REIT and subsidiary receive 90 days for late taxable-subsidiary election

Plain-English summary

A subsidiary had elected taxable REIT subsidiary status with its former REIT owner. After a new REIT acquired the subsidiary, the parties intended that status to continue but their tax adviser mistakenly believed the old election carried over and did not file a new Form 8875. The subsidiary consistently filed corporate returns as a taxable REIT subsidiary, and a later adviser discovered the missing election during due diligence. The IRS found that the REIT and subsidiary acted reasonably and in good faith, requested relief before the Service found the error, and were not using hindsight. It granted 90 days to file a joint election effective as of the ownership transfer date, without deciding whether either entity otherwise qualified as a REIT or taxable REIT subsidiary.

Ruling snapshot

• Question: Should the new REIT owner and its subsidiary receive extra time to file the required taxable REIT subsidiary election after the ownership transfer?
• Outcome: Approved, with 90 days to file Form 8875 effective as of the transfer date
• 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: 201530005 Third Party Communication: None
Release Date: 7/24/2015 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-104321-15
Date:
April 20, 2015

LEGEND:

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

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

Company A = ---------------------------------------------------

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

Firm A = --------------------------------------------

Firm B = ---------------------------------------------------

Firm C = ----------------------------------------

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

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

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

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

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

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

Year 2 = ------
PLR-104321-15 2

a = -----

Dear --------------------

   This ruling responds to a letter dated January 23, 2015, 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.

                                      FACTS

   Company A is an independent alternative investment management firm and is

the parent of Taxpayer. Taxpayer represents that it made an election to be treated as a
real estate investment trust (REIT) under § 856 of the Code. Taxpayer was organized
in Year 1 and invests in real property through its subsidiaries.

   Subsidiary is wholly owned by Taxpayer. Subsidiary was formed on Date 1 as a

State X limited liability company and defaulted to a disregarded entity for U.S. federal
income tax purposes. Subsidiary subsequently elected to change its classification to a
corporation for U.S. federal income tax purposes, effective Date 2.

   Subsidiary was wholly owned by Company B, an entity also owned by Company

A that Taxpayer represents made an election to be treated as a REIT under § 856 of the
Code. An election under § 856(l) of the Code to treat Subsidiary as a TRS of Company
B effective Date 2, was jointly made by Company B and Subsidiary in Year 1. In late
Year 1, Taxpayer was formed and became the parent company of Company B.
Company B distributed a % of the membership interests of Subsidiary to Taxpayer on
Date 3.

  Company A had consulted Firm A, its tax advisor at the time, to facilitate the

transactions described above. Taxpayer represents Company A always intended for
Subsidiary to be treated as a TRS by Taxpayer as it had been so treated by Company
B. However, Firm A did not realize that upon Taxpayer acquiring ownership of the
membership interests of Subsidiary, a joint election should have been made by
Taxpayer and Subsidiary by filing Form 8875 to treat Subsidiary as a TRS of Taxpayer.
Firm A mistakenly believed that a second TRS election was not necessary because
Subsidiary had already elected to be a TRS of its prior owner, Company B, and that
such classification would continue with Taxpayer, as the new owner.
PLR-104321-15 3

    Firm B was hired by Company A to issue an opinion on the REIT status of

Taxpayer. As part of its due diligence, Firm B requested copies of all TRS elections
filed for Subsidiary from Company A and Company A’s current tax advisor, Firm C.
Around Date 4, an employee of Firm C realized that Form 8875 had not been filed by
Taxpayer and Subsidiary after the membership interests of Subsidiary were distributed
by Company B to Taxpayer. The matter was brought to the attention of Company A and
Firm B. Subsequently, Firm C filed a request for a private letter ruling on behalf of
Taxpayer and Subsidiary, requesting 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 Code to treat Subsidiary as a TRS of Taxpayer, effective Date 3.

   Taxpayer and Subsidiary assert that the failure to make the required TRS

election was an error caused by a misunderstanding concerning the need to file a new
Form 8875 after Taxpayer’s acquisition of Subsidiary. Furthermore, Taxpayer has
represented that since Date 3, Subsidiary has been consistently treated as a TRS of
Taxpayer; specifically, Subsidiary has filed its Forms 1120 for Year 1 and Year 2 as a
TRS.

  Affidavits on behalf of Taxpayer and Subsidiary were provided with the

submission as required by § 301.9100-3(e) of the Procedure and Administration
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. Being fully informed of the required regulatory election and related tax
   consequences, Taxpayer and Subsidiary did not choose to not file the election.
   PLR-104321-15 4

5. Taxpayer and Subsidiary are not using hindsight in requesting relief. No specific
   facts have changed since the due date for making the election that makes this
   election advantageous to Taxpayer and Subsidiary.

                             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.

   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 Procedure and Administration Regulations provides
   that the Commissioner has discretion to grant a reasonable extension of time to make a
   regulatory election , 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 301.9100-1(b) defines a regulatory election 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.

   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(a) provides that
   requests for relief subject to this section will be granted when the taxpayer provides the
   evidence (including affidavits described in § 301.9100-3(e)) 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.
   PLR-104321-15 5

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

   reasonably and in 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. Moreover, a taxpayer will be
   deemed not to have acted 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 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.

   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 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)(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 § 6501(a) before the taxpayer’s receipt of a ruling granting relief under this
   section.

                                 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,
   effective Date 3. Taxpayer and Subsidiary have 90 calendar days from the date of this
   letter to make the intended election.

   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
   referenced in this letter. In particular, no opinion is expressed with regard to whether
   PLR-104321-15 6

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 first two authorized representatives.

                                               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

cc: