PLR 1336017: IRS grants a REIT an extension to make consent-dividend elections

Plain-English summary

A real estate investment trust and related entities asked for more time to make consent-dividend elections for prior tax years. The elections were needed to treat certain excess inclusion income from mortgage-related assets as consent dividends. The IRS determined that the taxpayers acted reasonably and in good faith, and that granting relief would not prejudice the government's interests. It granted a 45-day extension to amend the elections under IRC § 565 and the regulatory relief rules in §§ 301.9100-1 and 301.9100-3. The ruling did not decide whether the taxpayer otherwise qualified as a REIT or whether its excess inclusion income calculations were accurate.

Ruling snapshot

• Question: May the taxpayer receive additional time to make consent-dividend elections for prior tax years?
• Outcome: Approved, with a 45-day extension from the ruling date.
• Key authorities: IRC §§ 565, 561, and 6662; Treas. Reg. §§ 1.565-1, 1.565-6, 301.9100-1, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201336017 Third Party Communication: None
Release Date: 9/6/2013 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:B01
----------------- PLR-153875-12
Date:
May 20, 2013

              TY: ------------------------

Legend

Parent = ------------------------------------------
Taxpayer = ----------------------------------------------------------------------------
Taxpayer 1 = ----------------------------------------------------------------------------------------------------
----------
Subsidiary = ----------------------------------------------------------------------------------------------------
--------------------------------------------------------------
Date a = --------------------
Date b = -----------------
Date c = -------------
Date d = -------------------
Years at Issue = ------------------------------------------------------------------
Year 1 = -------
Year 2 = -------
Tax Consultant = ---------------
Tax Service = --------------------------------
Provider
Trusts = ----------------------------------------------------------------------------------------------------
---------------------------------------

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

This letter is in response to a ruling request dated December 4, 2012, submitted on
behalf of the Taxpayer, and Taxpayer 1, (Taxpayers) requesting an extension of time to
make a consent dividend election under § 565 of the Internal Revenue Code. The
request was made pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations.
PLR-153875-12 2

                                     FACTS

On Date a, Parent incorporated Taxpayer, and Taxpayer issued common and preferred
stock. Parent owned all of the common stock. Taxpayer elected to be treated as a
Real Estate Investment Trust (REIT) on its first tax return. Parent sold Trusts, including
real estate mortgage investment conduits (REMICs) and REIT taxable mortgage pools
(REIT-TMPs), to Taxpayer on Date b. On Date c, Taxpayer 1 acquired Parent.
Subsequent to the acquisition, Taxpayer 1 converted Parent to a Limited Liability
Company (LLC) treated as a disregarded entity. Consequently, after the conversion
Taxpayer 1 treated itself as directly holding the common stock of Taxpayer, initially held
by Parent. On Date d, additional voting common stock of Taxpayer and a de minimus
amount of nonvoting preferred stock was issued to the Subsidiary, a member of
Taxpayer 1’s consolidated group. Consequently, at all times after the acquisition of
Parent, Taxpayer 1 and Subsidiary owned at least ----% of the total voting power and at
least ----% of the total value of the stock of Taxpayer. However, because Taxpayer
elected to be treated as REIT on its first tax return, it cannot be an includable
corporation of Taxpayer 1’s consolidated group.

Taxpayer timely filed all of its federal income tax returns (Form 1120-REIT) for its first
year of operation as well as the Years at Issue. All of the returns for the Years at Issue
have been prepared by Taxpayer 1. In preparing the returns, Taxpayer 1 relied on
information provided by the Tax Service Provider and one other company. Taxpayer 1
used the quarterly balance sheet information provided by the Tax Service Provider to
prepare its and Taxpayer’s financial statements as well as Forms 1120-REIT of
Taxpayer.

The Tax Service Provider did not have an explicit obligation to calculate excess
inclusion income with respect to the REIT-TMPs, and, although individuals at the tax
department of Taxpayer 1 were aware of the tax considerations generally applicable to
REITs, they were unaware that special rules might apply to mortgage REITs regarding
excess inclusion income, and believed that information regarding the taxable income
and expense of Trusts provided by the Tax Service Provider was sufficient for purposes
of calculating Taxpayer’s income.

In addition, although the Tax Service Provider computed excess inclusion income with
respect to Year 2 and reported the amounts of excess inclusion income to Taxpayer on
Schedule Q, the individuals who prepared Taxpayer’s Form 1120-REIT for the Years at
Issue were not aware that the excess inclusion income from the REMIC residual
interests required special treatment for federal income tax purposes. As a result,
Taxpayer’s Form 1120-REIT for each of the Years at Issue was prepared without regard
to the requirement that taxable income may not be less than excess inclusion income.
PLR-153875-12 3

Tax Consultant has been providing professional tax services to Taxpayer 1 for a
number of years. However, for the Years at Issue Taxpayer 1 did not engage Tax
Consultant to assist in the preparation of Taxpayer’s federal income tax return. Under
the scope of general tax consulting contract, Tax Consultant reviewed calculations of
Taxpayer’s taxable income and its compliance with the REIT qualification tests for the
Years at Issue. In the course of its review, Tax Consultant noticed that Taxpayer 1 had
received Schedule Qs from Tax Service Provider for REMIC residual interests owned by
Taxpayer, and that Tax Service Provider had indicated the amounts of excess inclusion
income. Tax Consultant asked the Taxpayer 1’s tax department whether excess
inclusion calculations had been performed and was informed that none of the
individuals involved in preparing Taxpayer’s income tax returns had been aware of the
need to calculate excess inclusion income for the REIT-TMPs. Accordingly, no
calculations of excess inclusion income from the REIT-TMPs were performed during the
Years at Issue, and Taxpayer filed Form 1120-REIT for each of those years without
regard to the requirement that taxable income cannot be less than excess inclusion
income.

