REIT and subsidiary receive late TRS election relief

Plain-English summary

A real estate investment trust and its wholly owned corporation intended to file Form 8875 to elect taxable REIT subsidiary status, but personnel turnover at their investment adviser caused the deadline to be missed. An accounting firm discovered the omission during later tax-compliance work, before the IRS identified it. The taxpayers represented that relief would not lower their aggregate tax liability, that they had not used hindsight, and that they had not deliberately skipped the election. The IRS granted 90 days to file the election with the intended effective date but did not decide whether the parent qualified as a REIT or the subsidiary otherwise qualified as a TRS.

Ruling snapshot

• Question: May the REIT and its wholly owned subsidiary file a late taxable REIT subsidiary election?
• Outcome: approved; a 90-day extension was granted
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1, 301.9100-3; Announcement 2001-17

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201653016
Third Party Communication: None
Release Date: 12/30/2016
Date of Communication: Not Applicable
Index Number: 856.07-00, 9100.00-00
Person To Contact:
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ID No. ------------------
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CC:FIP:B01
PLR-121797-16
Date:
September 28, 2016

Legend:

Parent = -------------------------------------------------
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Subsidiary = ------------------------------------------------------
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Investment Adviser = ----------------------------------------------

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

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

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

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

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

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

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

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

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

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

Month 3 = -----------------
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Year 1 = -------

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

This responds to a letter dated July 8, 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, Parent’s wholly owned corporate 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 that has elected to be treated for federal income tax purposes as a real estate investment trust ("REIT") under § 856 for its initial taxable year that commenced on Date 1 and ended on Date 2 by filing Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, on Date 3. Taxpayers represent that they were formed to hold multiple investments, including, but not limited to hotel properties.

Subsidiary is a State A corporation formed on Date 4. Taxpayers represent that it was intended that a Form 8875, Taxable REIT Subsidiary Election, would be filed for Subsidiary effective Date 5, and that, to be timely, it should have been filed by Date 6.

Taxpayers are affiliated with, and currently are managed by, Investment Advisor.
However, in early Year 1, there was turnover in personnel at Investment Advisor, which was the manager responsible for tax matters for Parent and Subsidiary. Prior to Month 1, Individual 1, a member of the internal accounting staff at Investment Advisor, had responsibility for various tax-related matters, including ensuring timely filing of Forms 8875. However, Individual 1 left Investment Advisor at the end of Month 1, at which time the due date for the Form 8875 had not yet passed and, at which time, the Form 8875 had not yet been filed. Subsequent to Individual 1’s departure, no replacement was hired until Month 2, when Individual 2 became employed by Investment Advisor. By that time, the due date for filing the Form 8875 already had passed. Moreover, because Individual 1 had been responsible for ensuring that Forms 8875 were timely filed, and there was a gap between his departure and the hiring of his replacement, the fact that the Form 8875 had, indeed, not been filed, was not immediately noted by other personnel at Investment Advisor.

Investment Advisor’s accounting personnel handle certain internal tax matters, but it has also engaged Accounting Firm to perform U.S. tax compliance and consulting services. Accounting Firm had also advised on the acquisition of the hotel property in which Taxpayers own an interest. In Month 3, during the course of the preparation of various Forms 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, Accounting Firm, inquired about
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the TRS election for Subsidiary, as that was one of the entities for which an extension was to be filed. When it was not immediately apparent that the election had been filed, Accounting Firm brought the issue to the attention of Investment Adviser. Investment Advisor directed Accounting Firm to request an account transcript from the Internal Revenue Service to determine whether a TRS election has been processed on behalf of Subsidiary. Accounting Firm did so and, after review of the transcript, noted that the relevant Master File transaction codes were not present on the account. Following confirmation that there was no record of a TRS election on file, Investment Advisor made the determination to proceed with submitting a request for relief to make a late TRS election pursuant to the authority of §§ 301.9100-1 and -3.

In support of their letter ruling request, Taxpayers submitted affidavits from Investment Advisor and Accounting 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 in making the decision 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.

6. All relevant tax years of Taxpayers remain open and are not closed under the statute of limitations.
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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).
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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 5. Accordingly, Taxpayers have 90 days from the date of this letter to file their intended election.

This ruling is limited to the timeliness of the filing of 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 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.
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In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives.

Sincerely,

_________
Jason G. Kurth
Assistant to the Branch Chief
Office of Associate Chief Counsel
(Financial Institutions & Products)

Enclosures (2):

Copy of this letter
Copy for section 6110 purposes