IRS accepts late taxable REIT subsidiary election

Plain-English summary

A real estate investment trust and an indirectly owned subsidiary intended the subsidiary to be a taxable REIT subsidiary from its formation date. They missed the Form 8875 deadline because the sponsor, accounting firm, and outside law firms did not coordinate responsibility for the election. The accounting firm discovered the omission while preparing an extension for the subsidiary's return, after which the sponsor filed the form and requested regulatory relief. The IRS found reasonable and good-faith conduct and no prejudice to the government. It treated the filed Form 8875 as timely with the intended effective date. The ruling addressed only timeliness and did not decide whether either entity otherwise qualified or whether aggregate tax liability was unchanged.

Ruling snapshot

• Question: Could the REIT and its subsidiary make their late taxable REIT subsidiary election effective on the intended date?
• Outcome: Approved; Form 8875 was treated as timely filed with the requested effective date.
• 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: 202128006 Third Party Communication: None
Release Date: 7/16/2021 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:B03
PLR-126626-20
Date:
April 20, 2021

LEGEND:

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

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

Sponsor = ----------------------------------

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

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

Law Firm-1 = ----------------------------------------------------------

Law Firm-2 = -------------------------

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

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

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

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

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

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

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

PLR-126626-20 2

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

Year 1 = -------

Year 2 = -------

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

   This ruling responds to a letter dated November 16, 2020, and subsequent

correspondence, submitted on behalf of Taxpayer 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 (the “Regulations”) to make an election
under section 856(l) of the Internal Revenue Code (the “Code”) to treat Subsidiary as a
taxable REIT subsidiary (“TRS”) of Taxpayer effective as of Date 1.

                                         FACTS

    Sponsor is a real estate investment company that was formed on Date 2.

Sponsor formed Taxpayer, a State limited liability company, on Date 3, to invest in
single family rental homes (the “Real Property”). Taxpayer made an initial entity
classification election on Form 8832, Entity Classification Election, to be classified as an
association taxable as a corporation for federal income tax purposes effective as of
Taxpayer’s date of formation. Taxpayer elected to be treated as a real estate
investment trust (“REIT”) for federal income tax purposes beginning with Taxpayer’s
taxable year that ended Date 4. Taxpayer owns the Real Property through its
ownership of (i) a series of single-member limited liability companies that are treated as
disregarded entities from their owner for federal income tax purposes, and (ii) a series
of limited liability companies that are intended to be treated as taxable REIT
subsidiaries (the “TRS Entities”) of Taxpayer. The TRS Entities are comprised of
Subsidiary and two other related entities.

  Subsidiary is a State limited liability company that was formed on Date 1.

Subsidiary is indirectly owned by Taxpayer through a series of entities that are
disregarded from their owner for federal income tax purposes. When forming
Subsidiary, Sponsor and Taxpayer intended to treat Subsidiary as a TRS of Taxpayer.
To make a timely TRS election that would have been effective on Date 1, Taxpayer and
Subsidiary needed to have filed a Form 8875, Taxable REIT Subsidiary Election, with
the Service no later than Date 5.

    Sponsor provides certain administrative and management services to Taxpayer

and Subsidiary. These services include overseeing tax matters, for which Sponsor
relies on external legal and tax advisors to manage tax compliance and tax planning.
During the relevant time period, Year 1 and Year 2, neither Sponsor, Taxpayer, nor

PLR-126626-20 3

Subsidiary maintained an internal tax department or had tax professionals within their
employ. Sponsor retained Accounting Firm and Law Firm-1 in connection with the
structuring transactions relating to Taxpayer and Subsidiary. The scope of the services
provided by Accounting Firm and Law Firm-1 included advising on tax matters related to
Taxpayer and Subsidiary, including the REIT provisions. Additionally, Sponsor engaged
Accounting Firm to assist with certain income tax compliance matters related to
Taxpayer and Subsidiary, including the preparation and timely filing of their federal and
state income tax returns, and the review of quarterly and annual REIT compliance
testing.