Taxpayer reported losses in each of the Years at Issue, and the amount of loss for each
of the years was larger than the subsequently calculated amount of excess inclusion
income for that year. In order to distribute excess inclusion income to its common
shareholders, Taxpayer would have needed to make a deemed distribution pursuant to
a consent dividend election. However, consent dividend elections for excess inclusion
income from the REIT-TMPs and REMICs for the Years at Issue were not made timely.
Consequently, Taxpayer wishes to elect to make consent dividends for excess inclusion
income from REIT-TMPs and REMICs for the Years at Issue. The consent dividends
would be deemed paid to Taxpayer 1 and Subsidiary in proportion to their holdings of
Taxpayer’s common stock during those years.

                              LAW AND ANALYSIS

Section 565(a) provides that if any person owns consent stock (as defined in §
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 § 565(b), constitute a consent dividend
for purposes of § 561 (relating to the deduction for dividends paid). Consent stock
includes what is generally known as common stock and participating preferred stock,
the participation rights of which are unlimited. Section 1.565-6 of the Income Tax
Regulations.
Section 1.565-1(a) provides that the dividends paid deduction, as defined in § 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
PLR-153875-12 4

dividend, subject to specified limitations, by filing a consent at the time and in the
manner specified in § 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. With such
return, and not later than the due date, the corporation must file Forms 972 for each
consenting shareholder, and a return on Form 973 showing by classes the stock
outstanding on the first and last days of the taxable year, the dividend rights of such
stock, distributions made during the taxable years to shareholders, and give all other
information required by the form.
Section 301.9100-3 generally provides extensions of time for making regulatory
elections. For this purpose § 301.9100-1(b) defines the term “regulatory election” to
include an election whose deadline is prescribed by a revenue ruling, revenue
procedure, notice or announcement published in the Internal Revenue Bulletin.
Section 301.9100-3 provides that requests for extensions of time for regulatory elections
will be granted when the taxpayer provides evidence (including affidavits described in
paragraph (e) of this section) to establish to the satisfaction of the Commissioner that
the taxpayer acted reasonably and in good faith and granting relief will not prejudice the
interests of the government.
Section 301.9100-3(b)(1) states that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer --
(i) requests relief before the failure to make the regulatory election is discovered by
the Service;
(ii) inadvertently failed to make the election because of intervening events beyond
the taxpayer's control;
(iii) failed to make the election because, after exercising due diligence, the taxpayer
was unaware of the necessity for the election;
(iv) reasonably relied on the written advice of the Service; or
(v) reasonably relied on a qualified tax professional, and the tax professional failed
to make, or advise the taxpayer to make, the election.
The affidavits presented show that Taxpayer acted reasonably and in good faith, having
requested relief before the failure to make the election was discovered by the Service.
Under § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably
and in good faith if the taxpayer --
(i) seeks to alter a return position for which an accuracy-related penalty has been or
could be imposed under § 6662 at the time the taxpayer requests relief (taking into
account § 1.6664-2(c)(3) of the Income Tax Regulations) and the new position requires
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-153875-12 5

(iii) uses hindsight in requesting relief. If specific facts have changed since the

original deadline that make the election advantageous to a taxpayer, the Service will not
ordinarily grant relief.
Taxpayer has represented that it is not seeking to alter a return position for which an
accuracy-related penalty has been or could be imposed under § 6662 at the time
Taxpayer requests relief. Furthermore Taxpayer has represented that it is not using
hindsight in requesting relief and that specific facts have not changed since the original
deadline that made the election advantageous to Taxpayer.
Section 301.9100-3(c)(1)(i) provides, in part, 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 (taking into account the time value of money).
Section 301.9100-3(c)(1)(ii) provides, in part, that 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 these
criteria, the interests of the government are not prejudiced in this case.
Based on our analysis of the facts and representations, Taxpayer acted reasonably and
in good faith, and granting relief will not prejudice the interests of the government.
Therefore the requirements of § 301.9100-1 and § 301.9100-3 have been met.
Accordingly, the consent of the Commissioner is hereby granted for an extension of
time to amend the § 565 consent dividend election for the Years at Issue. This
extension shall be for a period of 45 days from the date of this ruling. Please attach a
copy of this ruling to the returns, schedules and forms filed in connection with making
the election under § 565 when such forms are filed. We enclose a copy of the letter for
this purpose. 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 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 ruling, 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. In particular, no opinion is hereby expressed or implied regarding whether
Taxpayer otherwise qualifies as a REIT under subchapter M of the Code or regarding
the accuracy of Taxpayer’s excess inclusion income calculations. 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-153875-12 6

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

                                   Sincerely,



                                   Lewis K Brickates
                                   Chief, Branch 1
                                   (Income Tax & Accounting)

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