IRS allows correction of a taxable REIT subsidiary election date

Plain-English summary

A real estate investment trust acquired an indirect interest in a corporation and intended that corporation to become its taxable REIT subsidiary on the acquisition date. The law firm filing their joint Form 8875 mistakenly listed an earlier effective date that preceded both the taxpayer's first REIT year and its ownership of the subsidiary. An accounting firm later discovered the error during a compliance review and promptly notified the taxpayer and counsel. The parties requested relief before the IRS discovered the mistake, did not seek to change a penalty-bearing return position, did not use hindsight, and represented that relief would not reduce their aggregate tax liability. The IRS found that they acted reasonably and in good faith and that relief would not prejudice the government. It granted them 90 days to file a new Form 8875 electing taxable REIT subsidiary status effective on the acquisition date.

Ruling snapshot

• Question: May the REIT and its subsidiary correct an erroneous Form 8875 effective date and make their taxable REIT subsidiary election effective on the acquisition date?
• Outcome: Approved: they received 90 days to file a corrected Form 8875.
• 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: 202123002 Third Party Communication: None
Release Date: 6/11/2021 Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.00-00
Person To Contact:
---------------------------------------- -----------------, ID No. -----------------
---------------------------- Telephone Number:
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---------------------------------------- Refer Reply To:
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PLR-126944-20
Date:
March 15, 2021

Legend

Taxpayer = [redacted]

Subsidiary = [redacted]

Law Firm = [redacted]

Accounting Firm = [redacted]

State = [redacted]

Date 1 = [redacted]

Date 2 = [redacted]

Date 3 = [redacted]

Date 4 = [redacted]

Year = [redacted]

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

   This letter is in response to a letter from your authorized representative, dated

November 20, 2020, requesting an extension of time under §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations for Taxpayer and
Subsidiary to make an election under § 856(l) of the Internal Revenue Code (“Code”) to
treat Subsidiary as a taxable REIT subsidiary (“TRS”) of Taxpayer.

                                       FACTS

    According to the information submitted and representations made, Taxpayer was

organized as a State limited liability company on Date 1. Taxpayer elected under § 856
to be treated as a real estate investment trust (“REIT”) for federal income tax purposes
effective Date 2. On Date 3, Taxpayer acquired an indirect ownership interest in
Subsidiary, a State corporation. Taxpayer did not own any stock directly or indirectly in
Subsidiary prior to Date 3.

    Taxpayer and Subsidiary intended for Subsidiary to be treated as a TRS effective

Date 3. On Date 4, Law Firm, Taxpayer’s legal counsel, filed on behalf of Taxpayer and
Subsidiary an election on Form 8875, Taxable REIT Subsidiary Election, to treat
Subsidiary as a TRS of Taxpayer. Inadvertently, however, Law Firm indicated on the
Form 8875 that the election was effective Date 1, prior to both the start of Taxpayer’s
first REIT taxable year on Date 2 and Taxpayer’s indirect ownership of stock in
Subsidiary on Date 3.

    During Year, Accounting Firm, whom Taxpayer had engaged to perform REIT

compliance, discovered the error. Accounting Firm promptly reported the error to
Taxpayer and Law Firm, which in turn prepared and submitted the ruling request for
relief.

    Taxpayer makes 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 (“IRS”).
2. Taxpayer and Subsidiary are not seeking to alter a return position for which an
accuracy-related penalty has been or could be imposed under § 6662.
3. Taxpayer and Subsidiary are not using hindsight in requesting this relief. No
specific facts have changed since the due date for making the election that make the
election more advantageous to Taxpayer or Subsidiary.
4. 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).

5. The period of limitations on assessment under § 6501(a) has not expired for
   Taxpayer and Subsidiary for the taxable year in which the election should have been
   filed, or for any taxable year(s) that would have been affected by the election had it
   been timely filed.

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

   In addition, affidavits on behalf of Taxpayer and Subsidiary have been provided
   as required by § 301.9100-3(e).

