REIT and two subsidiaries receive more time for taxable REIT subsidiary elections

Plain-English summary

A real estate investment trust and two indirectly owned limited liability companies intended to jointly elect taxable REIT subsidiary (TRS) treatment under IRC § 856(l). The companies also needed corporate tax classification, but the classification and Form 8875 elections were missed because advisers for different entities did not communicate about the structure. The omissions were found during due diligence for a potential sale, and the parties acted promptly before the IRS discovered them. Based on representations that the parties acted reasonably and in good faith and that relief would not prejudice the government, the IRS granted 90 days to make the two TRS elections with retroactive effective dates. The ruling addressed only whether the Forms 8875 were timely and did not decide whether the parent qualified as a REIT or the subsidiaries otherwise qualified as TRSs.

Ruling snapshot

• Question: May the REIT and two subsidiaries file late joint elections for taxable REIT subsidiary treatment?
• Outcome: Approved (90-day extension)
• 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: 202110004                                                Third Party Communication: None
 Release Date: 3/12/2021                                          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-113103-20
                                                                  Date:
                                                                  December 15, 2020




Legend:

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

Entity A                  =         ------------------------------------
                                   ------------------------

Entity B                  =         ------------------------------
                                   ------------------------

Entity C                  =        ----------------------

Entity D                  =        -------------------------------.

Entity E                  =        -------------------------

Entity F                  =        ----------------------------

Entity G                  =        ----------------------

Entity H                  =        ---------------------------------

Advisor 1                 =        ---------------------

Advisor 2                 =        -----------------------------------

Advisor 3                 =        --------------------

Advisor 4                 =        ----------------------
PLR-113103-20                                     2


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

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

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

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

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

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

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

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

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

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

State B              =   --------

Year 1               =   -------

Year 2               =   -------

Year 3               =   -------

Year 4               =   -------

Year 5               =   -------

a                    =   -----

b                    =   ---

c                    =   ---

d                    =   ---


Dear ------------:
PLR-113103-20                                 3

       This ruling responds to a letter dated May 22, 2020, and subsequent
correspondence, submitted on behalf of Taxpayer and its subsidiaries, Entity A and
Entity B. Taxpayer and Entity A and B, respectively, request extensions of time under
sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations
to make elections under section 856(l) of the Internal Revenue Code to treat Entity A
and Entity B each as a taxable REIT subsidiary (“TRS”) of Taxpayer effective as of Date
4 for Entity A and as of Date 6 for Entity B.

                                          FACTS

       Taxpayer is a State A corporation and represents that it made an election to be
treated as a real estate investment trust (“REIT”) under sections 856 through 859
commencing with its taxable year that ended on Date 2. Taxpayer uses the accrual
method as its overall method of accounting, and Taxpayer’s taxable year is the calendar
year. Taxpayer directly or indirectly holds assets related to senior housing facilities with
a focus on assisted living and memory care units.

Entity A Facts:

         Entity A is a limited liability company formed under the laws of the State A on
Date 3. All of Entity A’s membership interests are owned by Entity C, a State A limited
liability company. Taxpayer owns a percent of the limited partnership interests in Entity
D, a State B limited partnership which owns b of the membership interests in Entity C.
The remaining membership interests in Entity C are owned by Entity E, a State limitedly
liability company. Entity C is classified as a partnership for federal income tax
purposes.

        In Year 1, Advisor 1 advised Taxpayer and certain of its affiliates with respect to
an investment structure for senior living facilities. In particular, Advisor 1 advised
Taxpayer and its affiliates with respect to an Investment Agreement dated as of Date 1.
The Investment Agreement along with an Operating Agreement dated as of Date 1,
provided that Entity A would make a joint TRS election with Taxpayer. In order for
Entity A to be treated as a TRS of Taxpayer, it first had to be classified as a corporation
for federal income tax purposes. Entity A was eligible to elect to be treated as an
association taxed as a corporation and to make a TRS election effective as of Date 4. It
was intended that Entity A would file Form 8832, Entity Classification Election, with the
Internal Revenue Service to be effective as of Date 4, to elect to be classified as an
association taxed as a corporation for federal income tax purposes. In addition, in
conjunction with the filing of Form 8832, and after giving effect to such election, Form
8875, Taxable REIT Subsidiary Election, was to be filed jointly by Entity A and Taxpayer
to treat Entity A as a TRS of Taxpayer effective Date 4.