   During Year 1 and Year 2, Sponsor also engaged Law Firm-2 to provide legal

counsel with respect to third party loan agreements for the Real Property. Consistent
with the intent that certain properties of the Real Property would be owned and operated
by the TRS Entities, it was determined that the TRS Entities should be added as
borrowers to the loan agreements. Accordingly, Law Firm-2 prepared the necessary
documents for Subsidiary to be included in the loan agreements, which Sponsor
properly filed with State to be effective on Date 1.

    Sponsor relied on Accounting Firm to ensure that all significant tax matters,

including making the necessary TRS election, were properly handled in a timely
manner. Accounting Firm, however, was under the assumption that Sponsor had
engaged external legal counsel to prepare the TRS election, based on the premise that
Sponsor had historically engaged external legal counsel to prepare tax-related filings
relating to the legal formation of an entity. Sponsor, however, did not engage any law
firm to prepare the TRS election, nor did Sponsor timely notify Accounting Firm that
Subsidiary had been formed because Sponsor was unaware of the requirement to make
the TRS election. Consequently, the misunderstanding and gaps in coordination and
communication resulted in Sponsor inadvertently failing to timely file a Form 8875 on
behalf of Taxpayer and Subsidiary for Subsidiary to be treated as a TRS of Taxpayer
effective as of Date 1.

   On Date 6, in the course of assisting with the preparation of an extension request

for Subsidiary’s federal income tax return for the taxable year that ended Date 7,
Accounting Firm discovered that a Form 8875 had not been filed with the Service on
behalf of Taxpayer and Subsidiary. Accounting Firm informed Sponsor that the
deadline had passed for Taxpayer and Subsidiary to timely file a Form 8875 that would
have been effective Date 1. On Date 8, Sponsor caused the filing of a Form 8875 on
behalf of Taxpayer and Subsidiary with the Service, making an election for Subsidiary
be treated as a TRS of Taxpayer.

   Subsequently, Sponsor engaged Accounting Firm to prepare a request for a

private letter ruling under sections 301.9100-1 and 301.9100-3 of the Regulations to
seek an extension of time to allow Taxpayer and Subsidiary to make an election
pursuant to section 856(l) for Subsidiary to be treated as a TRS of Taxpayer effective as
of Date 1.

PLR-126626-20 4

  Taxpayer and Subsidiary make the following additional representations in

connection with their request for an extension of time:

   1. The request for relief was filed before the failure to make the regulatory

election was discovered by the Service.

   2. Granting the relief requested will not result in Taxpayer or Subsidiary having a

lower U.S. federal 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 of
the Code at the time they 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, Taxpayer and Subsidiary did not choose to not file the election.

   5. Taxpayer and Subsidiary 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 make the election advantageous to Taxpayer or Subsidiary.

   6. The period of limitations on assessment under section 6501(a) has not

expired for Taxpayer or 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.

  In addition, affidavits on behalf of Taxpayer and Subsidiary have been provided

as required by section 301.9100-3(e).

                                 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 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

PLR-126626-20 5

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) of the Regulations 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
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

PLR-126626-20 6

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 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 1. Accordingly, the Form 8875 filed by Taxpayer and Subsidiary on
Date 8 will be considered timely filed, and the effective date of the TRS election is Date
1.

   This ruling is limited to the timeliness of the filing of Form 8875. This ruling’s

application is limited to the facts, representations, and Code and Regulations 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 otherwise qualifies
as a REIT or whether Subsidiary 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 or

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
account the time value of money). Upon audit of the 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.

    The ruling contained in this letter is based upon information submitted and

representations made by Taxpayer and Subsidiary and accompanied by penalties 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 taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

PLR-126626-20 7

     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,


                                  ________________________________
                                  K. Scott Brown
                                  Branch Chief, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Financial Institutions & Products)

Enclosure:
Copy for section 6110 purposes

cc: