PLR 1116013: IRS granted time to correct consent-dividend elections

Plain-English summary

The IRS considered a parent company and two real estate investment trust subsidiaries that had reported incorrect amounts for consent dividends because of clerical, transcription, coding, sorting, and cost-segregation entry errors. The taxpayers asked for more time to correct their section 565 elections and related Forms 972 and 973. The IRS ruled that the taxpayers acted reasonably and in good faith, and that the correction would not prejudice the government because the aggregate tax liability would not be lower and no closed tax years were affected. Each subsidiary received a 45-day extension to revoke its original Form 973 claim, file a corrected Form 972, and file a corrected Form 973, subject to the corrected amount being included in the parent's consolidated income.

Ruling snapshot

• Question: May two REIT subsidiaries correct the amounts reported in their consent-dividend elections after discovering clerical and transcription errors?
• Outcome: Approved
• Key authorities: IRC §§ 565, 561, 6662, and 6501; Treas. Reg. §§ 1.565-1, 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201116013 Third Party Communication: None
Release Date: 4/22/2011 Date of Communication: Not Applicable
Person To Contact:
Index Number: 9100.10-01 ----------------------, ID No. -----------------
Telephone Number:
---------------------
-------------------------- Refer Reply To:
------------------- CC:ITA:B02
---------------------------- PLR-129906-10
------------------------------------------------- Date:
--------------------------------------------- January 06, 2011

               TY: -------

Legend

Taxpayer 1 = ----------------------------
Taxpayer 2 = -------------------------------------------------
Taxpayer 3 = ---------------------------------------------
Shareholder 1 = --------------------------------------
Shareholder 2 = ----------------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = ----------------
Date 1 = ---------------
Date 2 = -----------
Date 3 = --------------------------
Date 4 = ---------------------------
Date 5 = -----------------------
a= -----------------
b= -------------------
c= ----------------
d= ---------------
e= ------
f= -----------------

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

   This is in response to the letter dated July 19, 2010, submitted on your behalf by

your authorized representative. In the letter you request an extension of time for
PLR-129906-10 2

Taxpayer 2 and its common shareholder and Taxpayer 3 and its common shareholder
to agree to treat an additional amount as a dividend distributed by Taxpayer 2 and
Taxpayer 3 to its respective common shareholder pursuant to the consent dividend
procedure of section 565 of the Internal Revenue Code. The request is made in
accordance with sections 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations.
FACTS
Taxpayer 1 is the parent of a consolidated group of corporations that operate a
around the world. Taxpayer 1’s operations are comprised of three business segments:
b, c and d. For almost fifteen years, Taxpayer 1 has owned the majority of its e real
estate through two real estate owning subsidiaries that are organized as real estate
investment trusts (REIT) within the meaning of section 856 of the Code, namely
Taxpayer 2 and Taxpayer 3. Taxpayer 1 is the parent of Shareholder 1 which owns the
common voting stock in Taxpayer 2. Taxpayer 1 is also the parent of Shareholder 2
which owns the common voting shares in Taxpayer 3. The real estate owned by
Taxpayer 2 and Taxpayer 3 is leased to the relevant operating affiliates in the Taxpayer
1 group. Taxpayer 1, through its subsidiaries, controls Taxpayer 2 and Taxpayer 3 and
owns the vast majority of the equity interests in Taxpayer 2 and Taxpayer 3. However,
Taxpayer 2 and Taxpayer 3 each also have a significant number of other shareholders
consistent with the REIT qualifications of section 856 of the Code.
Taxpayer 2 and Taxpayer 3 are corporations for federal income tax purposes.
Taxpayer 1, Taxpayer 2 and Taxpayer 3 use an accrual method of accounting as their
overall method of accounting. Taxpayer 1 has a taxable year ending Date 1. Taxpayer
2 and Taxpayer 3 file their tax returns on a calendar year basis. Taxpayer 2 and
Taxpayer 3 do not file a consolidated return with Taxpayer 1. As a result of the
distribution requirements under section 857 of the Code, Taxpayer 1 includes
substantially all of the net income of Taxpayer 2 and Taxpayer 3 in its taxable income.
Taxpayer 2 and Taxpayer 3 generally distribute to shareholders, as dividends,
100% of net taxable income each year by December 31 in order to eliminate all federal
income tax liability of Taxpayer 2 and Taxpayer 3 for that taxable year. Taxpayer 2 and
Taxpayer 3 accomplish this through three separate processes undertaken on an annual
basis:
1. Actual distributions are paid with respect to REIT equity that carries a fixed
distribution preference;
2. Actual distributions are paid to Taxpayer 1 by Date 1 with respect to Date 2
operations of each of Taxpayer 2 and Taxpayer 3. This is done to minimize
any federal income tax deferral that would arise as a result of the Taxpayer 1
taxable year ending on Date 1; and
3. Consent dividends are paid pursuant to section 565 of the Code. The
consent dividends are calculated as of December 31 and the attachment to
Form 972, Consent of Shareholder to Include Specific Amount in Gross
PLR-129906-10 3

