REIT and subsidiary receive relief for a late TRS election

Plain-English summary

A real estate investment trust and an indirectly owned subsidiary intended the subsidiary to be a taxable REIT subsidiary, but the parties and their advisers overlooked the required Form 8875 amid a complex investment structure. The missed filing was discovered after they separately sought late entity-classification relief for the subsidiary. The IRS concluded that the companies satisfied the discretionary-relief requirements and gave them 90 days to make the joint election under IRC § 856(l), effective as of the intended date. The ruling addressed only filing timeliness and did not determine whether either company otherwise qualified as a REIT or taxable REIT subsidiary.

Ruling snapshot

• Question: May the REIT and its indirectly owned subsidiary make a late joint election to treat the subsidiary as a taxable REIT subsidiary?
• Outcome: Approved. The companies received 90 days to file Form 8875 effective as of the intended date.
• 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: 201724017 Third Party Communication: None
Release Date: 6/16/2017 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:B03
PLR-132566-16
Date:
March 16, 2017

LEGEND:

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

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

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

Project = -----------------------

Entity A = -----------------------------------------------

Firm 1 = --------------------------------------------

Firm 2 = ----------------

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

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

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

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

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

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

Year 1 = -------

PLR-132566-16 2

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

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

    This letter responds to your letter dated October 12, 2016, and subsequent

correspondence, submitted on behalf of Company A and Company B (collectively,
“Taxpayers"). Taxpayers request an extension of time under sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations (the “Regulations”) to
jointly make an election under section 856(l) of the Internal Revenue Code (“Code”) to
treat Company B as a taxable REIT subsidiary (“TRS”) of Company A effective as of
Date 2.
FACTS
Company A is a State A corporation formed on Date 1 that elected to be treated
for federal income tax purposes as a real estate investment trust (“REIT”) under
sections 856 through 859 commencing in Year 1. Company A is the preferred equity
member of Partnership, a limited liability company. Partnership wholly owns Company
B, which is a State A limited liability company. Company A and Company B are
calendar year taxpayers on the accrual method of accounting.
Partnership, through a disregarded entity, owns Project, a qualified health care
property as defined in section 856(e)(6)(D)(i) of the Code. Partnership has leased
Project to Subsidiary effective Date 3. Taxpayers represent that Project is operated and
managed by an eligible independent contractor as defined in section 856(d)(9).
Taxpayers represent that Company A was formed to engage in business as a
REIT and that Company B was formed to be a TRS of Company A. However, the
Project’s unusual investment structure, which involves multiple REITs, required
additional coordination and communication between the parties and their various legal
and tax advisors.
Entity A was responsible for overseeing U.S. tax matters for Company A and
relies on external tax advisors and service providers to manage tax compliance needs.
Entity A engages Firm 1 to ensure timely compliance with various tax filing requirements
and Firm 2 for quarterly and annual REIT testing and to provide advice on selected tax
matters. While the relevant personnel of Entity A understood that Company A was
intended to be a REIT and that it was responsible for managing REIT compliance
reporting and tax return preparation, they were not aware of the need to file Form 8832,
Entity Classification Election, or Form 8875, Taxable REIT Subsidiary Election, for
Company B. They also failed to fully inform Firm 1 regarding the ownership structure of
Partnership, so that Firm 1 was also unaware of the need to file Form 8875 for
Company A and Company B.
On Date 4, Entity A discovered that Company B had not filed Form 8832 to elect
to be classified as an association taxable as a corporation. Firm 1 then prepared a

PLR-132566-16 3

request for permission to file a late Form 8832 on behalf of Company B and effective as
of Date 2 under Rev. Proc. 2009-41, 2009-39 I.R.B. 439, which provides for late
elections based upon reasonable cause. The failure to file Form 8875 was discovered
on Date 5, when Firm 2 requested confirmation that Company B had elected to be
treated as a TRS of Company A. On Date 6, Entity A, Company A, Firm 1, and Firm 2
decided to request an extension of time under sections 301.9100-1 and 301.9100-3 of
the Regulations to file Form 8875 and elect under section 856(l) of the Code to treat
Company as a TRS of Company A effective as of Date 2.
Company A and Company B 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 Company A or Company B
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).
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.
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 Company A or
Company B.
6. The period of limitations on assessment under section 6501(a) has not
expired for Company A or 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 section 301.9100-3(e) of the 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

PLR-132566-16 4

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 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) 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

PLR-132566-16 5

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.
CONCLUSION
Based upon the facts and representations submitted, we conclude that
Taxpayers have satisfied the requirements for granting a reasonable extension of time
to elect under section 856(l) to treat Company B as a TRS of Company A, effective as
of Date 2. Accordingly, Taxpayers have 90 days from the date of this letter to file the
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, and Code and regulation sections
cited herein.
Except as 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 as to whether Company A qualifies as a
REIT, or whether Company B 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 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.
The ruling contained in this letter is based upon information and representations
submitted by Company A and Company B and accompanied by a penalty of perjury

PLR-132566-16 6

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 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,


                                       __________________________
                                       Julanne Allen
                                       Assistant 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