Inadvertent REIT election treated as never made

Plain-English summary

A corporation intended to file as a regular C corporation until it became eligible to elect REIT status, but its return preparer mistakenly filed Form 1120-REIT for its first year. After discovering the inadvertent election, the corporation filed an amended Form 1120-X and continued filing as a C corporation. The IRS consented to treat the REIT election as never made and accepted the amended Form 1120 in its place, without treating the correction as a termination or revocation subject to the five-year re-election bar.

Ruling snapshot

• Question: Could an inadvertently filed Form 1120-REIT be disregarded and replaced by an amended Form 1120?
• Outcome: Approved. The REIT election was treated as never made.
• Key authorities: IRC § 856(c), (g); Treas. Reg. §§ 301.9100-1 and 301.9100-3; Rev. Rul. 83-74

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201432014 Third Party Communication: None
Release Date: 8/8/2014 Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.00-00
Person To Contact:
---------------------------- --------------------------, ID No. ----------------
-------------------------------- ----------------
-------------------------------------- Telephone Number:
------------------------------- --------------------
Refer Reply To:
CC:FIP:B02
PLR-149382-13
Date:
April 24, 2014

Legend:

Taxpayer = --------------------------------------------------------------------

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

Year 1 = ------------------------------------------

Tax Consultant 1 = --------------------------

Tax Consultant 2 = -------------------

Year 2 = ------------------------------------------

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

   This is in reply to a ruling request dated December 5, 2013, and subsequent

correspondence, submitted on behalf of Taxpayer. Taxpayer requests a ruling that its
election to be treated as a real estate investment trust (REIT), which was made on a
Form 1120-REIT that was inadvertently filed for Year 1, be treated as never having
been made, and that the filing of an amended Form 1120 for Year 1 be accepted in its
place.

FACTS

   Taxpayer was incorporated on Date 1. Taxpayer was formed to invest in

interests in real estate, and anticipated making a REIT election when it met the

qualifications allowing it to do so. Tax Consultant 1 informed Taxpayer’s CEO that
taxpayer should file as a C corporation for Year 1, and that a REIT election should not
be made for that year. Tax Consultant 2 was subsequently hired to prepare Taxpayer’s
Year 1 tax return, and the agreement between Taxpayer and Consultant 2 provided that
Consultant 2 would prepare a Form 1120, U.S. Corporation Tax Return, for Taxpayer
for Year 1.

  Despite Taxpayer’s intent to file a Form 1120 for Year 1, Consultant 2 prepared a

Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, for that
year. Taxpayer represents that it executed and filed that return, not realizing it had
made a REIT election with the filing of the return. Taxpayer represents that upon
becoming aware that an inadvertent REIT election had been made, it filed an amended
Form 1120-X as a C corporation for Year 1 and filed a Form 1120 for Year 2, since
Taxpayer was not organized to qualify as a REIT for Year 2 either.

    Taxpayer represents that it is not seeking to alter a return position. Taxpayer

further represents that, while it intended to elect to be a REIT once it was eligible to do
so, it knew that it would not qualify as a REIT in Year 1 and Year 2 and, therefore, did
not intend to make a REIT election in Year 1.

LAW AND ANALYSIS

   Section 856(c)(1) of the Code provides that a corporation, trust or association

shall not be considered a REIT for any taxable year unless it files with its return for the
taxable year an election to be a REIT or has made such election for a previous taxable
year.

    Section 856(g)(1)provides that an election under section 856(c)(1) made by a

corporation shall terminate if the corporation is not a real estate investment trust to
which the provisions of section 856 et. seq. apply for the taxable year with respect to
which the election is made, or for any succeeding taxable year. Such termination shall
be effective for the taxable year for which the corporation is not a real estate investment
trust to which the provisions of section 856 et. seq. apply, and for all succeeding taxable
years.

   Section 856(g)(2) provides that an election under section 856(c)(1) made by a

corporation may be revoked by it for any taxable year after the first taxable year for
which the election is effective. Such revocation shall be effective for the taxable year in
which made and for all succeeding taxable years.

   Section 856(g)(3) provides, in general, that if a corporation has made a REIT

election and such election has been terminated or revoked, such corporation or any
successor corporation, shall not be eligible to make an election under section 856(c)(1)

for any taxable year prior to the fifth taxable year which begins after the first taxable
year for which such termination or revocation is effective.

    In Rev. Rul. 83-74, 1983-1 C.B. 112, a homeowners association sought

permission in 1980 to revoke an election made for its 1979 tax year to be taxed as a
tax-exempt organization under section 528. It based the request upon an inaccurate
audit performed by a professional tax advisor which understated the interest income of
the association (nonexempt income under section 528), and inadequate tax advice
provided by the advisor, which denied the association the use of a net operating loss
carryover that could have been used if the association had filed as a corporation instead
of electing to be taxed under section 528. In holding that under the facts and
circumstances of the revenue ruling a revocation of the election would be permissible,
the revenue ruling analogizes to situations in which taxpayers fail to make a particular
election because of inadequate or incorrect tax advice provided by an attorney or
accountant and subsequently seek extensions of time under section 1.9100-1 of the
Income Tax Regulations in which to make the election.

   Under section 301.9100-1 of the regulations, the Commissioner has discretion,

upon good cause shown by the taxpayer, to grant a reasonable extension of time fixed
by the regulations for making an election, provided certain conditions are met. 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 the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith and granting relief will not prejudice the interest 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) 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.

  Under section 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 section 6662 at the time the taxpayer requests relief
(taking into account any qualified amended return filed within the meaning of section
1.6664-2(c)(3)) 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

(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.

    The Taxpayer’s situation in this case is similar to Rev. Rul. 83-74, and analogous

to situations concerning taxpayers who have not made a particular election provided in
the regulations because of inadequate or incorrect advice from knowledgeable tax
professionals and are subsequently seeking extensions of time under section 301.
9100-1 of the regulations.

                                 CONCLUSION

    Based upon the facts and representations submitted, consent is granted for

Taxpayer to be treated as if it had not made the REIT election on the Form 1120-REIT
filed for Year 1 and the filing of the amended Form 1120 for Year 1 is effective in place
of the Form 1120-REIT originally filed. The foregoing shall not be treated as a
termination or revocation for purposes of section 856(g).

  This ruling’s application is limited to the facts, representations, Code sections,

and regulations cited herein. Except as specifically provided otherwise, no opinion is
expressed on the federal income tax consequences of the transaction described above.

   This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)

of the Code provides that it may not be used or cited as precedent.

    In accordance with the terms of a power of attorney on file in this office, a copy of

this letter is being sent to your authorized representative.

                                       Sincerely,


                                       Jonathan D. Silver
                                       Jonathan D. Silver
                                       Assistant to the Branch Chief, Branch 2
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)