      Income, and the Form 973, Corporation Claim for Deduction for Consent
      Dividends, are filed with the tax return of Taxpayer 2 and Taxpayer 3 for each
      taxable year. The elected consent dividend amount is the amount of taxable
      income of Taxpayer 2 and Taxpayer 3, less amounts actually paid out as
      dividend distributions during the year.
 For the taxable year of Taxpayer 2 and Taxpayer 3 ended Date 3, Taxpayer 2 and

Taxpayer 3 filed the attachments to Forms 972 and the Forms 973 on Date 4 with their
timely filed Forms 1120-REIT, U.S. Income Tax Return for Real Estate Investment
Trusts. Taxpayer 1 included substantially all of the net taxable income of Taxpayer 2
and Taxpayer 3, including the consent dividends, in its consolidated taxable income for
its tax year ending Date 5. In preparing these forms, Taxpayer 1, Taxpayer 2, and
Taxpayer 3 followed the processes described above, but clerical and transcription
mistakes were committed. Taxpayer 1 discovered these mistakes as a result of internal
reviews in connection with its financial statement preparation after the Year 1 Forms
1120-REITs were filed. These mistakes resulted in an incorrect dollar amount being
used for the section 565 consent dividends and a net understatement of dividend
income to Taxpayer 1 in the amount of $f. The errors consisted of a transcription error
for Taxpayer 3, as well as coding and sorting errors for Taxpayers 2 and 3 as a result of
the transition to a new software program. In addition, adjustments to cost segregations
were entered as negative where positive and positive where negative for both Taxpayer
2 and Taxpayer 3, and an incorrect number was transcribed from the tax accrual work
papers for both Taxpayer 2 and Taxpayer 3.
Taxpayer 1 conducted an extensive investigation of taxable years 2, 3 and 4 to
ensure there were no similar mistakes. Taxpayer 1 implemented changes to the tax
department’s systems to ensure that the reconciliations that resulted in the recognition
of the initial errors were incorporated into the tax return preparation process for both
Taxpayer 2 and Taxpayer 3, as well as for Taxpayer 1. Due to its extensive review and
improvements to the systems, Taxpayer 1 is confident that these errors have not and
will not recur in subsequent years.
Taxpayer 1, Taxpayer 2, and Taxpayer 3 have represented that none of the above
described errors were identified or discovered by the Internal Revenue Service and
none of the relevant taxable years for Taxpayer 1, Taxpayer 2, and Taxpayer 3 are
closed by statute or agreement. Taxpayer 1, Taxpayer 2, and Taxpayer 3 have further
represented that by filing for this relief, they do not seek to alter a return position for
which an accuracy-related penalty could be imposed under section 6662 at the current
time and granting relief would result in the same aggregate tax liability with respect to all
affected taxpayers as would have resulted if the election had been timely made. In
addition, Taxpayer 1, Taxpayer 2, and Taxpayer 3 stated that no facts have changed
that have influenced the consent dividends elections. Rather, mistakes were
discovered subsequent to filing the consent dividend elections that caused Taxpayer 1,
Taxpayer 2, and Taxpayer 3 to realize that the prior elections specified the wrong
amounts.
PLR-129906-10 4

LAW AND ANALYSIS
Section 565(a) of the Code provides that if any person owns consent stock (as
defined in section 565(f)(1)) in a corporation on the last day of the taxable year of such
corporation, and such person agrees, in a consent filed with the return of such
corporation in accordance with the regulations, to treat as a dividend the amount
specified in such consent, the amount so specified shall, except as provided in section
565(b), constitute a consent dividend for purposes of section 561 (relating to the
deduction for dividends paid).
Section 1.565-1(a) of the Income Tax Regulations provides that the dividends paid
deduction, as defined in section 561, includes the consent dividends for the taxable
year. A consent dividend is a hypothetical distribution (as distinguished from an actual
distribution) made by certain corporations to any person who owns consent stock on the
last day of the taxable year of such corporation and who agrees to treat the hypothetical
distribution as an actual dividend, subject to specified limitations, by filing a consent at
the time and in the manner specified in section 1.565-1(b). Section 1.565-1(b)(3)
provides that a consent may be filed not later than the due date (including extensions)
of the corporation's income tax return for the taxable year for which the dividends paid
deduction is claimed.
Section 301.9100-1(c) provides that the Commissioner of Internal Revenue, in
exercising his discretion, may grant a reasonable extension of time under the rules set
forth in section 301.9100-3 to make a regulatory election under all subtitles of the
Internal Revenue Code except subtitles E, G, H, and I. The term "regulatory election" is
defined in section 301.9100-1(b) as an election whose due date is prescribed by a
regulation published in the Federal Register, or a revenue ruling, revenue procedure, or
announcement published in the Internal Revenue Bulletin.
Section 301.9100-3(a) provides that requests for relief subject to this section will be
granted when the taxpayer provides the evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
relief will not prejudice the interests of the Government.
Under section 301.9100-3(b)(1)(i), except as provided in paragraphs (b)(3)(i) through
(iii), a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer
requests relief before the failure to make the regulatory election is discovered by the
Internal Revenue Service.
Paragraphs (b)(3)(i) through (iii) of section 301.9100-3 provide that a taxpayer is
deemed not to have acted reasonably and in good faith if the taxpayer:
(i) seeks to alter a return position for which an accuracy-related penalty could be
imposed under section 6662 at the time the taxpayer requests relief and the new
position requires or permits a regulatory election for which relief is requested;
(ii) was informed in all material respects of the required election and related tax
consequences, but chose not to file the election; or
PLR-129906-10 5

