January 1, 2001. Therefore, Company A and Company B are granted a period of time not to exceed 45 days from the date of this letter to re- submit the Form 8875.

This ruling is limited to the timeliness of the filing of the Form 8875. This ruling’s application is limited to the facts, representations, Code sections, and regulations cited herein. No opinion is expressed with regard to whether Company A qualifies as a REIT under subchapter M of the Code.

No opinion is expressed with regard to whether the tax liability of Company A and Company B is not lower in the aggregate for all years to which the election applies than such tax liability would have been if the election had been timely made (taking into account the time value of money). Upon audit of the federal income tax returns involved, the director’s office will determine such tax liability for the years involved. If the director’s office determines that such tax liability is lower, that office will determine the federal income tax effect.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

In accordance with the provisions of a Power of Attorney currently on file, we are sending a copy of this ruling letter to your authorized representatives.

Sincerely yours,
ALICE M. BENNETT
Chief, Branch 3
Office of Associate
Chief Counsel
(Financial Institutions & Products)

Enclosures:
Copy of this letter
Section 6110 Copy