PLR 1039021: IRS granted more time to elect taxable REIT subsidiary status

Plain-English summary

Two companies asked the IRS for more time to jointly elect to treat a wholly owned subsidiary as a taxable REIT subsidiary. Their advisers and lawyers each believed the other party was responsible for filing Form 8875, so the election was not filed on time. The IRS concluded that the companies met the requirements for relief under the applicable regulations and allowed them 60 days to make the election, effective as of the redacted date. The ruling addressed only the timing of the election and did not decide whether the parent qualified as a REIT or whether the subsidiary otherwise qualified for that status.

Ruling snapshot

• Question: Could the companies receive more time to make the § 856(l) taxable REIT subsidiary election?
• 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: 201039021
Release Date: 10/1/2010
Index Numbers: 856.00-00, 9100.00-00

----------------------------------------------- Person To Contact:
----------------------------------- ------------------, ID No. -----------------
--------------------------------------- Telephone Number:
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-------------------------------------------- Refer Reply To:
CC:FIP:B03 – PLR-154213-09
Date:
June 14, 2010

LEGEND:

Company A = -----------------------------------------.

Company B = -------------------------------------------------------------

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

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

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

Law Firm = ----------------------------------------------------------

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

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

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

Year 1 = -------

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

 This responds to a letter dated December 11, 2009, on behalf of Company B and

Company C requesting an extension of time under § 301.9100-1 of the Procedure and
PLR-154213-09 2

Administration Regulations to make an election under § 856(l) of the Internal Revenue
Code to treat Company C as a Taxable REIT Subsidiary of Company B, effective as of
Date 1.

                                     FACTS

 Company A is an investment firm whose principal activity is investing in commercial

properties. Company A owns all of the common stock of Company B. Company B was
formed as a corporation on Date 2 under the laws of State X and elected to be treated
as a real estate investment trust (“REIT”) for federal income tax purposes beginning
with its Year 1 tax year. Company C, a wholly-owned subsidiary of Company B, was
incorporated under the laws of State X on Date 1. Both Company B and Company C
are calendar year taxpayers and they use accrual method of accounting.

At the time of the formation of Company C, its tax advisor, Accounting Firm, advised

both Company B and Company C to file Form 8875, Taxable REIT Subsidiary Election,
jointly electing to treat Company C as a taxable REIT subsidiary of Company B under
§ 856(l). Company B and Company C agreed with this advice. Law Firm provided legal
advice on various State X corporate law issues to Company B and Company C, and
prepared all the documents in connection with the formation of Company B and
Company C. Law Firm believed, however, that Company B and Company C would be
preparing the Form 8875, while Company B and Company C believed that Law Firm
had prepared the form.

The failure to file Form 8875 was discovered on Date 3 in connection with performing
due diligence relating to an offering of stock by Company A. Immediately upon
discovering the failure to file, Accounting Firm was notified and it prepared the request
for an extension to file the election.

Company B and Company C represent that they have both treated Company C as a
taxable REIT subsidiary of Company B beginning with the Year 1 tax year.

Company B and Company C also make the following additional representations:

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

3. Company B and Company C 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.
   PLR-154213-09 3

   4. Being fully informed of the required regulatory election and related tax
      consequences, Company B and Company C 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
   the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code
   except subtitles E, G, H, and I.
   PLR-154213-09 4

   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
   Company B and Company C have satisfied the requirements for granting a reasonable
   extension of time to elect under § 856(l) to treat Company C as a taxable REIT
   subsidiary of Company B, effective as of Date 1. Company B and Company C 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.

   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. In particular, no opinion is expressed with regard to whether
   Company B qualifies as a REIT or whether Company C 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 Company B and
   Company C 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.
   PLR-154213-09 5

   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