REIT received 90 days to make late taxable-subsidiary elections

Plain-English summary

A company intending to qualify as a real estate investment trust acquired a predecessor's properties and subsidiaries in a transaction represented to be an F reorganization. Its former law firm failed to advise that the company became the predecessor's successor and failed to ensure that the required Form 8875 elections were timely filed for six taxable REIT subsidiaries. An accounting firm later found the omission, and replacement counsel identified both the succession issue and the need for relief. The IRS found that the taxpayer acted reasonably and in good faith, did not use hindsight, requested relief before the IRS discovered the failure, and would not prejudice the government's interests. It granted the company and the subsidiaries 90 days to make the Section 856(l) elections effective as of the requested date. The ruling addressed only the elections' timeliness and did not decide whether the reorganization qualified, whether the company qualified as a REIT, or whether the subsidiaries otherwise qualified as taxable REIT subsidiaries.

Ruling snapshot

• Question: Should the REIT and six subsidiaries receive extra time to file their taxable REIT subsidiary elections?
• Outcome: Approved, with 90 calendar days to make the elections effective on the requested 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: 202053008 Third Party Communication: None
Release Date: 12/31/2020 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:B02
PLR-110928-20
Date:
October 02, 2020

Legend

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

Trust = --------------------------

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

Corporation B = ------------------------------------

Corporation C = -----------------------------------

Corporation D = ------------------------------------

Corporation E = ------------------------------

Corporation F = --------------------------------

Holdco = -----------------------

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

PLR-110928-20 2

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

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

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

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

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

Date 7 = ---------------------

Date 8 = -------------------

Date 9 = --------------------------

Month 1 = --------

Month 2 = ------

Month 3 = --------------

Year = -------

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

Law Firm X = -------------------------------

Law Firm Y = ------------------------------

Accounting Firm = ---------

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

     This letter responds to a letter dated April 10, 2020, and subsequent

correspondence, submitted on behalf of Taxpayer (in its capacity as the successor-in-
interest to Trust) and Taxpayer’s subsidiaries Corporation A, Corporation B, Corporation
C, Corporation D, Corporation E, and Corporation F (the subsidiaries collectively, the
Corporations). Taxpayer and the Corporations request an extension of time under
sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations
to file elections to treat each of the Corporations as a taxable REIT subsidiary (TRS) of
Taxpayer under section 856(l) of the Internal Revenue Code (the Code) effective Date
3.

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                                      FACTS

  Taxpayer intends to elect to be treated as a real estate investment trust (REIT)

under sections 856 through 859 of the Code beginning with its initial taxable year
ending Date 9.

    Taxpayer was formed on Date 1 and made a valid and timely election to be

treated as an association taxable as a corporation for U.S. federal income tax purposes
effective Date 5. On Date 2, Trust was formed as a State limited liability company and
made a valid and timely election to be treated as an association taxable as a
corporation for U.S. federal income tax purposes effective Date 3. Immediately prior to
Date 5, Taxpayer and Trust were wholly owned directly or indirectly by Holdco.
Taxpayer and Trust were both formed to be REITs. Taxpayer was formed to indirectly
own certain hotel properties and lease them to its TRSs pursuant to section
856(d)(8)(B).

   On Date 5, Taxpayer acquired substantially all of the properties held by Trust,

including the Corporations, in a reorganization that Taxpayer represents is described in
section 368(a)(1)(F) (the Transaction). Taxpayer represents that, as a result of the
Transaction, Taxpayer became a successor-in-interest to Trust for U.S. federal income
tax purposes. Accordingly, Date 3, the first day of the tax year ending Date 9 for Trust,
became the first day of the tax year ending Date 9 for Taxpayer.

