REIT group receives 90 days to make late taxable REIT subsidiary elections

Plain-English summary

A company planning to qualify as a REIT acquired interests in six health care companies that had previously been taxable REIT subsidiaries of another REIT. New joint elections on Form 8875 were required to treat the companies as taxable REIT subsidiaries of the acquiring company, but the tax director missed the filing deadline during an extended illness. When the omission was discovered, the forms were filed with a later effective date, which would have caused the acquiring company to recognize more than two months of nonqualifying income and lose REIT status for the year. The taxpayers represented that they requested relief before IRS discovery, did not use hindsight, and would not reduce their aggregate tax liability. The IRS granted 90 days to file elections effective on the acquisition date, while expressing no opinion on whether the acquiring company qualified as a REIT or the subsidiaries otherwise qualified as taxable REIT subsidiaries.

Ruling snapshot

• Question: Could the REIT group obtain an extension to make six late taxable REIT subsidiary elections effective on the acquisition date?
• Outcome: Approved: 90 days from the letter date to file the intended elections.
• 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: 201811010 Third Party Communication: None
Release Date: 3/16/2018 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-124328-17
Date:
December 14, 2017

LEGEND:

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

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

Company C = -----------------------------------------------------------------------

Company D = -------------------------------------------------

Company E = -----------------------------------

Company F = ---------------------------------------------

Company G = -----------------------------------------------------------------------

Entity 1 = ------------------------------------------------------------------------
-----------------------------

Entity 2 = ------------------------------

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

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

PLR-124328-17 2

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

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

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

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

Year 1 = -------

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

a = ----

b = ----

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

   This letter responds to a letter dated July 21, 2017, and subsequent

correspondence, submitted on behalf of Company A, Company B, Company C,
Company D, Company E, Company F, and Company G (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
elections under section 856(l) of the Internal Revenue Code (“Code”) to treat Company
B, Company C, Company D, Company E, Company F, and Company G as taxable
REIT subsidiaries (“TRSs”) of Company A effective as of Date 3.

FACTS

    Taxpayers represent that, historically, Entity 1, a real estate investment trust

within the meaning of sections 856 through 859 (“REIT”), owned a health care portfolio
that included qualified health care properties, as defined in section 856(e)(6)(D) of the
Code and Company B, Company C, Company D, Company E, Company F, and
Company G (“Health Care Portfolio”). Taxpayers represent that before the Acquisition
Transaction (defined below), each of Company B, Company C, Company D, Company
E, Company F, and Company G had elected (1) on Form 8832, Entity Classification
Election, to be taxed as an association taxable as a corporation and (2) together with
Entity 1, on Form 8875, Taxable REIT Subsidiary Election, to be treated as a TRS of
Entity 1. Taxpayers represent that qualified health care properties in the Healthcare
Portfolio were leased to Company B, Company C, Company D, Company E, Company
F, and Company G, or disregarded entities of these companies, and that these
companies engaged eligible independent contractors, within the meaning of section
856(d)(9) to operate and manage the qualified healthcare properties.

PLR-124328-17 3

     Taxpayers represent that on Date 1, Entity 1 formed Company A, a State limited

liability company. On Date 2, Entity 1 merged with and into Entity 2. Entity 1 continues
to exist as a subsidiary of Entity 2 and Entity 2 is the common parent of both Company
A and Entity 1. On Date 3, Company A acquired from Entity 1 an interest of
approximately a% of the Health Care Portfolio, which includes Company B, Company C,
Company D, Company E, Company F, and Company G (“Acquisition Transaction”).
Entity 1, through an operating partnership, owns the remaining b% of the Health Care
Portfolio. Company A intends to elect to be treated as a REIT for federal income tax
purposes commencing in Year 1. Taxpayers are calendar year taxpayers on the
accrual method of accounting.

    As a result of the Acquisition Transaction on Date 3, Taxpayers were required to

make elections pursuant to section 856(l) on Forms 8875 to treat each of Company B,
Company C, Company D, Company E, Company F, and Company G as a TRS of
Company A. The tax director of each of Taxpayers (“Tax Director”) was responsible for
ensuring that these elections were timely made by timely filing the Forms 8875.
However, due to an extended illness suffered by the Tax Director, the elections were
not filed within the two-month, fifteen-day period after Date 3.

    On Date 4, the Tax Director realized that the elections had not been filed and

filed them that day, with an effective date of Date 5, the then earliest effective date
possible. Subsequent to filing these forms, the Tax Director realized that filing the
elections with an effective date of Date 5 would result in Company A recognizing over
two months of income that did not qualify for purposes of sections 856(c)(2) and (3) and
would therefore prevent Company A from qualifying as a REIT for Year 1. After
consultation with Firm 1, the decision was made to request an extension of time under
sections 301.9100-1 and 301.9100-3 of the Regulations to elect pursuant to section
856(l) to treat each of Company B, Company C, Company D, Company E, Company F,
and Company G as a TRS of Company A effective as of Date 3.

  Taxpayers 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 any of Taxpayers 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. Taxpayers 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.

PLR-124328-17 4

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

   5. Taxpayers 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 Taxpayers.

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

PLR-124328-17 5

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.

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, Company C, Company D, Company E,
Company F, and Company G as TRSs of Company A, effective as of Date 3.
Accordingly, Taxpayers have 90 days from the date of this letter to file their intended
elections.

PLR-124328-17 6

    This ruling is limited to Taxpayers’ 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, whether any of Company B, Company C, Company D, Company E, Company F,
or Company G 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 Taxpayers 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 Taxpayers and accompanied by a penalty of perjury 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, a copy of

this letter is being sent to your authorized representative.

                                        Sincerely,

                                        __________________________
                                        Julanne Allen
                                        Assistant Branch Chief, Branch 3
                                        Office of the Associate Chief Counsel
                                        (Financial Institutions and Products)

Enclosure:
Copy for section 6110 purposes

cc: