Late REIT election treated as timely

Plain-English summary

A single-member limited liability company intended to elect real estate investment trust status for its first taxable year as a corporation. Its tax firm mistakenly omitted the company's Form 7004 from a group of extension filings, then filed Form 1120-REIT after discovering the error. The company requested relief before the IRS discovered the missed election and represented that relief would not reduce its aggregate tax liability or rely on hindsight. The IRS found that the company acted reasonably and in good faith and that relief would not prejudice the government's interests. It treated the filed Form 1120-REIT as a timely section 856(c) election effective for the requested year, without deciding whether the company otherwise qualified as a REIT.

Ruling snapshot

• Question: May the company make a late election to be treated as a REIT under section 856(c)?
• Outcome: approved
• Key authorities: IRC §§ 6501(a), 6662, 856(c); Treas. Reg. §§ 1.856-2(b), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202015015 Third Party Communication: None
Release Date: 4/10/2020 Date of Communication: Not Applicable
Index Number: 856.00-00, 9100.00-00
Person To Contact:
----------------------------------------------------------- ---------------, ID No. -----------------
--------------- Telephone Number:
-------------------------------- --------------------
-------------------------------------- Refer Reply To:
----------------------------------------- CC:FIP:B03
PLR-118982-19
Date:
January 09, 2020

LEGEND:

Taxpayer = ---------------------------------------------------------
Fund = -------------------------------------
Sponsor = ------------------------------------
Firm = ----------------------
Date 1 = --------------------------
Date 2 = ------------------
Date 3 = ---------------------
Date 4 = ----------------
Date 5 = ------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------

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

    This ruling responds to a letter dated August 8, 2019, submitted on behalf of

Taxpayer. Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-
3 of the Procedure and Administration Regulations to make an election under § 856(c)
of the Internal Revenue Code (“Code”) to be treated as a real estate investment trust
(“REIT”) for the taxable year ended Date 1.

                                                 FACTS

    Taxpayer was formed as a single member limited liability company on December

1 of Year 1, being wholly owned by its sole member, Fund. Taxpayer did not elect to be
classified as an association taxable as a corporation and was therefore a disregarded
entity for Year 1. By making a REIT election for its Year 2 taxable year, Taxpayer would
be treated as a wholly owned subsidiary of Fund pursuant to § 301.7701-3(c)(1)(v)(B).
PLR-118982-19 2

    Sponsor raises capital, acquires property, and fundraises on behalf of Fund.

Sponsor is a real estate investment firm specializing in the investment, development,
ownership, and management of commercial and industrial properties in metropolitan
areas across the western United States. Sponsor began fundraising in Year 1 for the
purpose of adding properties to Taxpayer’s portfolio. Sponsor completed its fundraising
efforts in Year 3.

   Taxpayer intended to elect to be treated as a REIT under § 856 on its Form

1120-REIT, Tax Return for Real Estate Investment Trusts, for Taxpayer’s taxable year
ending Date 1. Taxpayer’s limited liability company agreement states Taxpayer
“intended to qualify for treatment as a REIT under Section 856 et seq. of the Code.”
The agreement references this intent several times.

    Sponsor engaged Firm for all tax compliance matters for Fund. Firm’s Managing

Director was charged with the overall management of both Fund’s and Taxpayer’s tax
filing preparation. Firm’s Senior Manager was also designated as part of Fund’s tax
preparation team. Because Year 2 was intended to be Taxpayer’s first taxable year as
a corporation, Taxpayer’s filing of Form 7004 to extend the due date of its return was
due on Date 2. Senior Manager was under the assumption that Taxpayer’s Form 7004,
Application for Automatic Extension of Time to File Certain Business Income Tax,
Information, and Other Returns, had been filed on Date 3 along with many other
extensions for Fund’s partnerships and other subsidiaries that were filed.

    A few days before Date 4, a Firm employee discovered that Taxpayer’s Form

7004 was inadvertently not included with the other extensions filed on Date 3. Firm
prepared and filed Form 1120-REIT on Date 5 and subsequently submitted this request
to treat its election to be treated as a REIT under § 856(c) as effective for the taxable
year ended Date 1.

  Taxpayer makes the following additional representations:

1. The request for relief was filed by Taxpayer before the failure to make the
   regulatory election was discovered by the Service.
2. Granting the relief will not result in Taxpayer having a lower tax liability in the
   aggregate for all years to which the regulatory election applies than Taxpayer
   would have had if the election had been timely made (taking into account the
   time value of money).
3. Taxpayer did not seek to alter a return position for which an accuracy-related
   penalty has been or could have been imposed under § 6662 of the Code at the
   time Taxpayer 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, Taxpayer did not choose to not file the election.

5. Taxpayer is not using hindsight in requesting relief. No specific facts have
   changed since the due date for making the election that makes this election
   advantageous to Taxpayer.
   PLR-118982-19 3

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

   Affidavits on behalf of Taxpayer have been provided with the submission as
   required by § 301.9100-3(e).

                              LAW AND ANALYSIS
   

   Section 856(c)(1) provides that a corporation, trust, or association shall not be
   considered a REIT for any taxable year unless it files with its return for the taxable year
   an election to be a REIT or has made such an election for a previous taxable year, and
   such election has not been terminated or revoked. Pursuant to § 1.856-2(b) of the
   Income Tax Regulations, the election shall be made by the trust by computing taxable
   income as a REIT in its return for the first taxable year for which it desires the election to
   apply.

   Section 301.9100-1(c) 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 six 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 to mean an election whose due date is prescribed by a regulation, or
   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 § 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 § 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 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 not be considered to have
   reasonably relied on a qualified tax professional if the taxpayer knew or should have
   PLR-118982-19 4

known that the professional was not (i) competent to render advice on the regulatory
election, or (ii) aware of all relevant facts. 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 § 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 of the required election, 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 a 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)(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 § 6501(a) before the taxpayer’s receipt of a ruling granting relief
under this section.

                                   CONCLUSION

   Based on the information submitted and the representations made, we conclude

that Taxpayer has satisfied the requirements for granting a reasonable extension of time
to elect under § 856(c) to be treated as a REIT for the tax year ended on Date 1.

   Accordingly, due to the reasonable extension of time granted to Taxpayer,

Taxpayer’s Form 1120-REIT filed on Date 5 for Taxpayer’s first REIT taxable year is
considered a timely election under § 856(c) to be treated as a REIT under subchapter M
of the Code effective for its taxable year ended Date 1.

   This ruling is limited to the timeliness of the filing of Taxpayer’s election under

§ 856(c). This ruling’s application is limited to the facts, representations, Code and
regulation sections cited herein. No opinion is expressed with regard to whether
Taxpayer otherwise qualifies as a REIT under subchapter M of the Code.

   Except as specifically provided otherwise, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. 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.
PLR-118982-19 5

   This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

                                               Sincerely,


                                               ______________________________
                                               Patrick White
                                               Senior Counsel, Branch 3
                                               Office of the Associate Chief Counsel
                                               (Financial Institutions & Products)

Enclosures:
Copy of this letter
Copy for section 6110 purposes

cc: