Late consent-dividend election for a REIT allowed under 9100 relief

Plain-English summary

A corporation (here a real estate investment trust, or REIT) can claim a deduction for "dividends paid" that includes "consent dividends," which are hypothetical dividends a shareholder agrees to treat as received (and pay tax on) even though no cash actually changes hands. For that to count, the shareholder must file a Form 972 (consent) and the corporation a Form 973 with its return by the return's due date. Here the REIT's board declared a dividend to its sole common owner, but no cash was distributed and no Form 972 was filed; the return preparer assumed cash had been paid and deducted the amount. The common owner, meanwhile, reported that amount as dividend income on its own return, showing that a consent dividend was intended. After the mismatch was discovered, the REIT asked for an extension under the § 301.9100-3 relief rules to amend its return and file the Forms 972 and 973 needed to perfect the § 565 consent-dividend election. The IRS found the REIT acted reasonably and in good faith and that relief would not prejudice the government, and granted 60 days from the date of the letter. The ruling does not decide whether the REIT otherwise qualifies for the dividends-paid deduction or as a REIT.

Ruling snapshot

• Question: May a REIT get an extension of time to file the Forms 972 and 973 to perfect a late § 565 consent-dividend election?
• Outcome: Approved (60-day extension granted)
• Key authorities: IRC § 565; Treas. Reg. § 1.565-1; Rev. Rul. 78-296; Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202201006 Third Party Communication: None
Release Date: 1/7/2022 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
-------------------, ID No. -----------------
---------------------------- Telephone Number:

-------------------------------------------- --------------------
Refer Reply To:

                                                            CC:ITA:B03

-------------------------------------------------- PLR-109643-21
Date:
October 12, 2021

       ---------------------------

LEGEND:

Taxpayer = -------------------------------------------------------
Common Owner = --------------------------------------------------------------
-------------------------
Return Preparer = -------------------
Taxable Year at Issue = --------------------------------------------------------------
----------------------------------------
Date1 = ----------------------
Date2 = --------------------------
Date3 = -----------------------
$a = -----------------
$b = ---------------
$c = -----------
$d = ---------------
$e = ---------------
$f = ---------------
$g = ---------------

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

This letter responds to your letter ruling request dated April 22, 2021, requesting an
extension of time pursuant to sections 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to make a late election of a consent dividend pursuant
to section 565 of the Internal Revenue Code (Code) for the Taxable Year at Issue.
PLR-109643-21 2

                                    FACTS

Taxpayer is a domestic LLC, a calendar year taxpayer that uses the overall accrual
method of accounting. Taxpayer was organized for the purpose of investing in real
property, and established as a Real Estate Investment Trust (REIT) on Date1.
Ownership of Taxpayer is split between the holders of preferred units, and common
units; Common Owner holds all common unit of Taxpayer.

On Date2, Taxpayer’s board of directors adopted a resolution (Date2 resolution) calling
for Taxpayer to make a distribution to Common Owner in an amount equal to the
greater of $a or Taxpayer’s previously undistributed taxable income for the Taxable
Year at Issue (declared dividend amount). That resolution provided that a cash
distribution of the declared dividend amount must be made on or before Date3, unless
Common Owner elected a consent dividend in-lieu-of the cash distribution by providing
Taxpayer with the requisite Form 972, Consent of Shareholder to Include Specific
Amount in Gross Income, pursuant to section 565 and the associated regulations.
Despite the Date2 resolution, however and due to an oversight, Taxpayer failed to make
any actual distribution of the declared amount to Common Owner, and Common Owner
failed to provide Taxpayer with a Form 972.

Taxpayer retained Return Preparer to prepare its Federal income tax return for the
Taxable Year at Issue (return). Return Preparer reviewed Taxpayer’s records and
recognized that Common Owner had not provided Taxpayer with a Form 972, nor had
Taxpayer prepared any associated Form 973, Corporation Claim for Deduction for
Consent Dividends, with respect to the declared dividend amount. As such, Return
Preparer construed the absence of those forms as an indication that Taxpayer actually
distributed the declared dividend amount in cash to Common Owner consistent with the
Date2 resolution, and prepared Taxpayer’s return accordingly.

Taxpayer’s return claimed a $b deduction for dividends paid, as provided by sections
857 and 561 of the Code. This deduction reflected $c in preferred dividends that
Taxpayer paid to its preferred owners, and $d in common dividends that it purportedly
paid to Common Owner.

Of the purported dividend to Common Owner, only $e reflected common dividend
amounts actually paid. The remainder reflected the declared dividend amount related to
the Date2 resolution. This amount, however, was neither paid to Common Owner, nor
had Common Owner provided Taxpayer with the requisite documentation electing to
treat such an amount as a consent dividend, and thus was reported in error (reporting
error).

The facts underlying the reporting error notwithstanding, Common Owner’s Form 1065,
U.S. Return of Partnership Income for the year at issue (Common Owner’s return)
reported the receipt of ordinary dividend income from Taxpayer totaling $f. Of that
amount, $e reflected the amount of common dividends actually paid to Common Owner;
PLR-109643-21 3

corresponding with amounts reported on Taxpayer’s return. The remaining $g related to
the declared dividend amount related to the Date2 resolution, and in this respect
demonstrates Owner’s intent to recognize that amount as a consent dividend under
section 565.

Taxpayer again retained Return Preparer to prepare its Federal income tax return for
the following year. In reviewing Taxpayer’s records, Taxpayer and Return Preparer
discovered the reporting error on Taxpayer’s return for the Taxable Year at Issue. On
April 22, 2021, Taxpayer filed this request for an extension of time to elect to make a
consent dividend of $g for the Taxable Year at Issue, consistent with the consent
dividend reported on Common Owner’s return.

