Late-filed REIT return is treated as a timely election

Plain-English summary

A newly taxable corporation intended to elect real estate investment trust status for its first short tax year. Its governing documents repeatedly stated that intent, and its manager relied on an accounting firm to prepare and file the necessary returns and extension request. The accounting firm could not electronically file Form 7004 and sent confusing instructions for a paper filing, while pandemic office closures added to the confusion. Each side mistakenly believed the other had filed the extension, so the Form 1120-REIT was filed after the unextended deadline. The error was discovered during due diligence for a proposed stock sale, and the taxpayer requested relief before the IRS found it. The IRS treated the filed Form 1120-REIT as a timely REIT election effective for the intended date but did not decide whether the taxpayer otherwise qualified as a REIT.

Ruling snapshot

• Question: May the taxpayer's late-filed first Form 1120-REIT be treated as a timely REIT election?
• Outcome: Approved.
• Key authorities: IRC § 856(c); Treas. Reg. §§ 1.856-2(b), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202121006 Third Party Communication: None
Release Date: 5/28/2021 Date of Communication: Not Applicable
Index Number: 856.00-00, 9100.00-00
Person To Contact:
------------------------------------------------------------ -------------------------, ID No. -----------------
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----------------------------- Telephone Number:
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--------------------------------------- Refer Reply To:
CC:FIP:B03
PLR-124612-20
Date:
March 03, 2021

Legend

Taxpayer = ------------------------------------------------------
Company 1 = -----------------------------
Fund = -----------------------------------------------------
Company 2 = ---------------------------------------------
Firm = ----------------------
Date 1 = ----------------------
Date 2 = -------------------
Date 3 = --------------------------
Date 4 = ------------------
Date 5 = -----------------------
Date 6 = ------------------
Date 7 = ---------------------------
Date 8 = ---------------------------
Month = ------
Year = -------

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

   This ruling responds to a letter dated October 23, 2020, that was 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 (“Regulations”) to make an
election under § 856(c) of the Internal Revenue Code (“Code”) to be treated as a real
estate investment trust (“REIT”) effective Date 1.

                                                 FACTS

  Taxpayer, directly owned by Company 1 and indirectly owned by Fund, was

formed as a single member limited liability company on Date 2. Taxpayer was treated
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as a disregarded entity for federal income tax purposes prior to timely filing Form 8832,
Entity Classification Election, electing to be treated as an association taxable as a
corporation effective Date 1.

    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 its initial, short taxable
year beginning Date 1 and ending Date 3 (the First REIT Taxable Year). Taxpayer’s
limited liability company agreement and supplemental documents state that it “intended
for the Company to qualify for treatment as a REIT under Code section 856.” The
agreement references this intent several times.

    Company 2 provides management services to Fund. As part of its management

services, Company 2 is responsible for tax matters and, more specifically, was
responsible for making Taxpayer’s REIT election. Company 2 regularly engages Firm
for the preparation and filing of tax and information returns for entities managed by
Company 2.
The filing of Form 7004 to extend the due date of Taxpayer’s return for the First
REIT Taxable Year was due on Date 4. In Month of Year, Firm timely prepared
Taxpayer’s Form 7004, Application for Automatic Extension of Time to File Certain
Business Income Tax, Information, and Other Returns. Firm also prepared various
other tax and information returns for entities managed by Company 2, which were
electronically filed by Firm at that time. Due to a miscommunication between Company
2 and Firm, Taxpayer’s Form 7004 was not timely filed. Specifically, Firm attempted but
was unable to electronically file a Form 7004 for Taxpayer in early Month of Year. As a
result, Firm instructed Company 2 that it would need to file a paper extension request;
however, Firm’s instructions in a letter dated early Month of Year were confusing and
not understood by Company 2. Coupled with the confusion arising from COVID-19
office closures, Company 2 inadvertently failed to file a paper copy of the extension
request. Company 2 believed that Firm had electronically filed Taxpayer’s Form 7004 in
Month of Year along with the other tax and information returns Firm had prepared at
that time. Firm assumed that Company 2 filed Taxpayer’s Form 7004 by paper based
on its letter dated early Month of Year.
Taxpayer’s Form 7004 would have extended the due date of its return and Form
1120-REIT for the First REIT Taxable Year from Date 4 to Date 5. Company 2 filed
Taxpayer’s return and Form 1120-REIT on Date 6, believing that such filing was timely.
However, because Taxpayer’s Form 7004 was not timely filed, Taxpayer’s Form 1120-
REIT was not timely filed.

   On Date 7, as part of responding to a due diligence inquiry related to the

proposed sale of Taxpayer’s stock, Company 2 requested confirmation that Firm had
filed Taxpayer’s Form 7004. On Date 8, Firm informed Company 2 that it had not filed
the Form 7004. Prior to the due diligence inquiry, both Company 2 and Firm had
believed that the other had timely filed the Form 7004 on behalf of Taxpayer. Taxpayer
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subsequently submitted this request to treat its election to be treated as a REIT under
§ 856(c) as effective Date 1.
Taxpayer makes the following additional representations:

   1. The request for relief was filed by the Taxpayer before the failure to make the
      regulatory election was discovered by the IRS.

   2. Granting the relief will not result in the 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. The Taxpayer did 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 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, the Taxpayer did not choose to not file the election.

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

   6. The period of limitations on assessment under Section 6501(a) has not
      expired for Taxpayer for the taxable year for 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
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regulatory election to mean an election whose due date is prescribed by a regulation,
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
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.
PLR-124612-20 5

                                   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 effective Date 1.

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

Taxpayer’s Form 1120-REIT filed on Date 6 for the 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 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.

  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 E. White
                                   Senior Counsel
                                   (Financial Institutions & Products)

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