REIT receives late-election relief for an indirectly owned taxable subsidiary

Plain-English summary

A real estate investment trust indirectly acquired an interest in a corporation when a tower-company acquisition changed from an asset purchase to a stock purchase. The REIT’s tax professionals were not told about the revised structure or the corporation formed to complete it, so the REIT and subsidiary missed the deadline to jointly elect taxable REIT subsidiary treatment. The issue surfaced while the REIT’s return was being prepared, and the parties promptly filed Form 8875 and requested relief for an earlier effective date. They represented that the IRS had not discovered the failure, they had not deliberately forgone the election, and relief would not reduce their aggregate tax liability. The IRS found the requirements of the section 301.9100 regulations satisfied and treated the Form 8875 as timely filed with the requested effective date. The ruling did not decide whether the taxpayer otherwise qualified as a REIT or whether the subsidiary otherwise qualified as a taxable REIT subsidiary.

Ruling snapshot

• Question: Could a REIT and an indirectly owned corporation make a late section 856(l) election for taxable REIT subsidiary status?
• Outcome: Approved
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1 and 301.9100-3; Announcement 2001-17

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201511019 Third Party Communication: None
Release Date: 3/13/2015 Date of Communication: Not Applicable
Index Number: 856.07-00, 9100.01-00
Person To Contact:
------------------------ -------------------
------------------------ ID No. ------------------
----------------------------- Telephone Number:
-------------------------------------------- ----------------------
------------------------------ Refer Reply To:
CC:FIP:B03
PLR-130058-14
Date:
December 02, 2014

LEGEND:

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

Subsidiary = ---------------------------------------

Parent = ---------------------------------

Investment Partnership = -----------------------------------------

Partnership A = ----------------------

Company B = ------------------------------

Company C = ------------------------------

Law Firm = ----------------------------

Accounting Firm = -----------------------

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

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

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

Date 2 = ---------------------------
PLR-130058-14 2

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

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

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

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

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

Date 8 = --------------------

Date 9 = --------------------

Year 1 = -------

Year 2 = -------

a = ------

b = ------

c = -----

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

   This ruling responds to a letter dated August 5, 2014, and subsequent

correspondence, submitted on behalf of Taxpayer and Subsidiary. Taxpayer and
Subsidiary request an extension of time under § 301.9100-1 and § 301.9100-3 of the
Procedure and Administration Regulations to make an election under § 856(l) of the
Internal Revenue Code to treat Subsidiary as a taxable REIT subsidiary (TRS) of
Taxpayer effective as of Date 1.

                                        FACTS

   Taxpayer is a limited liability company organized under the laws of State X.

Taxpayer represents that it made an election under § 856(c) of the Code to be treated
as a real estate investment trust (REIT). Taxpayer was formed by Parent on Date 2.
Subsidiary is a corporation organized under the laws of State X and was formed on
Date 1.
PLR-130058-14 3

    Investment Partnership is a limited partnership organized under the laws of State

X. Investment Partnership is a privately owned hedge fund sponsor that also manages
certain selected private investments. Investment Partnership primarily provides its
services to pooled investment vehicles, and invests in private and public equity and
fixed income instruments. Investment Partnership formed Parent on Date 2. Parent, a
partnership for federal tax purposes, owns common units of Taxpayer. Parent serves
as the aggregating investment vehicle for Investment Partnership’s and other third party
investors’ investment in Taxpayer.

     As a result of certain purchase and contribution transactions that closed on Date

3, Taxpayer acquired approximately a % of the interests in Partnership A, a limited
liability company organized under the laws of State X, which is treated as a partnership
for federal income tax purposes. Partnership A holds a diverse portfolio of wireless
communication towers located throughout the United States. The remaining
approximately b % of the interests in Partnership A are owned by certain managers of
Partnership A (“Management”) and certain investment funds unrelated to Taxpayer.
Although Taxpayer purchased approximately a % of the interests in Partnership A,
Investment Partnership (through Parent and Taxpayer) has retained Management in
most respects.

    Partnership A leases space on its towers to a variety of wireless communications

providers. Partnership A holds a majority of its wireless communication towers directly,
but holds a smaller portion of its towers indirectly through its ownership of (i) Company
C, a limited liability company organized under the laws of State X, and (ii) c % of the
interests in Subsidiary (and, through its ownership of a % of Partnership A, Taxpayer
indirectly holds a % of the interests in Subsidiary).

   Partnership A was formed in Year 1 to own and operate wireless communication

towers. From the time of its formation to the time when Taxpayer acquired its a %
interest in it, Partnership A generally acquired wireless communication towers through
acquisitions treated as asset acquisitions for U.S. federal income tax purposes.
Partnership A generally did not acquire interests in entities treated as corporations.

   In the fourth quarter of Year 2, Management began negotiations with the owners

of Company B (“Sellers”) to acquire Company B’s portfolio of towers and related assets.
Company B is a Subchapter S corporation organized under the laws of State Y. Law
Firm was hired to handle the transaction. Although the transaction was originally
structured as an acquisition of Company’s B’s portfolio of assets, the transaction was
changed to an acquisition of Company B’s stock. Accordingly, on Date 4, Partnership A
agreed to purchase c % of the stock of Company B. Although Investment Partnership
business personnel on Partnership A’s board were made aware of the pending
transaction, Investment Partnership’s and Taxpayer’s tax professionals were not notified
of the proposed structure of the acquisition of Company B.
PLR-130058-14 4

   Partnership A formed Subsidiary prior to the closing of the sale of Company B

stock to Partnership A. Sellers and Partnership A agreed to assign Partnership A’s
obligations and rights to Subsidiary. Therefore, Subsidiary purchased the stock of
Company B at closing. Investment Partnership’s and Taxpayer’s tax professionals were
not notified that the sale of Company B had been completed, resulting in Taxpayer
holding an indirect a % interest in Subsidiary without its knowledge.

    Neither Investment Partnership nor Taxpayer has in-house tax professionals.

Instead, the General Counsel for Investment Partnership has responsibility for
organizing legal analysis associated with certain investments made by Investment
Partnership and its co-investors. As a result, Investment Partnership often engages
external tax advisors to provide tax-related legal analysis. However, coordination of tax
filings and interactions with external tax accountants is generally handled by Investment
Partnership’s Chief Operating Officer (“COO”), not the General Counsel. Investment
Partnership’s COO is also the vice president of Taxpayer. Accordingly, Investment
Partnership, on behalf of Taxpayer, engages Accounting Firm and other advisors. In an
engagement letter between Investment Partnership and Accounting Firm to provide tax
compliance and advisory services, Investment Partnership engaged Accounting Firm to
prepare the Year 2 federal and state and local income tax returns for Taxpayer.

    Prior to its investment in Taxpayer, Investment Partnership had not made any

significant portfolio investment involving a REIT, and had not used a REIT to make a
controlling investment in any asset or assets. Moreover, at no time during the
acquisition process of Company B, were Investment Partnership’s or Taxpayer’s tax
professionals notified of the proposed transaction. In addition, Partnership A uses a
different external auditor and tax return preparer than does Taxpayer. Consequently,
Investment Partnership and Taxpayer mistakenly did not comprehend the need for
making a taxable REIT subsidiary election for Subsidiary within the necessary time
period.

    On Date 5, Accounting Firm filed a Form 7004 with the Internal Revenue Service

requesting a six-month extension of the deadline for Taxpayer to file its federal income
tax return for the Year 2 tax year. On Date 6, in connection with the preparation of the
Year 2 tax return for Taxpayer, Accounting Firm sent an email to Taxpayer’s vice
president inquiring about the acquisition of Company B and indicating that this could
pose certain issues relating to Taxpayer. In response, Taxpayer’s vice president
initiated various inquiries with Partnership A to determine all of the facts and
circumstances related to this acquisition and presented them to Accounting Firm for
review. By early Date 7, Accounting Firm had concluded that the ownership through
Partnership A of a % of the stock of Subsidiary caused Taxpayer to fail to satisfy certain
REIT requirements. To rectify the situation, Taxpayer was informed that it would need
to make a taxable REIT subsidiary election with respect to Subsidiary.
PLR-130058-14 5

    Taxpayer’s vice president has acknowledged that Taxpayer failed to provide

sufficient oversight of the tax compliance and reporting for Taxpayer and the
transactions undertaken at the Partnership A level that affect Taxpayer’s tax
compliance. After being informed of their inadvertent error, Taxpayer’s vice president
and Investment Partnership’s General Counsel directed Taxpayer and Subsidiary to file
on Date 8 a Form 8875 treating Subsidiary as a taxable REIT subsidiary of Taxpayer
that had an effective date of Date 9; and then submit a request under § 301.9100-1 and
§ 301.9100-3 of the Procedure and Administration Regulations that the Form 8875 be
considered as timely filed for an effective date as of Date 1.

  Affidavits on behalf of Taxpayer and Subsidiary have been submitted as required

by § 301.9100-3(e) of the Regulations.

  Taxpayer and Subsidiary make the following additional representations:

1. The request for relief was filed by Taxpayer and Subsidiary before the failure to
   make the regulatory election was discovered by the Internal Revenue Service
   (Service).

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

3. Taxpayer and Subsidiary did not seek to alter a return position for which an
   accuracy-related penalty has been or could have been imposed under § 6662 of
   the Code at the time Taxpayer and Subsidiary requested relief and the new
   position requires or permits a regulatory election for which relief is requested.

4. Taxpayer and Subsidiary did not choose to forgo making the TRS election after
   being informed in all material aspects of the required election and the related tax
   consequences.

                            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, the election and the revocation may be made without the
   consent of the Secretary.
   PLR-130058-14 6

   In Announcement 2001-17, 2001-1 C.B. 716, the Service announced the
   

   availability of Form 8875, “Taxable REIT Subsidiary Election.” The Announcement
   provides that 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 more than 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
   Internal Revenue Bulletin), or a statutory election (but no more than 6 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 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.
   Section 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
   Taxpayer and Subsidiary have satisfied the requirements for granting a reasonable
   extension of time to elect under § 856(l) to treat Subsidiary as a TRS of Taxpayer.
   Accordingly, the Form 8875 treating Subsidiary as a taxable REIT subsidiary of
   Taxpayer that was filed on Date 8, will be considered as timely filed with an effective
   date of Date 1.

   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. 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
   PLR-130058-14 7

referenced in this letter. In particular, no opinion is expressed with regard to whether
Taxpayer qualifies as a REIT or whether Subsidiary otherwise qualifies as a TRS under
subchapter M of the Code.

   No opinion is expressed with regard to whether the tax liability of either Taxpayer

or Subsidiary 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 Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                               Sincerely,


                                               ______________________
                                               Julanne Allen
                                               Assistant to the Branch Chief, Branch 3
                                               Office of the Associate Chief Counsel
                                               (Financial Institutions & Products)

Enclosures:
Copy of this letter
Copy for section 6110 purposes