PLR 201129034: IRS grants more time to make a taxable REIT subsidiary election

Plain-English summary

A REIT and a related company asked for more time to elect to treat the company as the REIT's taxable REIT subsidiary. An employee of the firm preparing Form 8875 mistakenly listed the partnership instead of the REIT as the electing entity and made other errors. The IRS granted up to 60 days from the ruling date to file a corrected Form 8875 effective as of the requested date. The ruling addressed only the timing of the election and did not decide whether the trust otherwise qualified as a REIT or the company otherwise qualified as a taxable REIT subsidiary.

Ruling snapshot

• Question: May the REIT and company correct an erroneous Form 8875 and make the taxable REIT subsidiary election effective as of the requested date?
• Outcome: approved
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1 and 301.9100-3; IRC § 6662

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201129034
Release Date: 7/22/2011
Index Number: 856.00-00, 9100.00-00

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Person To Contact:
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CC:FIP:B03 – PLR-110763-11
Date: April 15, 2011

LEGEND:

Trust = ------------------------------------------------------------------------
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Company = ------------------------------------------------------------

Partnership = ------------------------------------------------------------------------
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Firm = ------------------------------

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

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

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

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

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

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

Date 5 = -------------------------

Date 6 = -------------------------

Date 7 = --------------------------

Year = -------

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a = --------

b = ------

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

This responds to a letter dated March 10, 2011, submitted on behalf of Trust and Company, requesting an extension of time under § 301.9100-1 of the Procedure and Administration Regulations to make an election under § 856(l) of the Internal Revenue Code to treat Company as a Taxable REIT Subsidiary of Trust, effective as of Date 3.

FACTS

Trust was formed as a State X real estate investment trust (REIT) on Date 1 and elected to be treated for federal tax purposes as a REIT beginning with the tax year that ended on Date 2. Trust owns a percent of Partnership. Partnership owns b percent of Company, which was formed as a State Y limited liability company on Date 3.

Trust owns, but does not manage, hotel properties. Company was created to lease hotel properties from Trust. Company is responsible for hiring a hotel management company to directly manage the hotel properties. Company does not perform any management tasks itself, but instead hires eligible independent contractors as required by § 856(l)(3) of the Code.

Trust and Company represent that Trust and Company intended to make an election to treat Company as a Taxable REIT Subsidiary (TRS) of Trust as of Date 3, the date of Company’s formation. Pursuant to this intent, Firm was engaged to prepare a Form 8875 (Taxable REIT Subsidiary Election) on behalf of Trust and Company. The Form 8875 was filed with the Service on Date 4.

In preparing the Form 8875 that was filed with the Service, however, an employee of Firm inadvertently listed Partnership instead of Trust as the electing REIT in Part II of Form 8875 and made some other errors in the completion of the Form 8875. These errors on the Form 8875 that was filed on Date 4, did not come to light until Date 5, when the employee of Firm, while handling some other legal matters for Trust, discovered that the Form 8875 that had been filed on Date 4 contained these inadvertent mistakes. On Date 6, in order to ensure that Company would be a TRS of Trust for all of Year, Trust and Company filed a Form 8875 with the Service to treat Company as a TRS of Trust, with an effective date of Date 7. Less than 30 days after the discovery of the erroneous Form 8875, Trust submitted this request for a private letter ruling seeking an extension of time under § 301.9100-1 of the Regulations to make an election under § 856(l) of the Code to treat Company as a TRS of Trust, effective as of Date 3.

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Furthermore, Trust and Company make the following additional representations:

1. The request for relief was filed by Trust and Company before the failure to make the regulatory election was discovered by the Service.

2. Granting the relief will not result in Trust and/or Company having a lower tax liability in the aggregate for all years to which the regulatory election applies than that Taxpayer would have had if the election had been timely made (taking into account the time value of money).

3. Trust and Company 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 Trust and Company 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 did not choose to not file the election.

LAW AND ANALYSIS

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 TRS. To be eligible for treatment as a TRS, § 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, 2001-1 C.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 TRS. 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

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Internal Revenue Bulletin), or a statutory election (but no more than six 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 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 have satisfied the requirements for granting a reasonable extension of time to elect under section 856(l) to treat Company as a TRS of Trust, effective as of Date 3. Accordingly, Trust and Company are granted a period of time not to exceed 60 calendar days from the date of this letter to file a Form 8875 to treat Company as a TRS of Trust as of Date 3.

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 otherwise qualifies as a REIT or whether Company otherwise qualifies as a TRS under subchapter M of the Code.

No opinion is expressed with regard to whether the tax liability of either Trust or Company 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.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the Power of

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Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

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