Partnership receives extra time for a deemed-sale election on a REIT contribution

Plain-English summary

A two-member limited liability company treated as a partnership contributed property to a subsidiary that had elected REIT status. Because part of the property's gain or loss would be allocated to a corporate indirect owner, the partnership needed to elect deemed-sale treatment under Treasury Regulation section 1.337(d)-7. It missed the election after reasonably relying on a qualified tax professional who failed to make or recommend it. The IRS found that the partnership acted reasonably and in good faith and granted 60 days from the ruling date to file the election. Relief was conditioned on the aggregate tax liability of the partnership and the relevant direct and indirect owners not being lower than it would have been with a timely election, taking the time value of money into account. The IRS did not rule on the partnership's classification or the subsidiary's qualification as a REIT.

Ruling snapshot

• Question: May the partnership file a late deemed-sale election for property it contributed to a REIT subsidiary?
• Outcome: approved
• Key authorities: IRC §§ 337, 856, and 1374; Treas. Reg. §§ 1.337(d)-7, 301.7701-3, and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201801006                                             Third Party Communication: None
Release Date: 1/5/2018                                        Date of Communication: Not Applicable
Index Number: 337.03-00, 9100.22-00
                                                              Person To Contact:
--------------------------------------------------            ---------------------, ID No. ------------------
------------------------------------------------              Telephone Number:
-----------------------------------------------------         ----------------------
--------------------------------                              Refer Reply To:
                                                              CC:CORP:B02
                                                              PLR-113924-17
                                                              Date:
                                                              October 06, 2017

         TY: ----------------------------

Legend

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

Year 1                         = -------

Company 1                      = ----------------------------------------------------------------------------------
                                 ------------------------

Company 2                      = ----------------------------------------------------------------------------------
                                 -----------------------

Corporation A                  = ----------------------------------------------------------------------------------
                                 ------------------------

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

Sub 1                          = ----------------------------------------------------------------------------------
                                 -----------------------

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

Contributed Asset 1            = ----------------------------------------------------------------------------------
                                 --------------

Company Official 1             = ----------------------------------------------------------------------------------
                                 -------

PLR-113924-17                                       2

Company Official 2       = ----------------------------------------------------------------------------------
                           ----------------------------------------------------------------------------------
                           -------------------

Tax Professional         = -----------------------------------------------

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

This letter responds to a letter dated April 25, 2017, submitted on behalf of Taxpayer,
requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to file an election. Taxpayer is requesting an extension
of time to file a deemed sale election under § 1.337(d)-7(c) of the Income Tax
Regulations (the “Election”) that was required to be filed with its Federal income tax
return for the Year 1 taxable year. Additional information was submitted in a letter
dated August 17, 2017. The information submitted is summarized below.

Taxpayer is a limited liability company under State A law that has never elected under
§ 301.7701-3 to be classified as an association taxable as a corporation. Taxpayer is
jointly owned by Company 1 and Company 2. Company 2 is owned in part by
Corporation A, a State B corporation that is a C corporation. In Date 1, Taxpayer
contributed Contributed Asset 1 to a subsidiary, Sub 1, a State A limited liability
company that has elected to be taxed as a real estate investment trust (“REIT”) under
section 856 of the Internal Revenue Code (the “Code”).

A deemed sale election under § 1.337(d)-7(c)(1) to recognize gain and loss upon the
contribution of assets to Sub 1 was required to be attached to Taxpayer’s return for the
taxable year in which the deemed sale occurred, under the rules as in effect on the date
of the deemed sale. However, for various reasons, the Election was not filed.
Subsequently, this request was submitted, under § 301.9100-3, for an extension of time
to file the Election. The period of limitations on assessment under section 6501(a) of
the Code has not expired for Taxpayer’s taxable year for which it desires to make the
Election, or for any taxable years that would be affected by the Election, had it been
timely filed. Taxpayer has represented that it is not seeking to alter a return position for
which an accuracy related penalty has been or could be imposed.

All cites to regulations under § 1.337(d)-7 are to those regulations in effect on the date
of the transaction.

Section 1.337(d)-7(a)(1) provides, in relevant part, that if property owned by a C
corporation becomes the property of a RIC or a REIT in a conversion transaction (as
defined in § 1.337(d)-7(a)(2)(ii)), then section 1374 treatment will apply (as described in

PLR-113924-17                                  3

§ 1.337(d)-7(b)), unless the C corporation elects deemed sale treatment with respect to
the conversion transaction.

Section 1.337(d)-7(a)(2)(i) defines a C corporation as a corporation that is not an S
corporation, a RIC, or a REIT.

Section 1.337(d)-7(a)(2)(ii) defines the term conversion transaction to mean the
qualification of a C corporation as a RIC or a REIT or the transfer of property owned by
a C corporation to a RIC or a REIT.

Section 1.337(d)-7(c)(5) provides that a deemed sale election is made by a C
corporation (or a partnership to which the principles of § 1.337(d)-7 apply under
§ 1.337(d)-7(e)) by attaching a statement, as described therein, to its return for the
taxable year in which the deemed sale occurs.

Section 301.7701-3(b)(1) provides that unless the entity elects otherwise, a domestic
eligible entity is a partnership if it has two or more members.

Section 1.337(d)-7(e) provides that the principles of § 1.337(d)-7 apply to property
transferred by a partnership to a RIC or a REIT to the extent of any gain or loss in the
converted property that would be allocated directly or indirectly, through one or more
partnerships, to a C corporation if the partnership sold the converted property to an
unrelated party at fair market value on the deemed sale date (as defined in § 1.337(d)-
7(c)(3)).

Under § 301.9100-1(c), 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
Internal Revenue Code except subtitles E, G, H, and I.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make a regulatory election.
§ 301.9100-1(a). Section 301.9100-2 provides automatic extensions of time for making
certain elections. Section 301.9100-3 provides extensions of time for making regulatory
elections that do not meet the requirements of § 301.9100-2. Requests for relief under
§ 301.9100-3 will be granted when the taxpayer provides evidence to establish to the
satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith,
and that granting relief will not prejudice the interests of the government. § 301.9100-
3(a).

In this case, the time for filing the Election is fixed by the regulations (i.e. § 1.337(d)-
7(c)(5)). Therefore, the Commissioner has discretionary authority under § 301.9100-3
to grant an extension of time for Taxpayer to file the Election, provided Taxpayer
establishes that it acted reasonably and in good faith, that the requirements of

PLR-113924-17                                 4

§§ 301.9100-1 and 301.9100-3 are satisfied, and that granting relief will not prejudice
the interests of the government.

Information, representations, and affidavits submitted by Taxpayer, Company Official 1,
Company Official 2, and Tax Professional explain the circumstances that resulted in the
failure to timely file the Election. The information establishes that Taxpayer reasonably
relied on a qualified tax professional who failed to make, or advise Taxpayer to make,
the Election, and that the request for relief was filed before the failure to make the
election was discovered by the Internal Revenue Service. See §§ 301.9100-3(b)(1)(i)
and (v).

Based on the facts and information submitted, including the affidavits submitted and the
representations that have been made, we conclude that Taxpayer has shown that it
acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3
are satisfied, and granting relief will not prejudice the interests of the government.
Accordingly, an extension of time is granted under § 301.9100-3, until 60 days from the
date on this letter, for Taxpayer to file the Election.

The above extension of time is conditioned on Taxpayer’s, its members (or partners),
and their members (or partners) tax liability, if any, being not lower, in the aggregate, for
all years to which the Election applies, than it would have been if the Election had been
made timely (taking into account the time value of money).

No opinion is expressed as to any tax liability for the years involved. A determination
thereof will be made by the Director’s office upon audit of the Federal income tax
returns involved. In addition, no opinion is expressed as to the Federal income tax
effect, if any, if it is determined that any tax liability is lower. § 301.9100-3(c).

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. Further, we express no opinion as to the tax consequences of filing the
Election late under the provisions of any other section of the Code and regulations, or
as to the tax treatment of any conditions existing at the time of, or resulting from, filing
the Election late that are not specifically set forth in the above ruling. Specifically, no
opinion is provided concerning Taxpayer’s status as a partnership or Sub 1’s
qualifications as a REIT under subchapter M of the Code.

For purposes of granting relief under § 301.9100-3, we relied on certain information and
affidavits provided by Taxpayer, Company Official 1, Company Official 2, and Tax
Professional under penalties of perjury. However, the Director should verify all essential
facts. Moreover, notwithstanding that the extension is granted under § 301.9100-3 to
file the Election, any penalties and interest that would otherwise be applicable still apply.

PLR-113924-17                                  5

The ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be sued or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their returns that provides the date on and control number of
the letter ruling.

Pursuant to a power of attorney on file with this office, copies of this letter are being sent
to your authorized representatives.

                                       Sincerely,

                                       ______________________
                                       Ken Cohen
                                       Chief, Branch 3
                                       Office of Associate Chief Counsel (Corporate)

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