Office-building company receives 90 days to make late REIT election

Plain-English summary

A limited liability company that owned an office building intended to elect real estate investment trust status for its initial short tax year. Its outside accounting firm could not electronically file the extension request and sent the paper filing to an affiliated company's tax department, which mistakenly believed the accounting firm had handled it. Because the extension was not filed, the deadline for the return carrying the REIT election was not extended. The taxpayer sought relief before the IRS discovered the missed election and represented that the request did not use hindsight or reduce aggregate tax liability. The IRS found that the section 301.9100-3 requirements were met and granted 90 days to make the section 856(c) election. It did not rule on whether the company otherwise qualified as a REIT.

Ruling snapshot

• Question: May the company make a late election under section 856(c) to be treated as a REIT?
• Outcome: approved, with 90 days to make the election
• Key authorities: IRC § 856(c); 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: 201704017
Third Party Communication: None
Release Date: 1/27/2017
Date of Communication: Not Applicable
Index Number: 856.00-00, 9100.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:FIP:B03
PLR-117290-16
Date:
November 01, 2016

LEGEND:

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

State = --------------

Address = ---------------------------------------------

Joint Venture Company = -----------------------

Management Company = ---------------

Real Estate Company = ---------------------

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

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

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

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

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

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

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

This ruling responds to a letter dated May 26, 2016, submitted on behalf of Taxpayer. Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-
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3 of the Procedure and Administration Regulations to make an election under § 856(c) of the Internal Revenue Code (“Code”) to be treated as a real estate investment trust (“REIT”) for the taxable year ended Date 1.

FACTS

Taxpayer is a limited liability company formed under the laws of State. Taxpayer elected to be classified as an association taxable as a corporation effective Date 2. Taxpayer owns an office building located at Address. Joint Venture Company wholly owns Taxpayer. Management Company and Real Estate Company organized Joint Venture Company to hold Taxpayer. Management Company and Real Estate Company share administrative duties related to Joint Venture Company.

Taxpayer intended to elect to be treated as a REIT under § 856 on its Form 1120-REIT, Tax Return for Real Estate Investment Trusts, for Taxpayer’s initial, short taxable year beginning Date 2 and ending Date 1. Joint Venture Company’s operating agreement provides that the managing member will “cause [Taxpayer] to elect on its U.S. federal income tax return for the ------- fiscal year, to be treated as a REIT.” Taxpayer has a taxable REIT subsidiary, Subsidiary, for which a timely election to be classified as a taxable REIT subsidiary was made on Form 8875, Taxable REIT Subsidiary Election.

Management Company’s tax department provides tax services to Joint Venture Company. In addition, Accounting Firm was engaged to prepare state and federal tax returns and extensions for entities affiliated with Management Company. Accounting Firm is responsible for filing extensions electronically. Management Company’s tax department files any extensions that cannot be filed electronically. Accounting Firm represents that it was technically impractical to electronically file Taxpayer’s Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, for the taxable year ended Date 1. Therefore, Accounting Firm sent Taxpayer’s Form 7004 to Management Company’s tax department with instructions to file the Form 7004 on paper with the Internal Revenue Service (“Service”). Management Company’s tax department overlooked Accounting Firm’s instructions to file Taxpayer’s Form 7004 on paper. Management Company’s tax department believed Accounting Firm had filed Taxpayer’s Form 7004 electronically because Accounting Firm had electronically filed a Form 7004 for other joint ventures between Management Company and Real Estate Company.

Taxpayer’s Form 7004 was due Date 3. Accounting Firm contacted Management Company’s tax department after Date 3 to confirm that the tax department had filed Taxpayer’s Form 7004 on paper. Management Company’s tax department searched its files and determined that the department had not filed Taxpayer’s Form 7004. Because 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, was not extended from Date 3 to Date 4.
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Taxpayer makes the following additional representations:

1. The request for relief was filed by Taxpayer before the failure to make the
   regulatory election was discovered by the Service.
2. Granting the relief will not result in Taxpayer having a lower tax liability in the
   aggregate for all years to which the regulatory election applies than Taxpayer
   would have had if the election had been timely made (taking into account the
   time value of money).
3. Taxpayer 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 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 did not choose to not file the election.
5. Taxpayer is 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.

6. The period of limitations on assessment under § 6501(a) has not expired for
   Taxpayer for the taxable year in which the election should have been filed, nor
   for any taxable year(s) that would have been affected by the election had it been
   timely filed.

   Affidavits on behalf of Taxpayer have been provided with the submission as
   required by § 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 § 1.856-2(b) of the Income Tax Regulations, the election shall be made by the trust 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, 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 to mean an election whose due date is prescribed by a regulation, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

   Section 301.9100-3(a) through (c)(1) sets forth rules that the Service generally
   will use to determine whether, under the particular facts and circumstances of each
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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.

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 to have not acted reasonably and 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 of the required election, but chose not to file the election; or (iii) uses hindsight in requesting relief.

Section 301.9100-3(c)(1) 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)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in a 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 the representations made, we conclude that Taxpayer has satisfied the requirements for granting a reasonable extension of time to elect under § 856(c) to be treated as a REIT for the tax year ended on Date 1. Taxpayer is granted a period of time not to exceed 90 calendar days from the date of this letter to make the election.
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This ruling is limited to the timeliness of the filing of Taxpayer's election under § 856(c). This ruling's application is limited to the facts, representations, Code and regulation sections cited herein. No opinion is expressed with regard to whether Taxpayer otherwise qualifies as a REIT under subchapter M of the Code.

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 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 representatives.

Sincerely,

______
K. Scott Brown
Branch Chief, Branch 3
Office of the Associate Chief Counsel
(Financial Institutions & Products)

Enclosures:
Copy of this letter
Copy for section 6110 purposes