   Taxpayer and Trust generally relied on the advice of their outside tax counsel

regarding qualification as a REIT, including for all filing obligations. Taxpayer and Trust
also relied on their outside tax counsel regarding the tax consequences of the
Transaction. Law Firm X was Taxpayer’s and Trust’s outside tax counsel in Month 1 of
Year. At the time of the Transaction, it was intended that each of Taxpayer and Trust
would qualify as a REIT for Year. It was also intended that the Corporations would be
treated as TRSs before and after the Transaction as part of the Taxpayer-Trust
ownership structure. However, Law Firm X failed to advise Taxpayer and Trust that the
Transaction was a reorganization under section 368(a)(1)(F), with the result that
Taxpayer became a successor-in-interest to Trust. Law Firm X also failed prior to Date
4 to advise Trust to make (with the Corporations) section 856(l) TRS elections via Form
8875, Taxable REIT Subsidiary Election, to treat the Corporations as TRSs of Trust. In
order to be effective Date 3, the elections needed to have been filed on or before Date

4. Despite the fact that Date 4 had passed without the elections having been filed and
   that the Transaction had already occurred, on Date 6 Law Firm X rendered an
   unqualified opinion that each of Taxpayer and Trust would qualify as a REIT for Year.

   In Month 2 of Year, Accounting Firm was performing an audit of Taxpayer and
   Trust and discovered that Trust and the Corporations had failed to make section 856(l)
   TRS elections for the Corporations. Upon discovery of this failure, on Date 8, Trust and
   the Corporations made section 856(l) TRS elections for the Corporations with the

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earliest possible effective date of Date 7. Because Taxpayer and Trust had not yet
been advised that Taxpayer had become a successor-in-interest to Trust as a result of
the Transaction, these elections were not only untimely, but also were incorrectly filed
by Trust rather than by Taxpayer.

   Subsequently, Taxpayer and Trust engaged Law Firm Y as their outside tax

counsel. In Month 3 of Year, Law Firm Y advised Taxpayer and Trust of the correct tax
consequences of the Transaction, and advised Taxpayer to request relief under
sections 301.9100-1 and 301.9100-3 to extend the time to file section 856(l) TRS
elections for the Corporations effective Date 3.

                             REPRESENTATIONS

  Taxpayer makes the following representations in connection with this request for

an extension of time:

1. The request for relief was filed by Taxpayer before the failure to make the regulatory
   elections were 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 elections apply than Taxpayer would
   have had if the elections 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 Code section 6662 at the time
   Taxpayer requested relief and the new position requires or permits regulatory
   elections for which relief is requested.

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

5. Taxpayer and the Corporations 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 elections that make the elections advantageous to Taxpayer or the
   Corporations.

6. The period of limitations on assessment under Code section 6501(a) has not expired
   for Taxpayer and the Corporations for the taxable year in which the elections should
   have been filed, nor for any taxable year(s) that would have been affected by the
   elections had they been timely filed.

7. Taxpayer has not yet filed a federal income tax return for Year.

   In addition, affidavits on behalf of Taxpayer and the Corporations have been

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provided as required by section 301.9100-3(e)(2) and (3).

                              LAW AND ANALYSIS

    Section 856(l) 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) 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

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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 on the information submitted and representations made, we conclude that

Taxpayer, as the successor-in-interest to Trust, and the Corporations have satisfied the
requirements for granting a reasonable extension of time to elect under section 856(l) to
treat each Corporation as a TRS of Taxpayer effective Date 3. Accordingly, Taxpayer,
as the successor-in-interest to Trust, and the Corporations have 90 calendar days from
the date of this letter to make the intended elections to treat each Corporation as a TRS
of Taxpayer effective Date 3.

                                     CAVEATS

    This ruling is limited to the timeliness of the filing the 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 or implied regarding whether the
Transaction was a reorganization under section 368(a)(1)(F). Further, no opinion is
expressed or implied regarding whether Taxpayer otherwise qualifies as a REIT, or

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whether any Corporation otherwise qualifies as a TRS of Taxpayer under part II of
subchapter M of chapter 1 of the Code.

    No opinion is expressed with regard to whether the tax liability of Taxpayer is not

lower in the aggregate for all years to which the elections apply than such tax liability
would have been if the elections had been timely made (taking into account the time
value of money). Upon audit of the U.S. 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.

  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 representative.

                                       Sincerely,


                                       ___________________________
                                       Bernard J. Audet, Jr.
                                       Assistant to the Branch Chief, Branch 2
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)

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