(iii) uses hindsight in requesting relief. If specific facts have changed since the due
date for making the election that make the election advantageous to a taxpayer, the
Service will not ordinarily grant relief. In such a case, the Service will grant relief only
when the taxpayer provides strong proof that the taxpayer's decision to seek relief did
not involve hindsight.
Section 301.9100-3(c)(1) 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 taxable years affected by the election than the taxpayer would have
had if the election had been timely made. The interests of the government are ordinarily
prejudiced if the taxable year in which the regulatory election should have been made,
or any taxable years that would have been affected by the election had it been timely
made, are closed by the period of limitations on assessment under section 6501(a)
before the taxpayer’s receipt of a ruling granting relief under this section.
CONCLUSION
The taxpayers’ election is a regulatory election, as defined under section 301.9100-
1(b), because the due date of the election is prescribed in the regulations under section
1.565-1(b). Based upon our analysis of the facts and representations, Taxpayer 1,
Taxpayer 2, and Taxpayer 3 acted reasonably and in good faith, and granting relief will
not prejudice the interests of the government. Therefore the requirements of sections
301.9100-1 and 301.9100-3 have been met.
Under the facts represented, the failure of Taxpayer 1, Taxpayer 2, and Taxpayer 3
to report the correct amount in their consent dividend elections was not due to the
intentional disregard of the tax rules, but was due to clerical and transcription errors.
Taxpayer 1, Taxpayer 2, and Taxpayer 3 are not seeking to alter a return position for
which an accuracy-related penalty could have been imposed. There is no indication
that Taxpayer 1, Taxpayer 2, or Taxpayer 3 is using hindsight in requesting relief.
Finally, Taxpayer 1, Taxpayer 2, and Taxpayer 3 acted promptly in filing their request
for relief, before the Service discovered the errors. Therefore, Taxpayer 1, Taxpayer 2,
and Taxpayer 3 did not act unreasonably or in bad faith.
Furthermore, granting relief will not result in Taxpayer 1, Taxpayer 2, and Taxpayer
3 having a lower tax liability in the aggregate for all taxable years affected by the
election than Taxpayer 1, Taxpayer 2, and Taxpayer 3 would have had if the correct
amount had been reported as consent dividends, and no closed years will be affected.
Therefore, the interests of the Government will not be prejudiced by granting the
request for relief.
Because Taxpayer 1, Taxpayer 2, and Taxpayer 3 acted reasonably and in good
faith, and because the interests of the government will not be prejudiced if the request
for relief is granted, the following relief is granted:
(A) Taxpayer 2 is hereby granted an extension of 45 days from the date of this letter
within which it may:
PLR-129906-10 6

(1) Revoke its Claim for Deduction for Consent Dividends (Form 973) for its tax year
ending Year 1;
(2) Correct the amount of the section 565 election by filing a corrected Form 972 as
to Shareholder 1; and
(3) Execute and file a corrected Form 973.
(B) Taxpayer 3 is hereby granted an extension of 45 days from the date of this letter
within which it may:
(1) Revoke its Claim for Deduction for Consent Dividends (Form 973) for its tax year
ending Year 1;
(2) Correct the amount of the section 565 election by filing a corrected Form 972 as
to Shareholder 2; and
(3) Execute and file a corrected Form 973.
The consent of the Commissioner is contingent on the corrected amount of the
consent dividends being included in the consolidated income reported and paid by
Taxpayer 1 for its taxable year ending Date 5.
A copy of this letter should be attached to the amended returns filed reflecting the
elections. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.
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.
Further, no opinion is expressed or implied as to whether Taxpayer 2, Taxpayer 3, or
any entity mentioned in this letter that purports to be a Real Estate Investment Trust
qualifies as a Real Estate Investment Trust under Part II of Subchapter M of the Code.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayers 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.
This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.
PLR-129906-10 7

Pursuant to the power of attorney on file with this office, a copy of this letter is being
sent to your authorized representative.

                                   Sincerely,



                                   _______________________________
                                   NORMA C. ROTUNNO
                                   Senior Technician Reviewer, Branch 2
                                   Office of the Associate Chief Counsel
                                   (Income Tax & Accounting)

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