PLR 1045012: Extension of time for taxable REIT subsidiary elections

Plain-English summary

The IRS granted a REIT and two subsidiaries 60 days to make late elections treating the subsidiaries as taxable REIT subsidiaries. The taxpayers intended to make the elections but did not file the required Forms 8875 because their law firm and accounting firm each believed the other would handle the filings. The IRS concluded that the requirements for a reasonable extension of time were satisfied. The ruling addressed only the timeliness of the elections and did not decide whether the entities otherwise qualified as a REIT or taxable REIT subsidiaries.

Ruling snapshot

• Question: May the REIT and its subsidiaries make late elections under section 856(l) to treat the subsidiaries as taxable REIT subsidiaries?
• Outcome: Approved
• Key authorities: IRC §§ 856, 6662, and 6110(k)(3); Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201045012 Third Party Communication: None
Release Date: 11/12/2010 Date of Communication: Not Applicable
Index Number: 856.00-00, 9100.00-00
Person To Contact:
---------------------, ID No. -------------
---------------------------- Telephone Number:
------------- ---------------------
------------------------------ Refer Reply To:
------------------------------------------- CC:FIP:B03
---------------------------------- PLR-113798-10
Date:
July 29, 2010

LEGEND

Trust = ------------------------------
------------------------
Subsidiary 1 = ----------------------------------
--------------------------------------------------
Subsidiary 2 = ----------------------------------
------------------------------------------------
Parent = --------------------------------
------------------------
LP1 = ------------------------------------
------------------------
LP2 = ------------------------------------
------------------------
Company = -------------------------------------------
Advisor = ----------------------------
Law Firm = ---------------------------------
Accounting Firm = ----------------
State X = -------------
Date 1 = --------------------
Date 2 = ------------------------
Date 3 = ------------------------
Date 4 = -------------------------
Date 5 = ------------------------
Date 6 = -------------------
Date 7 = ---------------------------
Date 8 = ------------------------
Date 9 = ---------------------
a = ------
b = ------
c = -----

PLR-113798-10 2

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

   This responds to a letter dated March 24, 2010, on behalf of Trust, Subsidiary 1,

and Subsidiary 2 requesting an extension of time under §§ 301.9100-1 and 301.9100-3
of the Procedure and Administration Regulations to make elections under § 856(l) of the
Internal Revenue Code to treat each of Subsidiary 1 and Subsidiary 2 as a taxable REIT
subsidiary of Trust effective as of Date 5.

                                     FACTS

   Parent originally was formed as Company, a State X limited liability company, on

Date 1, and subsequently was converted into a State X limited partnership on Date 2.
LP1 and LP2 are State X limited partnerships, each formed on Date 3. Trust, a State X
corporation, was formed on Date 4. It has elected to be treated for federal income tax
purposes as a real estate investment trust (REIT). Subsidiary 1 and Subsidiary 2 are
State X corporations, each formed on Date 5.

  Trust and Parent are owned primarily by institutional investors. Trust owns

approximately a percent of the limited partnership interests of each of LP1 and LP2.
Parent owns the remaining percentage, approximately b percent, of the limited
partnership interests of each of LP1 and LP2. LP1 owns c percent of all the issued and
outstanding shares of Subsidiary 1. LP2 owns c percent of all the issued and
outstanding shares of Subsidiary 2.

   Advisor acts as operational advisor to Trust, Subsidiary 1, and Subsidiary 2.

Trust, Subsidiary 1, and Subsidiary 2 represent they relied on Law Firm and Accounting
Firm to ensure proper entity formation and related filings for Subsidiary 1 and Subsidiary

2. Law Firm was engaged to render legal advice regarding the REIT structure and
   taxation and prepare all the documents in connection with the formation of Subsidiary 1
   and Subsidiary 2. Accounting Firm was engaged to provide audit and tax services,
   including the preparation of tax returns for Subsidiary 1 and Subsidiary 2.

   Trust, Subsidiary 1, and Subsidiary 2 represent that they intended elections be
   made under § 856(l) of the Internal Revenue Code to treat each of Subsidiary 1 and
   Subsidiary 2 as a taxable REIT subsidiary of Trust effective as Date 5, but the elections
   were not made due to confusion as to whether Advisor, Law Firm, or Accounting Firm
   would make the elections on their behalf.

   Trust, Subsidiary 1, and Subsidiary 2 represent that they and Advisor intended
   the elections be made but did not know the specific procedure for making the elections.
   Trust, Subsidiary 1, and Subsidiary 2 represent that they and Advisor assumed that
   either Accounting Firm would make the elections in connection with filing the annual tax
   returns of each of Subsidiary 1 and Subsidiary 2, or Law Firm would advise Trust,
   Subsidiary 1, and Subsidiary 2 as to the specific steps required to make the elections.

PLR-113798-10 3

  Trust, Subsidiary 1, and Subsidiary 2 represent that Law Firm believed Trust,

Subsidiary 1, and Subsidiary 2, or Accounting Firm would make the elections, and that
Accounting Firm believed Law Firm would make the elections.

    For elections under § 856(l) of the Internal Revenue Code to treat each of

Subsidiary 1 and Subsidiary 2 as a taxable REIT subsidiary of Trust to be effective as of
Date 5, the date by which the Forms 8875 (Taxable REIT Subsidiary Election) were due
to be filed was Date 6, but the elections were never filed.

  Each of Subsidiary 1's and Subsidiary 2's initial tax return for the taxable year

ended Date 7 was due on or before Date 9. On Date 8, Accounting Firm sent Law Firm
a message requesting copies of the Taxable REIT Subsidiary Elections for Subsidiary 1
and Subsidiary 2, which message prompted the discovery that there was no record of
making these elections.

   Upon this discovery, Trust, Subsidiary 1, and Subsidiary 2 submitted this request

for an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations to make elections under § 856(l) of the Internal Revenue
Code to treat each of Subsidiary 1 and Subsidiary 2 as a taxable REIT subsidiary of
Trust effective as of Date 5.

  In support of their representations, above, Trust, Subsidiary 1, and Subsidiary 2

submitted with their request affidavits signed under penalties of perjury from appropriate
representatives of Trust, Subsidiary 1, Subsidiary 2, Law Firm, and Accounting Firm.

  Trust, Subsidiary 1, and Subsidiary 2 make the following additional

representations:

 1. The request for relief was filed by Trust, Subsidiary 1, and Subsidiary 2 before
    the failure to make regulatory elections was discovered by the Service.
 2. Granting the relief requested will not result in Trust, Subsidiary 1, and
    Subsidiary 2 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, Subsidiary 1, and Subsidiary 2 did not seek to alter a return position for
    which an accuracy-related penalty has been or could have been imposed under
    § 6662 of the Code at the time Trust, Subsidiary 1, and Subsidiary 2 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, Subsidiary 1, and Subsidiary 2 did not choose to not file
    the elections.

PLR-113798-10 4

                                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.

  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

PLR-113798-10 5

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, Subsidiary 1, and Subsidiary 2 have satisfied the requirements for granting a
reasonable extension of time to elect under § 856(l) to treat each of Subsidiary 1 and
Subsidiary 2 as a taxable REIT subsidiary of Trust effective as of Date 5. Trust,
Subsidiary 1, and Subsidiary 2 have 60 days from the date of this letter to make the
intended elections.

  This ruling is limited to the timeliness of the filing of the Forms 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 Subsidiary 1 or Subsidiary 2 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,

Subsidiary 1, and Subsidiary 2 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 Trust, Subsidiary 1, and Subsidiary 2 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.

PLR-113798-10 6

     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,

                                     /s/

                                   Alice M. Bennett
                                   Chief, Branch 3
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)

Enclosures:
Copy of this letter
Copy for section 6110 purposes