PLR 201006020: IRS extended time for a Taxable REIT Subsidiary election

Plain-English summary

The IRS granted a real estate investment trust and its wholly owned corporation 60 days to make a late election treating the corporation as a Taxable REIT Subsidiary under section 856(l). The corporation had changed its tax classification in anticipation of the election, but the trust learned about relevant real estate sales only after the intended filing period. The IRS found that the applicants satisfied the requirements for a reasonable extension and allowed the election to be effective as of the represented date. The ruling was limited to the timeliness of Form 8875 and did not decide whether the trust otherwise qualified as a REIT.

Ruling snapshot

• Question: Could the trust and corporation receive more time to make the Taxable REIT Subsidiary election under IRC § 856(l)?
• Outcome: approved, with 60 days to make the election
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1 and 301.9100-3; IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201006020
Release Date: 2/12/2010
Index Numbers: 856.00-00, 9100.00-00
Person To Contact:
------------------, ID No. ------------- Telephone Number:
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--------------------------------------------------------------- Refer Reply To:
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CC:FIP:B03 – PLR-130929-09
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Date:
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October 23, 2009

LEGEND:

Trust = -------------------------------------------------------------------------
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Company A = ------------------------------------------------------
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Company B = ---------------------------------------------

Company C = ----------------------------------------------------

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

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

a = --------

b = ---

Year 1 = --------

Year 2 = -------

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

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

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

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

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

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

This responds to a letter dated June 25, 2009, on behalf of Trust and Company A 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 A as a Taxable REIT Subsidiary of Trust.

FACTS

Trust, organized in Year 1 in State X, has elected to be treated as a real estate investment trust (REIT) under § 856 of the Code. Trust invests in real property through its subsidiaries. Trust wholly owns Company A, a State X corporation, organized on Date 1. Company A is a member of Company B, holding an a percent interest. Company B is a member of Company C, holding a b percent interest. Both Company B and Company C are joint venture partnerships formed to acquire a parcel of real property directly held by Company C.

Accounting Firm advised Trust to make an election under § 856(l) to treat Company A as a Taxable REIT Subsidiary of Trust prior to the time any potential sales of interests in the real property held by Company C took place. In anticipation of making the § 856(l) election, Company A elected a change in classification to that of corporation, effective on Date 2.

Company C failed to notify Company A timely about real estate sales made by Company C during Year 2. Company A learned about these sales on Date 3. Immediately afterwards, Trust and Company A filed Form 8875 and elected for Company A to be treated as a Taxable REIT Subsidiary of Trust, effective as of Date 4. Now they are seeking permission to make the election effective as of Date 5.

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

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3. Trust and Company A 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, Trust and Company A 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 Trust and Company A have satisfied the requirements for granting a reasonable extension of time to elect under § 856(l) to treat Company A as a taxable REIT subsidiary of Trust, effective as of Date 5. Trust and Company A have 60 days from the date of this letter to make the intended election.

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

No opinion is expressed with regard to whether the tax liability of Trust and Company A 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

cc: