Corporation receives relief for a late first-year REIT election

Plain-English summary

A corporation intended to elect real estate investment trust status for its first taxable year. Its tax firm overlooked Form 7004, so the filing deadline was not extended and the Form 1120-REIT carrying the election was late. The corporation requested relief before the IRS found the problem and filed the return while the ruling request was pending. The IRS found reasonable reliance, good faith, and no government prejudice and extended the election deadline through the actual filing date. It did not decide whether the corporation otherwise qualified as a REIT or whether late-filing interest or penalties applied.

Ruling snapshot

• Question: May the corporation's first-year REIT election on a late-filed Form 1120-REIT be treated as timely?
• Outcome: Approved through the date the return was filed.
• Key authorities: IRC § 856(c)(1); Treas. Reg. §§ 1.856-2(b), 301.9100-1, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201516037 Third Party Communication: None
Release Date: 4/17/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------- ----------------------------, ID No. -------------
---------------------------------------------------- ----------------
----------------------------------------- Telephone Number:
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------------------------------- Refer Reply To:
CC:FIP:B02
PLR-128520-14
Date:
December 22, 2014

Legend

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

State A = ------------

State B = --------------------

Owner 1 = ------------------------------

Owner 2 = ---------------------------------------------

Manager = ------------------------------------

Firm = ---------------------------------------

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

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

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

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

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

Date 6 = ---------------------------
PLR-128520-14 2

Year 1 = ------

x = -----

y = -----

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

   This ruling responds to your letter dated July 28, 2014, and supplemental

submission dated December 16, 2014, requesting an extension of time under sections
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make
an election under section 856(c) of the Internal Revenue Code (“Code”) to be treated as
a real estate investment trust (“REIT”) for the Taxpayer’s taxable year ended on Date 2.

                                       FACTS

   Taxpayer was formed on Date 1 as a corporation under the laws of State A for

the purpose of investing in real estate located in State B. Taxpayer is a corporation
under the laws of State A for federal income tax purposes.

   From Date 1 until Date 2, Taxpayer’s common shares were owned by Owner 1, a

State A corporation that elected to be taxed as a REIT under section 856. As of Date 2,
Owner 1’s common shares were owned by Owner 2, a State A limited partnership.
Owner 1’s preferred shares were owned by x shareholders. Taxpayer and Owner 1
were formed by and are managed by Manager. Manager is a privately-held registered
investment advisor. On Date 3, y additional shareholders purchased shares in
Taxpayer.

   Firm assists Manager with federal and state tax compliance services for the

various entities Manager serves. Manager relies on the advice of Firm, and relies on
Firm to prepare the relevant tax forms required to meet the managed entities’ federal
and state tax compliance obligations.

   Firm was engaged to advise and assist in the preparation of Taxpayer’s Year 1

Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, including
the preparation of a Form 7004, Application for Automatic 6-Month Extension of Time to
file Certain Business Income Tax, Information, and Other Returns. As part of
Manager’s engagement with Firm, it is customary for Firm to file Forms 7004 to extend
the period of time to file the original income tax return for all entities managed by
Manager.
PLR-128520-14 3

   Taxpayer intended to qualify as a REIT under section 856 for its initial taxable

year beginning on Date 1 and ending on Date 2 (First REIT Taxable Year). Taxpayer
represents that it would have qualified as a REIT under the provisions of section 856 for
that taxable year, but for the filing of a Form 1120-REIT to make an election to be so
treated for federal income tax purposes.

   Taxpayer’s Form 7004 for its First REIT Taxable Year was due on or before Date

4, the original due date for its Form 1120-REIT. It was Taxpayer’s and Firm’s intention
to extend the time for the Form 1120-REIT to be filed. Although Firm was engaged to
prepare and file the extension, Taxpayer’s Form 7004 was not filed on or before Date 4.
This failure to file was the result of inadvertence and administrative oversight on the part
of Firm. In preparing and filing numerous extensions for the various entities under the
control of Manager, Firm overlooked filing Taxpayer’s Form 7004. On Date 5, Firm
discovered that Taxpayer’s Form 7004 had not been filed.

   Because Taxpayer’s Form 7004 was not timely filed, the deadline for filing

Taxpayer’s federal income tax return, on which Taxpayer’s REIT election was to be
made, for its First REIT Taxable Year was not extended from Date 4 to Date 6. As
such, Taxpayer’s intended election to be treated as a REIT pursuant to section
856(c)(1) and section 1.856-2(b) of the Income Tax Regulations was not filed on or
before Date 4. Firm informed Taxpayer of the missed Form 7004 filing, and Firm
advised Taxpayer and Manager to submit a request for relief under section 301.9100-1.
Accordingly, Taxpayer submitted this request for a private letter ruling under section
301.9100-1(c) requesting an extension of time to elect to be treated as a REIT for its
taxable year ended Date 2.

     Taxpayer filed its Form 1120-REIT for its First REIT Taxable Year before Date 6

while its request for this private letter ruling was pending. On its Form 1120-REIT,
Taxpayer elected to be treated as a REIT for its First REIT Taxable Year.

