PLR 200922011: Late taxable REIT subsidiary election received filing relief

Plain-English summary

A real estate investment trust and a corporation intended to elect taxable REIT subsidiary status, but their accounting firm inadvertently failed to prepare the required Form 8875 by the deadline. The omission was discovered when the taxpayer requested a copy of the form, after which the accounting firm immediately prepared and filed it. The taxpayers represented that they sought relief before the IRS discovered the failure, had not deliberately declined to elect, and would not obtain a lower aggregate tax liability from the late election. The IRS concluded that they met the requirements for a reasonable extension under the section 301.9100 regulations. It treated the filed Form 8875 as timely and effective on the requested date, without ruling on whether the parent qualified as a REIT.

Ruling snapshot

• Question: Could a late Form 8875 election to treat a corporation as a taxable REIT subsidiary be treated as timely?
• Outcome: Approved: the filed election was treated as timely and effective on the requested date.
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1, 301.9100-3; Announcement 2001-17.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200922011
Release Date: 5/29/2009
Index Numbers: 856.00-00, 9100.00-00

------------------------------------------------ Person To Contact:
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Refer Reply To:
CC:FIP:B03
PLR-144667-08
Date:
February 13, 2009

LEGEND:

Company = ----------------------------------------

Partnership = -------------------------------------------------------

Parent = ---------------------------------------------------

Subsidiary = -----------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------

State X = -------------

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

a = ------

b = -----

c = -----

d = --

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

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

Date 3 = ----------------
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Date 4 = ------------------

Date 5 = -----------------

Date 6 = -----------------------

Date 7 = -----------------

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

This responds to a letter dated October 15, 2008, on behalf of Parent and Subsidiary 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 Subsidiary as a taxable REIT subsidiary of Parent.

FACTS

Company was organized as a State X real estate investment trust (REIT) on Date 1 to buy, own, redevelop and lease hotels. It owns a percent of the outstanding partnership interest in Partnership. Partnership previously owned b percent of the stock of Subsidiary. On Date 2, Company and Subsidiary made a Taxable REIT Subsidiary Election to treat Subsidiary as a taxable REIT subsidiary of Company. On Date 3, Partnership created Parent, which was organized as a REIT. Partnership owns c percent of Parent’s common stock. On Date 3, Parent purchased d shares of preferred stock of Subsidiary.

During the creation of Parent, Accounting Firm informed Company that a Taxable REIT Subsidiary Election would need to be made so that Subsidiary would be considered as a taxable REIT subsidiary of Parent. Accounting Firm inadvertently failed to prepare the election on a timely basis. The Taxable REIT Subsidiary Election was due to be filed by Date 4.

On Date 5, Company requested that Accounting Firm provide it with a copy of a Taxable REIT Subsidiary Election (Form 8875) that it believed Accounting Firm had filed on its behalf. After reviewing its files, Accounting Firm determined that the election had not been prepared, and immediately prepared the election form that was filed on Date 6.

Parent and Subsidiary make the following additional representations:
1. The request for relief was filed by Parent and Subsidiary before the failure to make regulatory elections was discovered by the Service.
2. Granting the relief requested will not result in Parent and Subsidiary having a lower tax liability in the aggregate for all years to which the regulatory election
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applies then that they would have had if the election had been timely made (taking into account the time value of money).
3. Parent and Subsidiary did 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, Parent and Subsidiary did not choose to not file the election.

LAW AND ANALYSIS

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
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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 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 Parent and Subsidiary have satisfied the requirements for granting a reasonable extension of time to elect under § 856(l) to treat Subsidiary as a taxable REIT subsidiary of Parent. Accordingly, the Form 8875 to treat Subsidiary as a taxable REIT subsidiary of Parent filed by Parent and Subsidiary on Date 6 will be treated as timely filed and effective as of Date 7.

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 Parent qualifies as a REIT under subchapter M of the Code.

No opinion is expressed with regard to whether the tax liability of Parent and Subsidiary 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.
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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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives.

Sincerely,

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

Enclosures:
Copy of this letter
Copy for section 6110 purposes