REIT receives 90 days to elect taxable subsidiary status

Plain-English summary

A subsidiary had been covered by a taxable REIT subsidiary election with an original REIT parent. After that REIT merged into a new parent, an advisor failed to explain that the existing Form 8875 election no longer applied because the original REIT had ceased to exist. The surviving parent and subsidiary intended taxable REIT subsidiary treatment from the merger date and sought relief after discovering the missing election. They represented that relief would not lower their aggregate tax liability, change a penalized return position, use hindsight, or affect a closed assessment year. The IRS granted 90 days to make the section 856(l) election, while expressing no opinion on whether the parent or subsidiary otherwise qualified for REIT or taxable REIT subsidiary status.

Ruling snapshot

• Question: Could the surviving REIT parent and subsidiary make a late joint election for taxable REIT subsidiary treatment after a merger?
• Outcome: approved, with a 90-day extension
• 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: 201710012 Third Party Communication: None
Release Date: 3/10/2017 Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.07-00
Person To Contact:
-------------------------------------------------------- --------------------, ID No. ------------------
----------------------------------- Telephone Number:
---------------------------------------- ----------------------
---------------------------------- Refer Reply To:
CC:FIP:B02
PLR-121796-16
Date:
December 02, 2016

LEGEND:

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

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

Partnership = ---------------------

Trust = ----------------------

Advisor = -----------------------

State 1 = --------------

State 2 = --------------

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

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

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

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

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

Date 6 = ---------------------------
PLR-121796-16 2

x = ----

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

  This ruling responds to a letter dated July 8, 2016, submitted on behalf of Parent

and Subsidiary. Parent and Subsidiary request an extension of time under sections
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to jointly
make an election under section 856(l) of the Internal Revenue Code (“Code”) to treat
Subsidiary as a taxable REIT subsidiary (“TRS”) of Parent effective Date 1.

                                      FACTS

    Subsidiary was formed as a corporation on Date 2 under the laws of State 1.

Subsidiary is wholly owned by Partnership. When Subsidiary was formed, Partnership
was owned by Trust, a real estate investment trust (“REIT”) for federal income tax
purposes. Trust and Subsidiary jointly elected to treat Subsidiary as a TRS on Form
8875, Taxable REIT Subsidiary Election, effective Date 3.

  Parent was formed as a corporation on Date 4 under the laws of State 2. On

Date 1, Trust merged into Parent, with Parent surviving. Parent currently holds x%
ownership interests in Partnership.

   At the time of the merger, Advisor failed to advise Parent and Subsidiary that the

previously filed TRS election on Form 8875 was no longer effective since Trust no
longer existed. In Date 5, during the course of an audit, Advisor requested a copy of
Form 8875 for Subsidiary effective from the date of the merger. At that time, Parent and
Subsidiary realized that a TRS election on Form 8875 was not filed by Parent and
Subsidiary to treat Subsidiary as a TRS of Parent. Parent and Subsidiary intended to
treat Subsidiary as a TRS of Parent effective from the date of the merger.

  Parent filed its initial federal income tax return for the taxable year ended Date 6

on a Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, on
which Parent elected to be treated as a REIT under section 856 of the Code.

  Parent and Subsidiary make the following additional representations in

connection with their request for an extension of time:

1. The request for relief was filed before the failure to make the regulatory election was
   discovered by the Internal Revenue Service (“Service”).

2. Granting the relief requested will not result in Parent and Subsidiary having a lower
   tax liability in the aggregate for all years to which the election applies than they would
   have had if the election had been timely made (taking into account the time value of
   money).
   PLR-121796-16 3

3. Parent and Subsidiary do not seek to alter a return position for which an accuracy-
   related penalty has been or could have been imposed under section 6662 of the Code
   at the time they 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, Parent and Subsidiary did not choose to not file the election.

5. Parent and Subsidiary are not using hindsight in making the decision to seek the
   relief requested. No specific facts have changed since the due date for making the
   election that make the election advantageous to the taxpayers.

6. The period of limitations on assessment under section 6501(a) has not expired for
   Parent and Subsidiary 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.

   In addition, affidavits on behalf of Parent and Subsidiary have been provided as
   required by section 301.9100-3(e) of the Procedure and Administration Regulations.

                             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, section 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, section 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 taxable 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 taxable year.
   However, the effective date of the election depends on when the Form 8875 is filed.
   The instructions further provide that the effective date 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
   PLR-121796-16 4

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, 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
situation, the Commissioner will grant an extension of time for regulatory elections that
do not meet the requirements of section 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 section 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 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. 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 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 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)(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 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)(1)(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.
PLR-121796-16 5

                                   CONCLUSION

   Based upon the facts and representations submitted, we conclude that Parent

and Subsidiary have shown good cause for granting a reasonable extension of time to
elect under section 856(l) to treat Subsidiary as a TRS of Parent. The extension of time
to make this election is 90 days from the date of this letter.

   This ruling is limited to the timeliness of the filing of Form 8875. This ruling’s

application is limited to the facts, representations, and Code and regulation sections
cited herein. No opinion is expressed as to whether Parent otherwise 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 Parent and

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.

  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 taxpayers that requested 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, copies of

this letter are being sent to your authorized representatives.

                                        Sincerely,


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

Enclosures (2):
Copy of this letter
Copy for section 6110 purposes