PLR 200827032: Two REITs get more time to elect taxable subsidiary status

Plain-English summary

Two real estate investment trusts indirectly owned a corporation through a partnership and intended it to be a taxable REIT subsidiary of both trusts from its formation. Their law firm and accounting firm each thought the other would file the required Form 8875, so the election was missed. The firms sought relief after finding the omission and before the IRS discovered it. The IRS granted 60 days from the letter to file the election with the intended effective date. The ruling covers filing timeliness only; it does not decide whether either trust qualifies as a REIT or whether the late election changes the companies' total tax liability.

Ruling snapshot

• Question: Can the two REITs make a late election to treat their indirectly owned corporation as a taxable REIT subsidiary?
• Outcome: Approved; Form 8875 may be filed within 60 calendar days of the letter.
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200827032
Third Party Communication: None
Release Date: 7/4/2008
Date of Communication: Not Applicable
Index Number: 856.00-00, 9100.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:FIP:B03
PLR-152460-07
Date:
March 20, 2008

LEGEND:

Company 1 = --------------------------------------------------------------

Company 2 = -------------------------------------------------------------------------
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Company 3 = -------------------------------------------------------------------------
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Company 4 = -------------------------------------------------------------------------
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State X = -------------

Date 1 = -------------------

Date 2 = -------------------

Date 3 = ----------------

Law Firm = ------------------

Accounting Firm = ------------------------------------

Dear ------------------:

This responds to a letter dated November 27, 2007, on behalf Company 1, Company 2, Company 3, and Company 4 requesting an extension of time under

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§ 301.9100-1 of the Procedure and Administration Regulations to make an election under § 856(l) of the Internal Revenue Code to treat Company 4 as a taxable REIT subsidiary of both Company 1 and Company 2.

FACTS

Company 1 and Company 2 are limited liabilities companies, formed on Date 1 and Date 2, respectively, under the laws of State X. Company 1 and Company 2 have elected to be treated as real estate investment trusts (“REITs”). Company 3, a partnership owned by both Company 1 and Company 2, was formed under the laws of State X on Date 2. Company 3 owns all the issued and outstanding shares of Company

4. Company 4 was formed on Date 2 and intended to be treated for federal tax
   purposes as a taxable REIT subsidiary of both Company 1 and Company 2 as of its date of formation.

   Company 1, Company 2, Company 3, and Company 4 relied on Law Firm and
   Accounting Firm to ensure proper entity formation and related filings, including the filing of the Form 8875 with the Service. While Law Firm was engaged to render legal advice and prepare all the documents in connection with the formation of Company 1, Company 2, Company 3, and Company 4, Accounting Firm was engaged to prepare tax returns for these companies. Each firm believed that the other one would prepare the Form 8875. The failure to file the Form 8875 was discovered on Date 3 by Managing Director of Accounting Firm. Immediately upon discovering the failure to file, Accounting Firm requested an extension of time to file the election.

   Company 1, Company 2, Company 3, and Company 4 make the following
   additional representations:
   1. The request for relief was filed by Company 1, Company 2, Company 3,
   and Company 4 before the failure to make the regulatory election was
   discovered by the Service.
   2. Granting the relief requested will not result in Company 1, Company 2,
   Company 3, or Company 4 having a lower tax liability in the aggregate
   for all taxable years affected by the election than they would have had if
   the election had been timely made (taking into account the time value of
   money).
   3. Company 1, Company 2, Company 3, and Company 4 do not seek to
   alter a return position for which an accuracy-related penalty has been or
   could have been imposed under section 6662 of the Code at the time
   they requested relief and the new position requires or permits a
   regulatory election for which relief is requested.
   4. Being fully informed of the required regulatory election and related tax
   consequences, Company 1, Company 2, Company 3, and Company 4
   did not choose to not file the election.

                            LAW AND ANALYSIS
   
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   The Ticket to Work and Work Incentives Improvement Act of 1999, P.L. 106-170,
   included a change, for tax years beginning after December 31, 2000, to the REIT provisions of § 856(d). This change allows a REIT to form a Taxable REIT Subsidiary that can perform activities that otherwise would result in impermissible tenant service income. The election under § 856(l) is made on Form 8875, “Taxable REIT Subsidiary Election.” Officers of both the REIT and the Taxable REIT Subsidiary must jointly sign the form, which is filed with the IRS Service Center in Ogden, UT.

   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 Service 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 2 months and 15 days prior to the date of filing the election, or 12 months after the date of filing the election. If no date is specified on the form, the election is effective on the date the form is filed with the Service.

   Section 301.9100-1(c) of the regulations 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 particular 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

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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 submitted and representations made, we conclude that Company 1, Company 2, Company 3, and Company 4 have satisfied the requirements for granting a reasonable extension of time to elect under § 856(l) to treat Company 4 as a taxable REIT subsidiary of both Company 1 and Company 2. Accordingly, Company 1, Company 2, and Company 4 will be granted a period of time not to exceed 60 calendar days from the date of issuance of this letter to file the Form 8875 to treat Company 4 as a taxable REIT subsidiary of both Company 1 and Company 2 as of Date 2.

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 either Company 1 or Company 2 qualifies as a REIT under subchapter M of the Code.

No opinion is expressed with regard to whether the tax liability of either Company 1, Company 2, Company 3 or Company 4 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.

The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter

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

PLR-152460-07
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In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

Alice M. Bennett
Chief, Branch 3
Office of Associate Chief Counsel
(Financial Institutions and Products)

Enclosures:
Copy of the letter
Copy for section 6110 purposes

cc: