IRS grants late taxable REIT subsidiary election

Plain-English summary

A real estate investment trust acquired an ownership interest in a subsidiary that leased facilities from the REIT, and both entities intended to elect taxable REIT subsidiary treatment. Their investment manager, law firm, and tax preparer each believed another party would file Form 8875, so the election was missed even though the returns were consistent with timely TRS treatment. The omission was discovered before the IRS identified it, and the taxpayers represented that relief would not reduce aggregate tax liability, change a penalized return position, or use hindsight. The IRS concluded that the regulatory-relief requirements were satisfied. It granted 30 days to file the election with the intended effective date, without deciding whether either entity otherwise qualified as a REIT or TRS.

Ruling snapshot

• Question: Could the REIT and its subsidiary receive extra time to make their taxable REIT subsidiary election under § 856(l)?
• Outcome: Approved
• 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: 202104008                                             Third Party Communication: None
Release Date: 1/29/2021                                       Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.00-00
                                                              Person To Contact:
--------------------------                                    -----------------, ID No. -----------------
------                                                        Telephone Number:
---------------------------                                   --------------------
-------------------------------------------                   Refer Reply To:
----------------------------                                  CC:FIP:B01
                                                              PLR-115339-20
                                                              Date:
                                                              October 30, 2020




Legend:

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

Subsidiary                 = ----------------------------------------------------------------------------------
                             -----------------------

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

Tax Preparer               = ------------------------------

Investment                 = ------------------------------------------------------
Manager

Facilities                 = -------------------------------

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

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

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

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

Month 1                    = ---------------------

Month 2                    = -------------

 a                         = --



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

       This ruling responds to a letter dated July 9, 2020, submitted on behalf of Tax-
payer and Subsidiary. Taxpayer and Subsidiary request an extension of time under
sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations
to make an election under section 856(l) of the Internal Revenue Code (“Code”) to treat
Subsidiary as a taxable REIT subsidiary (“TRS”) of Taxpayer.

                                         FACTS

       Taxpayer and Subsidiary are State A limited liability companies which were orga-
nized on Date 1 and which filed timely Forms 8832, Entity Classification Election, to be
treated as corporations as of the date of their formation. Taxpayer timely elected under
section 856 of the Code to be treated as a real estate investment trust (“REIT”) effective
Date 1. Taxpayer owns Facilities and leases Facilities to Subsidiary.

        On Date 2, Taxpayer acquired a(n) a% direct ownership interest in Subsidiary.
Taxpayer and Subsidiary represent that they intended to make an election on Form
8875, Taxable REIT Subsidiary Election, to treat Subsidiary as a TRS as of Date 2, and
that all of their tax returns are consistent with having timely made that election. To be
effective as of Date 2, the election should have been filed no later than Date 3. How-
ever, Taxpayer and Subsidiary now believe that no TRS election was in fact filed.

      Taxpayer and Subsidiary represent that a timely TRS election was not filed solely
because of a misunderstanding among Law Firm, Tax Preparer, and Investment
Manager. Investment Manager oversaw tax elections for Taxpayer and Subsidiary.
Law Firm advised Investment Manager on Taxpayer’s investment in Subsidiary. Tax
Preparer was engaged to prepare income tax returns of Taxpayer and Subsidiary
beginning with the year the entities were formed.

       Taxpayer and Subsidiary have submitted affidavits from the three agents, each of
whom represents that Taxpayer and Subsidiary intended to file a timely TRS election.
An affiant for the Investment Manager indicates that he believed that Law Firm would
prepare and file the TRS election just as it had prepared and filed the Forms 8832. But
an affiant for Law Firm reveals that he assumed based on past practices that either
Investment Manager or Tax Preparer would take care of the TRS filing. Likewise, Tax
Preparer assumed that either Investment Manager or Law Firm would file the election.

     In Month 1, Investment Manager first discovered that two entities under its man-
agement had not made an intended TRS election. Investment Manager’s subsequent

examination indicated that Taxpayer and Subsidiary had not made their intended TRS
election.

       Taxpayer and Subsidiary first learned of the missing TRS election during Month 2
from Investment Manager and Tax Preparer and promptly prepared and submitted the
request for relief to which this ruling responds.

       Taxpayer and Subsidiary make the following additional representations:

       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 Taxpayer or Subsidiary 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. Taxpayer and Subsidiary do not seek to alter a return position for which an
accuracy-related penalty has been or could have been imposed under section 6662 at
the time they requested relief.

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

       5. Taxpayer and Subsidiary are not using hindsight in requesting relief. No
specific facts have changed since the due date for making the election that make the
election more advantageous to Taxpayer or Subsidiary.

       6. The period of limitations on assessment under section 6501(a) has not
expired for Taxpayer and Subsidiary 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, Subsidiary, Investment Manager, Law Firm, and
Tax Preparer have been provided as required by sections 301.9100-3(e)(2) and (3).

                                  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 such corporation, and the REIT and such corporation must jointly elect such treat-
ment. The election is irrevocable once made, unless both the REIT and the corporation

consent to its revocation. In addition, section 856(l) specifically provides that the
election, and any revocation thereof, may be made without consent of the Secretary.

         In Announcement 2001-17, 2001-1 C.B. 716, the Service announced the avail-
ability of Form 8875, Taxable REIT Subsidiary Election. According to the Announce-
ment, 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 of the election 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 sub-
titles of the Internal Revenue 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 regu-
lations or by 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 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 reason-
ably and in good faith if the taxpayer (i) requests relief under this section before the fail-
ure 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 tax-
payer’s experience and the complexity of the return or issue), the taxpayer was un-
aware 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 profes-
sional 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 reasonab-
ly and in good faith if the taxpayer (i) seeks to alter a return position for which an accu-
racy-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 inter-
ests of the Government are prejudiced if granting relief would result in the taxpayer hav-
ing 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 the representations made we conclude
that Taxpayer and Subsidiary have satisfied the requirements for granting a reasonable
extension of time to elect under section 856(l) to treat Subsidiary as a TRS of Taxpayer,
effective as of Date 2. Accordingly, Taxpayer and Subsidiary have 30 calendar days
from the date of this letter to make the intended election to treat Subsidiary as a TRS of
Taxpayer effective as of Date 2.

        This ruling is limited to the timeliness of filing Form 8875. This ruling’s application
is limited to the facts, representations, Code sections, and regulations cited herein. Ex-
cept as provided herein, no opinion is expressed or implied concerning the tax conse-
quences of any aspect of any transaction or item discussed or referenced in this letter.
No opinion is expressed as to whether Taxpayer otherwise qualifies as a REIT, or
whether Subsidiary otherwise qualifies as a TRS, 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 and
Subsidiary 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 ac-
count 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 U.S. federal income tax effect.

       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 Power of Attorney on file with this office, copies of the
letter are being sent to your authorized representatives.

                                       Sincerely,


                                       _________________________
                                       Steven Harrison
                                       Branch Chief, Branch 1
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)




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