                                       LAW

Section 565(a) of the Code provides that if any person owns consent stock (as defined
in section 565(f)(1)) in a corporation on the last day of the taxable year of such
corporation, and such person agrees, in a consent filed with the return of such
corporation in accordance with the regulations, to treat as a dividend the amount
specified in such consent, the amount so specified shall, except as provided in section
565(b), constitute a consent dividend for purposes of section 561 (relating to the
deduction for dividends paid).

Section 1.565-1(a) of the Income Tax Regulations provides that the dividends paid
deduction, as defined in section 561, includes the consent dividends for the taxable
year.

A consent dividend is a hypothetical distribution (as distinguished from an actual
distribution) made by certain corporations to any person who owns consent stock on the
last day of the taxable year of such corporation and who agrees to treat the hypothetical
distribution as an actual dividend, subject to specified limitations, by filing a consent at
the time and in the manner specified in section 1.565-1(b). See section 1.565-1(a),
Income Tax Regs. As such, section 1.565-1(b)(3) provides that a consent may be filed
not later than the due date of the corporation’s income tax return for the taxable year for
which the dividends paid deduction is claimed. Under Rev. Rul. 78-296, 1978-2 C.B.
183, the due date for purposes of section 1.565-1(b)(3) includes the extended due date
of a return filed pursuant to an extension of the time to file.

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory election. Section 301.9100-2 provides
automatic extensions of time for making certain elections. Section 301.9100-3 provides
extensions of time for making elections that do not meet the requirements of section
301.9100-2.
PLR-109643-21 4
Section 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that the Commissioner may 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
Internal Revenue Code except subtitles E, G, H and I.

Section 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
Government.

Section 301.9100-3(b)(1) states that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer --

  (i) requests relief 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 due diligence, 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.

Under section 301.9100-3(b)(3), a taxpayer will not be considered to have 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
  (taking into account section 1.6664-2(c)(3)) 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

PLR-109643-21 5

   (iii) uses hindsight in requesting relief.

If specific facts have changed since the original deadline that make the election
advantageous to a taxpayer, the Service will not ordinarily grant relief.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. Section 301.9100-3(c)(1)(i) 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 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, in part, 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.

                                      ANALYSIS

Taxpayer is a REIT and all of its common units are owned by Common Owner.
Taxpayer represents that these common units constitute consent stock under section
565(f)(1). Taxpayer and Common Owner intended to elect to make a consent dividend
for purposes of section 561 (relating to the deduction for dividends paid). Taxpayer
claimed a corresponding deduction for dividends paid as provided by section 561.

Taxpayer, however, failed to perfect its election by failing to file Forms 972 and 973 with
Taxpayer’s return for the year at issue. It is with respect to that failure that Taxpayer
requests an extension of time to amend its original filed return in order to perfect its
election to make a consent dividend by including the required Forms 972 and 973, and
thus to perfect its corresponding deduction for dividends paid.

Taxpayer's request pertains to a regulatory election as defined in section 301.9100-1(b)
of the Procedure and Administration Regulations, as the due date for electing to make a
consent dividend is prescribed by section 1.565-1(b) of the Income Tax Regulations
and Rev. Rul. 78-296. Accordingly, the Commissioner has the authority under sections
301.9100-1 and 301.9100-3, to grant Taxpayer’s request for an extension of time to file
an election to make a consent dividend under section 565 for the year at issue.

The information submitted, and representations made by Taxpayer establish that
Taxpayer acted reasonably and in good faith under section 301.9100-3(b)(1). Taxpayer
requested relief before its failure to properly make the regulatory election was
discovered by the Commissioner. Accordingly, Taxpayer will be considered to have
acted reasonably and in good faith.
PLR-109643-21 6
Moreover, Taxpayer should not be deemed to have acted unreasonably or in a manner
lacking good faith. Taxpayer’s representations indicate that none of the circumstances
listed in section 301.9100-3(b)(3) apply.

Based on Taxpayer’s representation of the facts, granting an extension of time to file the
election will not prejudice the interests of the government under section 301.9100-
3(c)(1). Taxpayer has represented that granting relief would not result in a lower tax
liability in the aggregate for all taxable years affected by the election than would have
resulted had Taxpayer timely made the election (taking into account the time value of
money). Further, Taxpayer has represented that the period of limitations on assessment
under section 6501(a) has not closed for the Taxable Year at Issue, or for any taxable
years that would have been affected had Taxpayer timely made the election.

                                  CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of sections
301.9100-1 and 301.9100-3(b)(1) of the Procedure and Administration Regulations
have been satisfied.

Taxpayer is granted an extension of time until 60 days following the date of this ruling to
file an amended tax return that includes the Forms 972 and 973 that are necessary for
electing to make a section 565 consent dividend for the Taxable Year at Issue.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
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.

Except as expressly provided herein, no opinion is expressed or implied concerning the
Federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling under any other provision of the Code. In particular, no opinion
is expressed or implied as to whether Taxpayer otherwise qualifies for the deduction for
dividends paid, or as a REIT under the Code.

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.

A copy of this ruling must be attached to Taxpayer’s Federal income tax returns for the
tax years affected. Alternatively, taxpayers filing their returns electronically may satisfy
this requirement by attaching a statement to their return that provides the date and
control number of the letter ruling.
PLR-109643-21 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. We are also sending a copy of this letter
to the appropriate operating division director. Enclosed is a copy of the letter ruling
showing the deletions proposed to be made in the letter when it is disclosed under
section 6110 of the Code.

                                      Sincerely,



                                      JAMIE J. KIM
                                      Senior Technician Reviewer, Branch 3
                                      Office of the Associate Chief Counsel
                                      (Income Tax & Accounting)

Enclosure: Copy of the letter for section 6110 purposes

cc: