PLR 1140003: REIT granted more time to make a consent dividend election

Plain-English summary

A real estate investment trust asked for more time to make a consent dividend election after its tax return included forms with the wrong entities identified as the shareholder and corporation. The IRS found that the error resulted from inadvertent tax-preparation software and review mistakes, rather than an intentional decision not to make the election. It concluded that the taxpayer acted reasonably and in good faith, and that relief would not prejudice the government. The IRS granted 45 days from the ruling date to file the election and attach the ruling to the amended return.

Ruling snapshot

• Question: May the REIT receive extra time to make a consent dividend election under IRC § 565?
• Outcome: Approved, with a 45-day extension.
• Key authorities: IRC § 565; Treas. Reg. §§ 1.565-1 and 301.9100-1 through 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201140003 Third Party Communication: None
Release Date: 10/7/2011 Date of Communication: Not Applicable
Index Number: 565.00-00, 9100.00-00
Person To Contact:
----------------- -------------------------, ID No. -------------
-------------------------------------------------------- Telephone Number:
-------------------------------------- ---------------------
--------------------------------------------- Refer Reply To:
------------------------- CC:ITA:B02
PLR-103962-11
In re: ----------------------------------------------------- Date:
----- July 08, 2011

              TY: -------

Legend

Taxpayer = -----------------------------------------------------
Common Parent = ----------------------------
Parent 1 = --------------------------------------
Parent 2 = --------------------------------------------------
Subsidiary REIT = ---------------------------------------------------------------------
Accounting Firm = ----------------------
Date 1 = ---------------------
Date 2 = --------------------------
Date 3 = -------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
$aa = ------------------
Manager = --------------------
Employee =---------------
Partner = ----------------------------

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

   This letter is in response to a ruling request dated ---------------------- submitted on

behalf of Taxpayer by Parent 1, Taxpayer’s successor in interest, requesting an
extension of time to make a consent dividend election under section 565 of the Internal
Revenue Code. This request is made pursuant to sections 301.9100-1 and 301.9100-3
of the Procedure and Administration Regulations. This letter supersedes the letter
dated ----------------.
PLR-103962-11 2

                                   FACTS

   Taxpayer is a corporation that has elected to be treated as a real estate

investment trust (“REIT”) for Federal income tax purpose since Date 1. Taxpayer uses
the accrual method of accounting and files its tax returns on a calendar-year basis.

   During Year 1, Parent 2 owned all of the outstanding common shares and some

of the outstanding preferred shares of Taxpayer. Unrelated investors also owned
preferred shares of Taxpayer. Parent 2 was a member of Common Parent’s
consolidated group and was included on Common Parent’s consolidated Federal
income tax return. Also during Year 1, Taxpayer owned common and preferred shares
of Subsidiary REIT and unrelated investors owned preferred shares of Subsidiary REIT.
On Date 2, both Parent 2 and Taxpayer were merged into Parent 1, with Parent 1
assuming all assets and liabilities of Taxpayer and, in each case, with Parent 1
surviving as the successor in interest.

   Taxpayer timely filed its Form 1120-REIT for tax year Year 1. With its return,

Taxpayer included a Form 972 “Consent of Shareholder to Include Specific Amounts In
Gross Income” reflecting consent dividends with respect to common stock in the amount
of $aa, and a Form 973 “Corporation Claim for Deduction for Consent Dividends.”
However, instead of showing Taxpayer’s information on Line 1 and Parent 2 as the
shareholder including the $aa consent dividend in income, the Form 972 showed
Subsidiary REIT’s information on Line 1 and Taxpayer as the shareholder.

    Taxpayer’s Year 1 Federal income tax return was prepared by employees in

Common Parent’s tax department and signed by Partner at Accounting Firm as paid
preparer. During the preparation of Taxpayer’s Year 1 return, Employee prepared a first
draft of the Form 972 using tax preparation software. The draft of the Form 972 was
reviewed by Manager, who made no changes to the draft Form 972 because the draft
Form 972 correctly reflected Parent 2 as the shareholder including the $aa of consent
dividends in income and Taxpayer’s information on Line 1. However when Taxpayer’s
complete Federal income tax return was prepared, Common Parent’s employees used
a different tax preparation software that erroneously populated the Form 972 with
Taxpayer’s name and identifying number as the shareholder including the consent
dividend in income and Subsidiary REIT’s information on Line 1. When Common
Parent’s employees reviewed the completed return, they did not notice the error.
Further, Partner reviewed the completed return and also did not notice the error.

   On Date 3, Common Parent’s employees met with members of the Service’s

examination team examining Common Parent’s consolidated Federal income tax
returns for Year 1, Year 2, and Year 3. Prior to the meeting, Common Parent’s
employees had provided Taxpayer’s Form 972, among other information, to the
Service’s employees. Common Parent’s employees discovered the errors on the Form
PLR-103962-11 3

972 when one of the members of the examination team asked for clarification with
regards to the names on the Form 972 filed with Taxpayer’s Year 1 return during the
meeting on Date 3.

                              LAW AND ANALYSIS

   Section 565(a) of the Internal Revenue 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 of the corporation’s
income tax return for the taxable year for which the dividends paid deduction is claimed.
Under Rev. Rul. 78-296, 1978-2 C.B. 183, the due date for purposes of section 1.565-
1(b)(3) includes the extended due date of a return filed pursuant to an extension of time
to file.

    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 Service.
PLR-103962-11 4

 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

   (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.

                                   CONCLUSION

    Based upon our analysis of the facts, Taxpayer 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, Taxpayer’s failure to make a proper consent

dividend election was not due to the intentional disregard of the tax rules, but was due
to inadvertent errors on the part of Common Parent’s tax professionals. Taxpayer did
not affirmatively choose not to file the election. Taxpayer is not seeking to alter a return
position or to use hindsight to request relief. Finally, Taxpayer acted promptly in filing
its request for relief, before the Service discovered the failure to make the regulatory
election. Therefore, Taxpayer did not act unreasonably or in bad faith.

    Furthermore, granting relief will not result in Taxpayer having a lower tax liability

in the aggregate for all taxable years affected by the election than Taxpayer would have
had if the election had been timely made, nor will any closed years be affected.
Therefore, the interests of the government will not be prejudiced by granting the request
for relief.
PLR-103962-11 5

   Because Taxpayer acted reasonably and in good faith, and because the interests

of the government will not be prejudiced if the request for relief is granted, Taxpayer is
granted an extension of 45 days from the date of this ruling to file its consent dividend
election. A copy of this letter should be attached to the amended return filed reflecting
the election.

   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 whether Taxpayer, Subsidiary REIT

or any entity mentioned in this letter that purports to be a REIT qualifies as a REIT
under Part II of Subchapter M of Chapter 1 of the Code.

  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 representative.

   A copy of this letter must be attached to any income tax return to which it is

relevant. 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.

  The rulings contained in this letter are 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.

                                    Sincerely,



                                    Thomas D. Moffitt
                                    Branch Chief, Branch 2
                                    (Income Tax & Accounting)

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