PLR 201007048: IRS granted an extension for a taxable REIT subsidiary election

Plain-English summary

The IRS granted a real estate investment trust and a corporation an extension of time to make a joint election to treat the corporation as a taxable REIT subsidiary. The parties intended to make the election, but their tax advisers did not realize that the election had to be filed within a prescribed time frame. The IRS concluded that the parties satisfied the requirements for relief and gave them 30 days from the date of the letter to file Form 8875, effective as of the requested date. The ruling was limited to the timeliness of that filing and did not decide whether the entities otherwise qualified as a REIT or taxable REIT subsidiary.

Ruling snapshot

• Question: Could the parties receive an extension of time to make the joint taxable REIT subsidiary election under IRC § 856(l)?
• Outcome: Approved
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201007048                                               Third Party Communication: None
Release Date: 2/19/2010                                         Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.00-00
                                                                Person To Contact:
-----------------------------------------                       ---------------, ID No. -------------
----------------------------------                              Telephone Number:
----------------------------------------------------            ---------------------
 ------------------------------                                 Refer Reply To:
                                                                CC:FIP:B02
                                                                PLR-141327-09
                                                                Date:
                                                                November 03, 2009


Legend:

Taxpayer                   =        -------------------------------------------------------------

Corporation                =        ---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

State A                    =        ------------

State B                    =        ------------

x                          =        -----

Advisor                    =        -----------------------------

Lawyer                     =        -------------------------------------------------

Accountant                 =        -------------------------

Month 1                    =        ----------

Month 2                    =        ------

Year 1                     =        -------

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

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

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

PLR-141327-09                                     2

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


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

       This is in reply to a letter dated September 11, 2009, requesting a ruling on
behalf of Taxpayer and Corporation. Specifically, you have requested that Taxpayer
and Corporation be granted an extension of time under section 301.9100-1 of the
Procedure and Administration Regulations to file Form 8875, Taxable REIT Subsidiary
Election, so that Taxpayer and Corporation may jointly elect for Corporation to be
treated as a taxable REIT subsidiary (TRS) of Taxpayer effective Date 3.

Facts:

       Taxpayer was incorporated under the laws of State A on Date 2 and intends to
make an election to be treated as a real estate investment trust (REIT) under
subchapter M of the Internal Revenue Code effective for the Year 1 tax year.
Corporation was formed as a limited liability company under the laws of State B on Date
1 and filed an election under section 301.7701-3(c) of the Income Tax Regulations to be
taxed as a corporation for federal income tax purposes. Taxpayer owns x% of the
interests in Corporation.

          Taxpayer and Corporation are externally managed and advised by Advisor and
its affiliates. The vice president of tax of Advisor (Vice President) is the primary advisor
on tax matters for Taxpayer and Corporation.

      Advisor organized Taxpayer for the specific purpose of qualifying as a REIT that
would own healthcare properties and lease such properties to a TRS. Taxpayer and
Corporation intended to make a joint election under § 856(l) to treat Corporation as a
TRS of Taxpayer.

       REIT and Corporation closed on the purchase of a healthcare properties portfolio
in Month 1 of Year 1. Since the closing of the acquisition, Advisor has monitored the
operations and activities of REIT to ensure compliance with REIT requirements.
Furthermore, Advisor engaged Lawyer to provide tax advice including a tax opinion to
be rendered to the investors of REIT.

        In Month 2 of Year 1, Vice President realized that a TRS election had not been
filed for Corporation. While Advisor understood that it was necessary to utilize a TRS to
serve as a lessee of the healthcare properties, Vice President and the other members of
Advisor’s tax department were unaware of the need to file an actual TRS election within
a proscribed time frame.

PLR-141327-09                                  3

       In late Month 2 of Year 1, Vice President discussed the failure to file the TRS
election with Accountant. Accountant advised that Taxpayer and Corporation file a
Form 8875 and seek a letter ruling requesting an extension of time to make the election.
Taxpayer and Corporation filed the Form 8875 on Date 4.

        Taxpayer and Corporation make the following representations. The granting of
relief under section 301.9100-3 would not result in Taxpayer or Corporation having a
lower tax liability in the aggregate for all years to which the election applies than each
would have had if the election had been timely made (taking into account the time value
of money). Neither Taxpayer nor Corporation knowingly chose not to file the election.
Neither Taxpayer nor Corporation used hindsight in requesting relief. Finally, Taxpayer
and Corporation represent that they are not seeking to alter a return position for which
an accuracy-related penalty has been or could be imposed under section 6662.
Taxpayer has submitted affidavits of Vice President and an employee of Lawyer all
attesting to and supporting the facts and representations underlying this ruling request.

Law and Analysis:

        Section 856(l) 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, section 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, the election and the
revocation may be made without the consent of the Secretary.

        In Announcement 2001-17, 2001-1 C.B. 716, the Internal Revenue Service
(Service) announced the availability of 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. The instructions further provide that the
effective date of the election cannot be more than 2 months and 15 days prior to the
date of filing the election, or more than 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. 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, Utah.

      Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time to make a regulatory election (defined in section
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

PLR-141327-09                                  4

the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code
except subtitles E, G, H, and I.

      Sections 301.9100-3(a) through (c)(1)(i) set 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 section 301.9100-2. Section
301.9100-3(b) provides that subject to paragraphs (b)(3)(i) through (iii) of section
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 section 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).

        Based on the information submitted and representations made, we conclude that
Taxpayer and Corporation have satisfied the requirements for granting a reasonable
extension of time to elect under § 856(l) to treat Corporation as a TRS of Taxpayer
effective as of Date 3. Accordingly, Taxpayer and Corporation are granted 30 days
from the date of this letter in which to file Form 8875 to make the intended TRS 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 Taxpayer otherwise qualifies as
a REIT or whether Corporation would otherwise qualify as a TRS under subchapter M of
the Code.

      No opinion is expressed with regard to whether the tax liability of either Taxpayer
or Corporation 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.

PLR-141327-09                               5


      This ruling is directed only to the taxpayers who requested it. Section 6110(k)(3)
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,


                                     ___________________________
                                     David B. Silber
                                     Chief, Branch 2
                                     (Financial Institutions & Products)