IRS grants a REIT extra time to make a taxable REIT subsidiary election it failed to file

Plain-English summary

A real estate investment trust (REIT) acquired a hotel, planning to own it through the REIT and lease it to a subsidiary that would be treated as a "taxable REIT subsidiary" (TRS). A REIT generally cannot operate a hotel directly, but it can lease one to a TRS, so getting that status matters. To make the subsidiary a TRS, the REIT and the subsidiary must jointly file Form 8875. The REIT's accounting firm advised making the election, but the CFO mistakenly believed he had delegated the filing to the owner's accounting department, so the needed forms were never filed on time. After discovering the lapse, the taxpayers filed late and asked for relief under the section 9100 regulations, which let the IRS extend the time for a missed regulatory election when the taxpayer acted reasonably and in good faith and the government is not prejudiced. Because the taxpayers reasonably relied on a qualified tax professional and satisfied the other conditions, the IRS granted a 90-day extension to make the TRS election. The ruling covers only the timeliness of the Form 8875 filing, not whether the entities actually qualify as a REIT or a TRS.

Ruling snapshot

• Question: Should the REIT and its subsidiary receive an extension of time to file the joint Form 8875 election treating the subsidiary as a taxable REIT subsidiary under section 856(l)?
• Outcome: Approved (90-day extension granted to make the TRS election)
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1 through 301.9100-3; Announcement 2001-17, 2001-1 C.B. 716; Rev. Proc. 2009-41

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202149005 Third Party Communication: None
Release Date: 12/10/2021 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-106719-21
Fax: Date:
September 13, 2021

Legend:

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

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

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

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

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

Individual = -------------------

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

State B = -------------

State C = -------------

Hotel = ------------------------------------------------

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

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

Date 3 = --------------------------
PLR-106719-21 2

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

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

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

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

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

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

Date 10 = -----------------------

Date 11 = -----------------------

Date 12 = --------------------

Month 1 = ----------------------

Year 1 = -------

x = -----

y = --

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

    This ruling responds to a letter dated March 17, 2021, 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

   Taxpayer is a State A statutory trust that elected to be classified as a corporation

for U.S. federal income tax purposes effective Date 2. Taxpayer elected to be taxed as
a real estate investment trust (REIT) under section 856 through 859 of the Code
commencing with its taxable year that ended on Date 3. Taxpayer uses an accrual
method as its overall method of accounting, and Taxpayer’s taxable year is the calendar
year.
PLR-106719-21 3

   Taxpayer is owned by one common shareholder (“Owner”) and x preferred

shareholders. Taxpayer established Entity A and Entity B, two wholly owned U.S.
limited liability companies, in connection with the acquisition of a hotel in State C.
Taxpayer is the sole owner of Entity A, which in turn is the sole owner of Entity B.

     Subsidiary is a State B limited liability company. Subsidiary uses an accrual

method as its overall method of accounting, and its taxable year is the calendar year.
Subsidiary was formed on Date 4 and has been indirectly but wholly owned by
Taxpayer through Entity B since it was formed. As a U.S. disregarded limited liability
company, Subsidiary was an entity that was eligible to elect its classification status for
U.S. federal income tax purposes pursuant to Treas. Reg. § 301.7701-3. Subsidiary
filed a Form 8832, Entity Classification Election after its formation electing to change its
initial default classification from a disregarded entity to classification as an association
taxable as a corporation, with an effective date of Date 5. Before Date 5, Subsidiary was
treated as a disregarded entity for U.S. federal income tax purposes, and no
inconsistent tax or information returns have been filed.

   Taxpayer engaged Accounting Firm to advise on tax matters and to assist with

tax compliance for Taxpayer and for Subsidiary. Individual is the Chief Financial Officer
for each of Taxpayer and Subsidiary. Individual has overall responsibility for tax
compliance and planning for Taxpayer and Subsidiary.

   Entity B entered into a purchase and sale agreement on Date 6 to acquire Hotel.

Taxpayer informed Accounting Firm that it intended to own Hotel in a REIT and lease
Hotel to Subsidiary. On Date 7, Accounting Firm provided a memorandum that advised
that Taxpayer, a statutory trust, and Subsidiary, a disregarded limited liability company,
each file a Form 8832 to elect to be classified as a corporation for U.S. federal income
tax purposes. Additionally, Accounting Firm advised that Taxpayer and Subsidiary
should jointly file Form 8875, Taxable REIT Subsidiary Election to treat Subsidiary as a
TRS of Taxpayer for the year ended Date 3.

   Entity B acquired Hotel on Date 8. Entity B and Subsidiary entered into a y year

operating lease of Hotel immediately after the acquisition as landlord and tenant,
respectively. Subsidiary entered into an agreement with a third-party hotel management
company to operate Hotel as an eligible independent contractor pursuant to section
856(d)(8)(B).

   In Month 1, Accounting Firm was working to complete the Year 1 tax compliance

for Taxpayer and Subsidiary. Accounting Firm requested a copy of Forms 8832 filed by
each of Taxpayer and Subsidiary so that the forms could be attached to their respective
federal tax returns for the year ended Date 3. Accounting Firm also requested for its
records a copy of Form 8875 jointly filed by Taxpayer and Subsidiary. Individual is
responsible for tax compliance and oversight for Taxpayer and Subsidiary. Owner’s
accounting department provides support with tax compliance and oversight for
Taxpayer and Subsidiary to Individual.
PLR-106719-21 4

  During a conference call with Accounting Firm on Date 9, to discuss the status of

the Forms 8832 and 8875, Individual confirmed that he mistakenly believed he had
delegated the responsibility for filing Forms 8832 and 8875 to someone in Owner’s
accounting department. As a result of this mistake, Forms 8832 and 8875 had
inadvertently not been filed.

   Based on advice from Accounting Firm, Individual agreed that each of the forms

would be filed as soon as possible. Taxpayer and Subsidiary filed Forms 8832 on Date
10 pursuant to the late classification relief provided for in Rev. Proc. 2009-41, 2009-39
I.R.B. 439, for Taxpayer and Subsidiary each to elect to be classified as an association
taxable as a corporation, effective Date 2 and Date 5, respectively. On Date 11,
Taxpayer and Subsidiary filed a Form 8875 that listed what was at that point in time the
earliest possible effective date permitted under Form 8875, Date 12, although Taxpayer
and Subsidiary desired an effective date of Date 1.

                              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 and 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 and Subsidiary.

6. The period of limitations on assessment under section 6501(a) of the Code has
   not expired for Taxpayer and Subsidiary for the taxable year for which the
   election should have been filed, nor for any taxable years that would have been
   affected by the election had it been timely filed.
   PLR-106719-21 5

   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
   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 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
   PLR-106719-21 6

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
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 Date 6. Accordingly, Taxpayer and Subsidiary have 90 calendar days from the
date of this letter to make the intended election to treat Subsidiary as a TRS of
Taxpayer effective Date 6.

                                     CAVEATS

    This ruling is limited to the timeliness of the filing 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.
PLR-106719-21 7

    No opinion is expressed with regard to whether the tax liability of Taxpayer 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 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 ruling, 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,


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