REIT and subsidiary receive more time for TRS election

Plain-English summary

A company intended to elect REIT status and to treat a hotel-operating subsidiary as a taxable REIT subsidiary from the start of operations. Its investment adviser believed outside tax professionals had filed Form 8875, but a later discussion revealed a miscommunication and no election could be found. The taxpayers represented that they had consistently treated the entities as a REIT and TRS, requested relief before the IRS discovered the omission, and would not obtain lower aggregate tax liability from the late election. The IRS granted 90 days to file the joint election with the requested effective date.

Ruling snapshot

• Question: Could a prospective REIT and its subsidiary make a late taxable REIT subsidiary election?
• Outcome: Approved, with 90 days to file Form 8875 for the requested effective date.
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201640002                                              Third Party Communication: None
Release Date: 9/30/2016                                        Date of Communication: Not Applicable
Index Number: 856.07-00, 9100.00-00
                                                               Person To Contact:
----------------------                                         --------------------, ID No. ------------------
-----------------------------------------------                Telephone Number:
-----------------------------------------------------          --------------------
--------------------------------------------------             Refer Reply To:
--------------------------------------                         CC:FIP:B01
 --------------------------------                              PLR-103080-16
                                                               Date:
                                                               June 29, 2016




Legend:

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

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

Investment Adviser                  =        -----------------------------------------------------------------------

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

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

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

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

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

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

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

Month 1                             =        ---------

Month 2                             =        --------------

Year 1                              =        ------
PLR-103080-16                                2



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

       This responds to a letter dated January 13, 2016 submitted on behalf of Parent
and Subsidiary (collectively, “Taxpayers”). Taxpayers request an extension of time
under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations
to elect to treat Subsidiary as a taxable REIT subsidiary (“TRS”) of Parent under
§ 856(l) of the Internal Revenue Code (“Code”).

                                          Facts

         Parent is a State A limited liability company formed on Date 1 and began
operations on Date 2. As of formation, Parent defaulted to an entity disregarded as
separate from its owner for federal income tax purposes. Parent has not yet filed an
initial federal income tax return. Parent intends to elect to be treated for federal income
tax purposes as a real estate investment trust (“REIT”) under § 856 by filing Form 1120-
REIT, U.S. Income Tax Return for Real Estate Investment Trusts, on or before Date 3.
Parent was formed with the intention of holding, through a subsidiary, a hotel property.

        Subsidiary is a State A limited liability company that was formed on Date 1 and
began operations on Date 2. Subsidiary submitted a Form 8832, Entity Classification
Election, seeking late election relief under Rev. Proc. 2009-41, 2009-39 I.R.B. 439, prior
to the due date of its first income tax return to make an election to be classified as a
domestic corporation effective Date 2. Form 8832 was filed on Date 4 and is currently
pending with the Internal Revenue Service (“Service”) Entity Control Unit. Taxpayers
represent that they always intended to make an election for Subsidiary to be a TRS to
satisfy the requirements of § 856(d)(8).

       Taxpayers were formed by, and currently are managed by, Investment Advisor.
Investment Advisor engages outside tax professionals for tax advice relating to many of
the tax obligations of the entities it manages. Investment Advisor engaged Law Firm
and Accounting Firm to advise Investment Advisor with respect to certain legal and tax
matters related to the hotel property transaction involving Taxpayers.

        Investment Advisor believed that its external tax advisors filed the federal
income tax forms required to elect to treat Parent as a REIT and to treat Subsidiary as a
TRS, including the preparation of Form 8875, Taxable REIT Subsidiary Election. In
Month 1 of Year 1, however, individuals from Law Firm and Accounting Firm
participated in a conference call to discuss a different real estate transaction in which
Law Firm was preparing REIT-related elections for Investment Advisor. During the call,
the TRS election that was believed to have been filed on behalf of Taxpayers was
discussed. It was realized that due to an apparent miscommunication on who was to
prepare and file the TRS election, the election inadvertently might not have been filed
timely. When the TRS election could not be located, Accounting Firm, in Month 2 of
PLR-103080-16                                 3

Year 1, contacted the Service and determined that there was no TRS election on
Subsidiary’s account in the Master File.

       Investment Advisor requested advice from Accounting Firm on how to proceed.
Because the desired effective date of Date 2 for Subsidiary’s TRS election is more than
2 months and 15 days prior to the discovery of the oversight, Form 8875 cannot be
timely filed with an effective date of Date 2. As such, Accounting Firm advised
Investment Advisor to submit a request for relief under § 301.9100-1 for an extension of
time to file the election under § 856(l).

      Taxpayers represent that, notwithstanding the fact that no TRS election was
made by Taxpayers for Subsidiary, Parent and Subsidiary have continually been treated
as a REIT and TRS, respectively, since Date 2. All relevant tax years of Taxpayers
remain open and are not closed under the statute of limitations.

      In support of their letter ruling request, Taxpayers submitted affidavits from
Investment Advisory, Accounting Firm, and Law Firm as required by § 301.9100-3(e).

      Taxpayers make the following additional representations:

      1. The request for relief was filed by Taxpayers before the failure to make
      the regulatory election was discovered by the Service.

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

      3. Taxpayers are not seeking 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 Taxpayers 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 elections and related tax
      consequences, Taxpayers did not choose to not file the election.

      5. Taxpayers have not used hindsight to seek an extension of time to
      make the TRS election. No specific facts have changed since the due
      date for making the election that makes this election advantageous to
      either Parent or Subsidiary.
PLR-103080-16                                 4

                                    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, § 856(l) specifically provides that the election, and any
revocation thereof, may be made without the consent of the Secretary.

        In Announcement 2001-17, 2001-1 C.B. 716, the Service announced the
availability of new Form 8875, Taxable REIT Subsidiary Election. According to the
Announcement, 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 of the election 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 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 for automatic extensions under § 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 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 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).
PLR-103080-16                                   5


                                         Conclusion

       Based on the information submitted and representations made, we conclude that
Taxpayers have satisfied the requirements for granting a reasonable extension of time
to elect under § 856(l) to treat Subsidiary as a TRS of Parent, effective as of Date 2.
Accordingly, Taxpayers have 90 days from the date of this letter to file their intended
elections.

       This ruling is limited to the timeliness of the filing of Forms 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
Parent qualifies as a REIT, or whether Subsidiary otherwise qualifies as a TRS under
part II of subchapter M of the Code.

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

      The ruling contained in this letter is based upon information and representations
submitted by Taxpayers and accompanied by a penalty of perjury statements executed
by appropriate parties. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

      This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.
PLR-103080-16                                  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,


                                       ___________________________
                                       Steven Harrison
                                       Branch Chief, Branch 1
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)




Enclosures (2):

       Copy of this letter
       Copy for section 6110 purposes


cc: