CCA 200923034: Closing agreement may permit a REIT to re-elect after asset-test failure

Plain-English summary

Chief Counsel forwarded an excerpt from earlier advice about a real estate investment trust that failed the 75 percent asset test. If the failure was due to reasonable cause, the district director could allow the taxpayer to re-elect REIT status under section 856(g)(4). A closing agreement addressing the tax consequences, and potentially preserving REIT status in relation to shareholders, was within the district director's discretion. Because the failure likely produced tax liability as a regular C corporation, the district director could require payment of a reasonable portion of the foregone tax as a condition of the agreement. The amount could reflect factors such as litigation hazards.

Ruling snapshot

• Question: Could a closing agreement permit a REIT to re-elect after a reasonable-cause failure of the 75 percent asset test, subject to payment?
• Outcome: Advice given, the agreement and a reasonable payment condition were within the district director's discretion
• Key authorities: IRC §§ 856(g)(4) and 7121

Full text (IRS public release)

ID: CCA-217525-09 Number: 200923034
Release Date: 6/5/2009
Office: ----------------
UILC: 856.00-00, 7121.00-00
__________
From: ---------------------
Sent: Tuesday, February 17, 2009 5:25 PM
To: -------------------
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)

Attachment:
1996 FSA Lexis 130