   Taxpayer represents that:

   1. This relief is being requested before the failure to make the regulatory
      election was discovered by the Internal Revenue Service (“Service”).
      Taxpayer represents that the failure to make said election was never
      discovered by the Service.

   2. Taxpayer relied upon qualified tax professionals, Firm, who did not prepare or
      timely file Form 7004 and Form 1120-REIT for Taxpayer’s First REIT Taxable
      Year. No actions of Taxpayer contributed to the failure to timely file its federal
      income tax return electing to be treated as a REIT.

PLR-128520-14 4

   3. Granting the relief will not result in Taxpayer having a lower U.S. federal tax
      liability in the aggregate for all years to which the regulatory election applies
      than if the election had been timely made (taking into account the time value
      of money).

   4. Taxpayer is not seeking to alter a return position for which an accuracy-
      related penalty has been or could have been imposed under section 6662 at
      the time Taxpayer is requesting relief and the new position requires or permits
      a regulatory election for which relief is requested.

   5. Being fully informed of the required regulatory election and related tax
      consequences, Taxpayer did not choose not to file the election. No decision
      was made not to file the requested election, and at all times since formation,
      Taxpayer intended to be treated as a REIT for federal income tax purposes.

   6. Taxpayer is not using hindsight in requesting relief. Taxpayer will not be in a
      better tax position by the grant of relief than if the regulatory election had
      been timely made. No facts have changed that make it more advantageous
      for Taxpayer to make the regulatory election at issue.

   7. Taxpayer’s Form 1120-REIT for its First REIT Taxable Year was filed before
      Date 6, but after Date 4. As such, that taxable year and any subsequent
      taxable years remain open.

  An affidavit supporting Taxpayer’s representations was provided with the

submission, as required by section 301.9100-3(e).

                              LAW AND ANALYSIS

   Section 856(c)(1) 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 an election for a previous taxable year, and
such election has not been terminated or revoked. Pursuant to section 1.856-2(b), the
election shall be made by computing taxable income as a REIT in its return for the first
taxable year for which it desires the election to apply.

   Section 301.9100-1(c) provides that the Commissioner has discretion to grant a

reasonable extension of time to make a regulatory election (as defined in section
301.9100-1(b)) 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 Code except subtitles E, G, H,
and I. Section 301.9100-1(b) defines a regulatory election as an election whose date is
prescribed by regulations or by a revenue ruling, revenue procedure, notice, or
announcement published in the Internal Revenue Bulletin.
PLR-128520-14 5

   Section 301.9100-3(a) provides that requests for relief subject to this section will

be granted when the taxpayer provides the evidence (including affidavits described in
section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that (1)
taxpayer acted reasonably and in good faith, and (2) the grant of relief will not prejudice
the interests of the Government.

    Section 301.9100-3(b) provides that a taxpayer is deemed to have acted

reasonably and good faith if the taxpayer (i) requests relief under this section 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 reasonable diligence (taking into account
the taxpayer’s experience and the complexity of the return or issue), 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, including a tax
professional employed by the taxpayer, and the tax professional failed to make, or
advise the taxpayer to make, the election. A taxpayer will be deemed not to have acted
in good faith if the taxpayer (i) is seeking 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 and the new position requires or permits a regulatory election
for which relief is requested; (ii) was informed of the required election but chose not to
file the election; or (iii) uses hindsight in requesting relief.

    Section 301.9100-3(c) provides that a reasonable extension of time to make a

regulatory election will be granted only when the interests of the government will not be
prejudiced by the granting of relief. Section 301.9100-3(c)(i) 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). Section 301.9100(3)(c)(ii) provides 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 section 6501(a) before the taxpayer’s receipt of a ruling granting
relief under this section.

                                  CONCLUSION

   Based on the information submitted and the representations made, we conclude

that Taxpayer has satisfied the requirements for the Service to grant a reasonable
extension of time to elect under section 856(c) to be treated as a REIT for the tax year
ending on Date 2. Taxpayer represents that while this letter ruling was pending and
before Date 6, Taxpayer made the election to be treated as a REIT for the tax year
ending on Date 2. Accordingly, Taxpayer is hereby granted a reasonable extension of
time through the date that Firm filed Taxpayer’s Form 1120-REIT for Taxpayer’s First
PLR-128520-14 6

REIT Taxable Year to make an election to be treated as a REIT for U.S. federal income
tax purposes.

    This ruling is limited to the timeliness of the filing of Taxpayer’s election under

section 856(c). This ruling’s application is limited to the facts, representations, Code
sections, and regulations cited herein. No opinion is expressed regarding whether
Taxpayer otherwise qualifies as a REIT under subchapter M of the Code. No opinion is
expressed concerning whether Taxpayer is subject to interest or penalties associated
with its late filed Form 1120-REIT or its failure to file Form 7004 to request an automatic
extension with which to file that return. No opinion is expressed regarding any material
item or representation on Taxpayer’s Form 1120-REIT.

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

  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 requesting 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 representatives.

                                              Sincerely,


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