IRS grants extra time to elect a taxable REIT subsidiary after a law-firm and fund each assumed the other would file

Plain-English summary

A real estate fund set up a structure to hold hotels through a REIT and a taxable REIT subsidiary (TRS), a common "RIDEA" arrangement that lets a REIT lease its lodging facilities to a TRS that hires an independent operator. To make the subsidiary a TRS, the REIT and the subsidiary had to file a joint election (Form 8875) under section 856(l) by a deadline. Because the fund and its law firm each assumed the other would file the form, no one did, and the deadline passed. After discovering the error, they filed the Form 8875 late and asked the IRS for an extension of time under the "9100 relief" regulations (Treas. Reg. §§ 301.9100-1 and 301.9100-3). The IRS found the taxpayer acted reasonably and in good faith and that granting relief would not prejudice the government, so it granted the extension and treated the late Form 8875 as timely filed effective the requested date. The ruling is limited to the timeliness of that election; it does not decide whether the entities otherwise qualify as a REIT or a TRS.

Ruling snapshot

• Question: Should the IRS grant an extension of time to file the joint election to treat the subsidiary as a taxable REIT subsidiary under section 856(l), where the form was missed due to a miscommunication?
• Outcome: Approved (9100 relief granted; the late Form 8875 treated as timely, effective the requested date)
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1, 301.9100-3; Announcement 2001-17, 2001-1 C.B. 716; IRC §§ 6501(a), 6662

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202148005
Third Party Communication: None
Release Date: 12/3/2021
Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.00-00
Person To Contact:
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Telephone Number:
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CC:FIP:B03
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PLR-106075-21
Date:
September 08, 2021

LEGEND:

Taxpayer = -------------------------------------------------------------------------------------
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Subsidiary = -------------------------------------------------------------------------------------
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Fund = -------------------------------------
Partnership = ----------------------------------------------------------
Law Firm = -------------------------------------------------------------------------------------
State = -------------
Date 1 = ------------------
Date 2 = ----------------------
Date 3 = ---------------------
Date 4 = --------------------------
Date 5 = -------------------------------------------------------------------------------------
Date 6 = -------------------
Date 7 = -------------------------
Date 8 = -------------------
Year 1 = -------

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

This letter responds to a letter dated March 4, 2021, 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 to file an election to treat Subsidiary as a
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taxable REIT subsidiary (TRS) of Taxpayer under section 856(l) of the Internal Revenue Code (the Code) effective Date 3.

FACTS

Fund is a State limited partnership that was formed on Date 1. Fund is an investment fund that focuses on real estate related investments.

Taxpayer is a State limited liability company formed on Date 2 and is wholly owned by Fund. On Date 7, Taxpayer filed Form 8832, Entity Classification Election, pursuant to the late classification relief provided in Revenue Procedure 2009-41, 2009- 39 I.R.B. 439, to elect to be classified as an association taxable as a corporation, effective Date 3. Taxpayer intends to elect to be treated as a real estate investment trust (“REIT”) beginning with its first taxable year ended Date 5.

Partnership is a State limited liability company formed on Date 2 and is treated as a partnership for U.S. federal income tax purposes. Partnership is wholly owned by Taxpayer.

Subsidiary is a State limited liability company formed on Date 2 and is wholly owned by Partnership. On Date 7, Subsidiary filed Form 8832 pursuant to the late classification relief in Revenue Procedure 2009-41, 2009-39 I.R.B. 439, to elect to be classified as an association taxable as a corporation, effective Date 3.

Taxpayer and Subsidiary are entities that were formed to, among other things, acquire and develop hotels and other qualified lodging facilities, as defined in section 856(d)(9)(D), through an arrangement pursuant to section 856(d)(8)(B) whereby Subsidiary would qualify as a TRS, lease the qualified lodging facilities, and engage an eligible independent contractor or contractors, as defined in section 856(d)(9), to operate the qualified lodging facilities on its behalf (an arrangement commonly referred to as a “RIDEA structure”).

Fund intended that Taxpayer qualify as a REIT and Subsidiary qualify as a TRS under section 865 during the Year 1 taxable year and for each taxable year thereafter. Subsidiary’s limited liability company agreement states that Subsidiary “will make an election to be treated as an association taxable as a corporation and will jointly make an election with [Taxpayer] to be treated as a taxable REIT subsidiary…of the REIT.” In order to make a timely TRS election that would have been effective on Date 3, Taxpayer and Subsidiary would have had to file Form 8875, Taxable REIT Subsidiary Election, no later than Date 4.

Law Firm handles a range of matters for Fund and related entities. Law Firm assigns different teams to work on different matters for different entities, including for Taxpayer and Subsidiary. Due to miscommunication and inadvertent error, both Fund and Law Firm mistakenly assumed that the other party would file Form 8875 for
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Taxpayer and Subsidiary, and the form was not filed on or before Date 4. The failure to file was discovered in Date 6, and Law Firm prepared both Form 8875, filed by Taxpayer and Subsidiary on Date 8, indicating an effective date of Date 3, and this request for an extension of time to make the election effective Date 3.

REPRESENTATIONS

Taxpayer makes the following representations in connection with this request for an extension of time:

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

2. Granting the relief will not result in Taxpayer or Subsidiary 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).

3. Taxpayer and Subsidiary did 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 requesting this relief. No
   specific facts have changed since the due date for making the election that make
   this 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 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.

   In addition, affidavits on behalf of Taxpayer and Subsidiary have been provided
   as required by section 301.9100-3(e)(2) and (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
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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 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) 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 generally 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, however, 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
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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 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.

Under all the facts and circumstances of this case as presented by Taxpayer and Subsidiary, we have determined that the interests of the Government are not prejudiced under the standards set forth in section 301.9100-3(c)(1)(i).

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 Date 3. Accordingly, the Form 8875 filed by Taxpayer and Subsidiary on Date 8 will be considered as timely filed to be effective Date 3.

CAVEATS

This ruling is limited to the timeliness of the filing the Form 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 or implied regarding 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.

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.
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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 representative.

Sincerely,

Grace Cho
Assistant to the Branch Chief, Branch 3
Office of Associate Chief Counsel
(Financial Institutions & Products)

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