PLR 201016039: Late taxable REIT subsidiary election treated as timely

Plain-English summary

The IRS granted a REIT and its subsidiary 60 days to make a late election treating the subsidiary as a taxable REIT subsidiary effective as of an earlier date. The election was missed after the trust's chief financial officer resigned and an interim CFO assumed the duties. The IRS found that the taxpayers met the requirements for a reasonable extension and limited the ruling to the timeliness of Form 8875. It did not rule on whether the trust qualified as a REIT or whether the corporation otherwise qualified as a taxable REIT subsidiary.

Ruling snapshot

• Question: May a REIT and its subsidiary make a late taxable REIT subsidiary election effective as of an earlier date?
• Outcome: Approved
• Key authorities: IRC § 856(l); Treas. Reg. §§ 1.856-2(b) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201016039
Release Date: 4/23/2010
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-140509-09
----------------------------------------------- Date:
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January 08, 2010

LEGEND:

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

Operating Partnership = -----------------------------------------------

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

State Y = -------------

a = ---

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

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

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

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

This responds to a letter dated September 3, 2009, on behalf of Trust and Company A requesting an extension of time under § 301.9100-1 of the Procedure and
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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 effective as of Date 2.

FACTS

Trust, a State X corporation, was incorporated on Date 1. It has elected to be treated for federal income tax purposes as a real estate investment trust. It owns its assets and conducts its operations through Operating Partnership and owns an approximately a percent interest in Operating Partnership. Company A, a State Y corporation, was incorporated on Date 2 as a wholly owned subsidiary of Company B, a State Y limited liability company, that is wholly owned by Operating Partnership. Two other wholly owned subsidiaries of Company B were formed that acquired real estate property and leased it to Company A.

The chief financial officer (CFO) of Trust was responsible for ensuring that a taxable REIT subsidiary election was made for Company A. At the time of the transaction, however, the CFO resigned his position, and a new interim CFO took over his duties. As a result of these changes, the taxable REIT subsidiary election was not made until the failure to file was discovered the following year. Trust and Company A subsequently filed Form 8875 with the Service making a taxable REIT subsidiary election for Company A with an effective date of Date 3. Trust and Company now seek relief to make an election to treat Company A as a taxable REIT subsidiary of Trust effective as of Date 2.

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).
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
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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 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
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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 2. 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 or whether Company A otherwise qualifies as a taxable REIT subsidiary 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.

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.
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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
Alice M. Bennett
Chief, Branch 3
Office of Associate Chief Counsel
(Financial Institutions & Products)
Enclosures:
Copy of this letter
Copy for section 6110 purposes