      Advisor 2, the historic tax accounting firm providing services to Entity F, the
management company of Entity C and its affiliates, was engaged to prepare the federal
income tax return of Entity C for the calendar Year 2. In order to discharge its federal
PLR-113103-20                                  4

and state tax compliance obligations for the calendar year 2016, and to ensure that its
REIT status would be maintained, Taxpayer itself engaged Advisor 3.

       Because Advisor 2 did not have a copy of relevant agreements prepared by
Advisor 1, it did not understand the importance of making a TRS election for Entity A or
the importance of classifying Entity A as a corporation for federal income tax purposes.
Advisor 2, having not been familiar with the tax-law limitations applicable to a REIT, did
not review (or inquire of its client regarding) the REIT related issue related to an indirect
partner of its client. Due to the lack of understanding and communication regarding the
applicable TRS election requirements, Entity A was treated as a disregarded entity of
Entity C, and the federal income tax returns for Entity C for the taxable years ended
December 31, Year 2, Year 3 and Year 4, included the activity for Entity A. As a result,
Entity A has not filed a separate federal income tax return for Year 2 (or any subsequent
taxable year) on the basis of its unintended treatment as an entity disregarded as
separate from its owner.

        On or about Date 7, during due diligence procedures in connection with a
potential sale of Taxpayer and other entities, it was discovered that neither the entity
classification election nor the TRS election was filed for Entity A. When the matter was
investigated, it became apparent that the oversight was due to a lack of communication
between the representatives of the various entities.

        Once it became clear to Taxpayer that the appropriate entity classification and
TRS elections were not made, Taxpayer engaged Advisor 3 and Advisor 4 to determine
options for requesting relief for the missed elections. Advisor 3 advised Taxpayer and
Entity A that the only available option to make the late entity classification and TRS
elections was to file a request for a private letter ruling. Once the failure to make these
elections was discovered, Taxpayer and Entity A took prompt action to gather the facts
and to authorize Advisor 3 to submit this ruling request. Entity A was granted an
extension of time to make the entity classification election effective Date 4 in a private
letter ruling dated Date 9. On Date 8, consents were submitted by the appropriate
parties to extend the period of limitations on assessment.

      Taxpayer and Entity A make the following additional representations in
connection with their request for an extension of time:

1. Entity A intends to elect to be treated as a corporation for federal income tax
   purposes effective Date 4 and will be an eligible entity within the meaning of Treas.
   Reg. section 301.7701-3(a) on the date the retroactive election to treat Entity as a
   TRS of Taxpayer becomes effective.

2. The request for relief was filed before the failure to make the regulatory election was
   discovered by the Service.

3. Granting the relief will not result in Taxpayer or Entity A having a lower tax liability in
PLR-113103-20                                 5

   the aggregate for all years to which the regulatory election applies than they would
   have had if the election had been timely made (taking into account the time value of
   money).

4. Taxpayer and Entity A do not seek to alter a return position for which an accuracy-
   related penalty has been or could be imposed under section 6662 as of the date of
   this letter.

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

6. Taxpayer and Entity A 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 makes the election advantageous to Taxpayer or Entity A.

7. The period of limitations on assessment under Code section 6501(a) has not expired
   for Taxpayer and Entity A 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 Taxpayer and Entity A have been provided as
required by section 301.9100-3(e).

Entity B Facts:

         Entity B is a limited liability company formed under the laws of State A on Date 5.
All of its membership interests are owned by Entity G, a State A limited liability
company. Taxpayer own c percent of the limited partnership interests in Entity H, a
State B limited partnership which owns d percent of the membership interests in Entity
G. Entity G is classified as a partnership for federal income tax purposes.

         As discussed above, in Year 1, Advisor 1 advised Taxpayer and certain of its
affiliates with respect to an investment structure for senior living facilities and with
respect to the Investment Agreement. The Investment Agreement along with an
Operating Agreement dated as of Date 5, provided that Entity B would make a joint TRS
election with Taxpayer. In order for Entity B to be treated as a TRS of Taxpayer, it first
had to be classified as a corporation for federal income tax purposes. Entity B was
eligible to elect to be treated as an association taxed as a corporation and to make a
TRS election effective as of Date 6. It was intended that Entity B would file Form 8832,
Entity Classification Election, with the Internal Revenue Service to be effective as of
Date 6, to elect to be classified as an association taxed as a corporation for federal
income tax purposes. In addition, in conjunction with the filing of Form 8832, and after
giving effect to such election, Forms 8875, Taxable REIT Subsidiary Election, were to
be filed jointly by Entity B and Taxpayer to treat Entity B as a TRS of Taxpayer effective
Date 6.
PLR-113103-20                                6


       Entity F was also the manager of Entity G and engaged Advisor 2 to prepare the
federal income tax return of Entity G for Year 5. As discussed above, in order to
discharge its federal and state tax compliance obligations for Year 5, and to ensure that
its REIT status would be maintained, Taxpayer engaged Advisor 3.

        Because Advisor 2 did not have a copy of relevant agreements prepared by
Advisor 1, it did not understand the importance of making a TRS election for Entity B or
of classifying Entity B as a corporation for federal income tax purposes. Advisor 2,
having not been familiar with the tax-law limitations applicable to a REIT, did not review,
or inquire of its client regarding the REIT related issue related to an indirect partner of
its client. Due to the lack of communication regarding the applicable REIT election
requirements, Entity B treated itself as a disregarded entity of Entity G and no federal
income tax return was filed for Entity B for the taxable year ended December 31, Year
5.

        On or about Date 7, during due diligence procedures in connection with a
potential sale of Taxpayer and other entities, it was discovered that neither the entity
classification election nor the TRS election was filed for Entity B. When the matter was
investigated, it became apparent that the oversight was due to a lack of communication
between the representatives of the various entities.

       Once it became clear to Taxpayer that the appropriate entity classification and
TRS elections were not made, Taxpayer engaged Advisor 3 and Advisor 4 to determine
options for requesting relief for the missed elections. Advisor 3 advised Taxpayer and
Entity B that the only available option to make the late entity classification and TRS
elections was to file a request for a private letter ruling. Once the failure to make these
elections was discovered, Taxpayer and Entity B took prompt action to gather the facts
and to authorize Advisor 3 to submit this ruling request. Entity B represents that it
intends to file a late entity classification election under Rev. Proc. 2009-41, 2009-39
I.R.B. 439, to be taxed as a Corporation for federal income tax purposes effective Date
6.

      Taxpayer and Entity B make the following additional representations in
connection with their request for an extension of time:

1. Entity B intends to elect to be treated as a corporation for federal income tax
   purposes effective Date 6 and will be an eligible entity within the meaning of Treas.
   Reg. section 301.7701-3(a) on the dated the retroactive election to treat Entity as a
   TRS of Taxpayer becomes effective.

2. The request for relief was filed before the failure to make the regulatory election was
   discovered by the Service.
PLR-113103-20                                  7

3. Granting the relief will not result in Taxpayer or Entity B having a lower tax liability in
   the aggregate for all years to which the regulatory election applies than they would
   have had if the election had been timely made (taking into account the time value of
   money).


4. Taxpayer and Entity B do not seek to alter a return position for which an accuracy-
   related penalty has been or could be imposed under section 6662 as of the date of
   this letter.


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


6. Taxpayer and Entity B 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 makes the election advantageous to Taxpayer or Entity B.


7. The period of limitations on assessment under Code section 6501(a) has not expired
   for Taxpayer and Entity B 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 Taxpayer and Entity B have been provided as
required by section 301.9100-3©.

                                   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 Form 8875, Taxable REIT Subsidiary Election. The announcement
provides that this form is to be used for taxable years beginning after 2000 for eligible
entities to elect to be treated 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.
PLR-113103-20                                 8

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© 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 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 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©) 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©(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©(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
PLR-113103-20                                   9

account the time value of money). Section 301.9100-3©(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 Entity A and Entity B, respectively, have satisfied the requirements
for granting a reasonable extension of time to jointly elect under section 856(l) to treat
Entity A as a TRS of Taxpayer, effective Date 4, and Entity B as a TRS of Taxpayer,
effective Date 6. Accordingly, Taxpayer and Entity A and Entity B, respectively, have 90
calendar days from the date of this letter to make the intended elections to treat Entity A
as a TRS of Taxpayer effective Date 5, and Entity B as a TRS of Taxpayer effective
Date 6.

       This ruling is limited to the timeliness of the filing of the Forms 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 Taxpayer qualifies as a
REIT, or whether Entity A or Entity B otherwise qualifies as a TRS of Taxpayer under
part II of subchapter M of the Code.

       No opinion is expressed with regard to whether the tax liability of Taxpayer,
Entity A or Entity B 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 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.

      The ruling contained in this letter is based upon information and representations
submitted by Taxpayer, Entity A and Entity B, and accompanied by penalty of perjury
statements executed by the 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.
PLR-113103-20                                  10


         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,



                                                    ______________________
                                                    Matthew Howard
                                                    Senior Counsel, Branch 2
                                                    Office of the Associate Chief Counsel
                                                    (Financial Institutions & Products)


Enclosure:

       Copy of this letter for section 6110 purposes



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