REIT and subsidiary receive 90 days to make a late TRS election

Plain-English summary

A corporation and its subsidiary filed Form 8875 before the parent qualified as a real estate investment trust, then mistakenly assumed the taxable REIT subsidiary election remained effective after the parent became a REIT. Counsel later discovered the problem and the companies sought discretionary relief before the IRS found it. The IRS concluded that the companies acted reasonably and in good faith and that relief would not prejudice the government. It granted 90 days to jointly elect taxable REIT subsidiary status under IRC § 856(l) for the requested effective date. The ruling addressed only the timeliness of Form 8875, not whether either company otherwise met the substantive REIT or subsidiary requirements.

Ruling snapshot

• Question: May the REIT and its subsidiary make a late joint election for taxable REIT subsidiary status?
• Outcome: Approved. The companies received 90 days from the ruling date to make the election.
• 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: 201722017
Third Party Communication: None
Release Date: 6/2/2017
Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.07-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:FIP:2
PLR-134677-16
Date:
February 24, 2017

LEGEND

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

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

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

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

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

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

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

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

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

State Y = --------------

Counsel = ----------------------------

Dear ----------------
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This letter is in reply to a letter dated November 1, 2016, and subsequent correspondence, submitted on behalf of Company A and Company B. Company A and Company B request an extension of time under section 301.9100-1 of the Procedure and Administration Regulations to jointly make an election under section 856(l) of the Internal Revenue Code to treat Company B as a Taxable REIT Subsidiary of Company A effective as of Date 6.

FACTS

Company A, a State X corporation, was formed on Date 1. Company B, a State Y corporation, was formed on Date 2.

On Date 3, Company A and Company B filed Form 8875, Taxable REIT Subsidiary Election, and elected to have Company B treated as a Taxable REIT subsidiary of Company A ("the Election"). The Election specified Date 2 as an effective date. Company A did not qualify as a REIT during the taxable year including Date 2 and, therefore, did not elect to be taxed as a REIT. Company A and Company B, however, assumed the Election was effective, and that there was no need to refile Form 8875 once Company A qualified as a REIT.

Subsequent to the Election, Company A engaged the services of Counsel. On Date 4, Counsel reviewed certain tax materials, including documents pertaining to the Election, and discovered that the Election may not have been in strict compliance with the instructions to Form 8875. On Date 5, Counsel informed Company A of the issue and recommended that Company A and Company B request an extension of time under sections 301.9100-1 and 301.9100-3 to jointly make an election under section 856(l) to treat Company B as a taxable REIT subsidiary of Company A. Company A and Company B agreed.

Company A and Company B make the following representations in connection with the 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 Service.

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

3. Company A and Company B 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.
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4. Being fully informed of the required regulatory election and related tax consequences, Company A and Company B did not choose to not file the election.

5. Company A and Company B 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 Company A and Company B 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 Company A and Company B have been provided as required by sections 301.9100-3(e) (2) and (3) 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 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
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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.
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CONCLUSION

Based upon the facts and representations submitted, we conclude that Company A and Company B have shown good cause for granting a reasonable extension of time to elect under section 856(l) to treat Company B as a Taxable REIT Subsidiary of Company A effective as of Date 6. The extension of time to make the 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 Company A otherwise qualifies as a REIT or whether Company B otherwise qualifies as a Taxable REIT Subsidiary under subchapter M of the Code.

No opinion is expressed with regard to whether the tax liability of Company A and Company B 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.

Sincerely,

Susan Thompson Baker
Susan Thompson Baker
Senior Technician Reviewer, Branch 2
Office of the Associate Chief Counsel
(Financial Institutions & Products)