                              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,
   § 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 treatment. The
   election is irrevocable once made, unless both the REIT and the corporation consent to
   its revocation. In addition, § 856(l)(1) 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 IRS announced the availability
   

   of Form 8875. 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 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 IRS.

   Section 301.9100-1(c) provides, in part, 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)
   provides, in part, that the term “election” includes an application for relief in respect of
   tax; a request to adopt, change, or retain an accounting method or accounting period;
   but does not include an application for an extension of time for filing a return under
   § 6081. Section 301.9100-1(b) also provides, in part, that the term “regulatory election”
   means an election whose due date is prescribed by a regulation published in the
   Federal Register, or by a revenue ruling, revenue procedure, notice, or announcement
   published in the Internal Revenue Bulletin.

   Section 301.9100-3 sets forth rules for determining whether the Commissioner
   

   will grant a reasonable extension of time for regulatory elections that do not meet the
   requirements of § 301.9100-2 for an automatic extension. In general, requests for relief
   subject to this section will be granted when the taxpayer provides evidence (including
   any required affidavits) 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)(1) provides, in part, that, except as provided in
   paragraphs (b)(3)(i) through (iii) of § 301.9100-3, when a taxpayer applies for relief
   under § 301.9100-3 before the failure to make the regulatory election is discovered by
   the IRS, the taxpayer will be deemed to have acted reasonably and in good faith.

   Section 301.9100-3(b)(3)(i) provides that a taxpayer is deemed to have not acted
   

   reasonably and in good faith if the taxpayer 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. Section 301.9100-3(b)(3)(ii) provides that a taxpayer is
   deemed to have not acted reasonably and in good faith if the taxpayer was informed in
   all material respects of the required election and related tax consequences but chose
   not to file the election. Section 301.9100-3(b)(3)(iii) provides that a taxpayer is deemed
   to have not acted reasonably and in good faith if the taxpayer uses hindsight in request-
   ing relief. If specific facts have changed since the due date for making the election that
   make the election advantageous to the taxpayer, the IRS will not ordinarily grant relief.
   In such a case, the IRS will grant relief only when the taxpayer provides strong proof
   that the taxpayer’s decision to seek relief did not involve hindsight.

   Section 301.9100-3(c) provides, in part, 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 to which the regulatory election applies than the taxpayer
   would have had if the election had been timely made (taking into account the time value
   of money). Further, the interests of the Government are 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 § 301.9100-3.

                                  CONCLUSION
   

   Based solely on the information submitted and representations made, we
   conclude that Taxpayer and Subsidiary have satisfied the requirements for granting a
   reasonable extension of time to elect under § 856(l) to treat Subsidiary as a TRS of
   Taxpayer, effective Date 3. Accordingly, Taxpayer and Subsidiary have 90 calendar
   days from the date of this letter to file with the IRS a new Form 8875 and elect to treat
   Subsidiary as a TRS of Taxpayer effective Date 3.

                                    CAVEATS
   

   This ruling is limited to the timeliness of filing a Form 8875. Except as expressly
   provided herein, no opinion is expressed or implied concerning the application of any
   other provisions of the Code or regulations or 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 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.

   Moreover, 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
   regulatory 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
   federal income tax returns involved, the Director, Exam Division, will determine the
   relevant tax liability, treatment, and effect for the taxable years involved.

   The ruling contained in this letter is based upon information and representations
   submitted by the taxpayer and accompanied by a penalty of perjury statement executed
   by an appropriate party. Because this office has not verified any of the material
   submitted in support of the request for rulings, such material is subject to verification on
   examination.

   This ruling is directed only to the taxpayer requesting 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, copies of this
   

   letter are being sent to your authorized representatives.

                                     Sincerely,
   
                                     Associate Chief Counsel
                                     (Financial Institutions and Products)
   
                                  By: _______________________________
                                     JIAN H. GRANT
                                     Senior Technician Reviewer, Branch 5
                                     Office of Associate Chief Counsel
                                     (Financial Institutions and Products)
   

Enclosure (1):
Copy for § 6110 purposes

cc: