CCA 200913057: A REIT closing agreement could require part of the forgone corporate tax

Plain-English summary

Chief Counsel forwarded earlier field-service advice about a REIT's failure of the 75 percent asset test. If the district director found reasonable cause, the taxpayer could reelect REIT status under section 856(g)(4). A closing agreement could resolve the tax consequences and, at the director's discretion, preserve the REIT's status in relation to its shareholders for the relevant period. Because the failure likely produced corporate-level tax liability, the director could require a reasonable portion of the forgone tax as a condition of the agreement. Counsel offered help drafting the agreement and evaluating an offer in light of factors such as litigation hazards.

Ruling snapshot

• Question: What relief and payment terms could a closing agreement provide after a reasonable-cause failure of the REIT asset test?
• Outcome: Advice given: the agreement could support renewed REIT status, resolve the affected tax consequences, and require payment of a reasonable share of forgone tax.
• Key authorities: IRC §§ 856(g)(4) and 7121.

Full text (IRS public release)

ID: CCA_2009022721454669 Number: 200913057
Release Date: 3/27/2009
Office: ----------------
UILC: 856.00-00, 7121.00-00

From: -----------------
Sent: Friday, February 27, 2009 9:45:47 PM
To: -----------------
Cc:
Subject: FYI: Previously mentioned FSA addressing a REIT closing agreement; reasonable cause, and
the amount of a payment as a condition of the closing agreement

-------FYI, you may find of interest the attached FSA I've mentioned from time-to-time but may not have
cited or forwarded to you previously. Following is a brief excerpt:

Generally, if the District Director determines that the taxpayer's failure of the 75% asset test was due to reasonable cause, taxpayer would be eligible to re-elect REIT status for its [TEXT REDACTED] tax year pursuant to I.R.C. § 856(g)(4). A closing agreement setting forth the District Director's determination and resolving the REIT's tax consequences for [TEXT REDACTED] (including, if the District Director so chooses, a provision that preserves the REIT's status for [TEXT REDACTED] vis-a-vis its shareholders) is within the District Director's discretion.

As the taxpayer's violation of the 75% asset test would, in all likelihood, result in a positive tax liability (computed as for a regular subchapter C corporation) for [TEXT REDACTED], the District Director may require the taxpayer to remit some reasonable portion of the foregone tax as a condition of the closing agreement. This office would be available to help draft such a closing agreement and to discuss those factors, including litigation hazards, which should be taken into consideration in evaluating the merits of any offer by taxpayer.

(Emphasis added)