A company got more time to fix the effective date of its REIT election

Plain-English summary

A limited liability company wanted to be taxed as a Real Estate Investment Trust (REIT) under Section 856. A REIT election is made on the company's tax return (Form 1120-REIT) for the first year it wants the election to apply. The company intended its REIT status to start on a specific date (called Date 5), the first day of the quarter in which it was capitalized and bought its first asset, and it filed a Form 8832 electing corporate treatment as of that date. But its Form 1120-REIT mistakenly listed the tax year as beginning on its formation date (Date 1), when it still owned no assets, instead of Date 5. The preparer, the parent company's tax department, and the company's CFO all missed the error. The mistake surfaced later when an outside auditor reviewed the parent's financial statements. The company asked for "9100" relief to correct the election's effective date. The IRS found the company acted reasonably and in good faith (it reasonably relied on a tax professional who erred) and that granting relief would not prejudice the government. It gave the company 90 days to amend its Form 1120-REIT to make the REIT election effective as of Date 5. The IRS did not rule on whether the company otherwise qualifies as a REIT.

Ruling snapshot

• Question: May the company get an extension of time to make its § 856(c) REIT election effective as of its intended start date?
• Outcome: Approved (90 days to amend Form 1120-REIT)
• Key authorities: IRC § 856(c); Treas. Reg. §§ 1.856-2(b), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202244011 [Third Party Communication:
Release Date: 11/4/2022 Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
------------------ ------------------, ID No. -----------------
------------------------------ Telephone Number:
-------------------- --------------------
------------------------------------------ Refer Reply To:
------------------------------ CC:FIP:B02
------------------------- PLR-129056-20
Date:
August 01, 2022

Legend

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

Parent 1 = ---------------------------------

Parent 2 = ----------------------------------------

Firm = ----------------------------------------

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

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

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

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

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

Date 5 = ----------------
PLR-129056-20 2

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

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

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

Year = -------

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

   This ruling responds to a letter dated December 15, 2020, submitted on behalf of

Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to make an election under
section 856(c) of the Internal Revenue Code (“Code”) to be treated as a Real Estate
Investment Trust (“REIT”).

                                                Facts

   Taxpayer is a limited liability company formed under the laws of State on Date 1.

Taxpayer was wholly owned by Parent 1 from Date 1 to Date 2. During this time,
Taxpayer owned no assets and engaged in no activities. On Date 2, Taxpayer was
transferred to Parent 2. Parent 2 is a partnership formed under the laws of State and at
the time of the transfer was owned by Parent 1 and an institutional investor. Taxpayer
acquired its first asset on Date 3.

     Taxpayer intended to elect to be treated as a REIT under section 856 on its Form

1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, effective for its
initial tax year ended Date 4. Taxpayer’s limited liability company agreement dated
Date 2, states that it is Taxpayer’s intention to qualify for treatment as a REIT under
Code sections 856 through 860. The agreement references this intent several times.

   Parent 1 provides Taxpayer with portfolio and management services. These

services include tax matters which are overseen by the Vice-President of Tax at Parent

1. Additionally, Parent 1 engages Firm to provide Parent 1 and Taxpayer with advice on
   tax-related matters and assistance with tax compliance.

   Parent 1 determined that Taxpayer would make a REIT election pursuant to
   

   section 856(c) effective Date 5. Parent selected Date 5 because it was the first day of
   the first quarter in which Taxpayer was capitalized and acquired its first asset.
   Taxpayer filed a Form 8832, Entity Classification Election, making a change election for
   Taxpayer to be classified as an association taxable as a corporation effective as of Date
   5.
   PLR-129056-20 3

   Firm prepared and filed Taxpayer’s Form 7004, Application for Automatic
   

   Extension of Time to File Certain Business Income Tax, Information, and Other Returns,
   by Date 6 to extend the filing due date of Taxpayer’s Form 1120-REIT. The Form 7004
   listed the initial tax year as the period of Date 1 to Date 4.

    On Date 7, a partner at Firm reviewed a draft of Taxpayer’s initial Form 1120-
   

   REIT and requested Firm staff to confirm that the tax year beginning date and the date
   the REIT was established were consistent with the date listed on the Form 8832
   previously filed for Taxpayer. The Firm partner did not notice that the Form 1120-REIT
   still recorded the tax year beginning date as Date 1 rather than Date 5 when he
   reviewed Taxpayer’s final Form 1120-REIT. The Form 1120-REIT was then reviewed
   by the Vice-President of Tax for Parent 1 and his tax department who also did not notice
   the discrepancy on the effective date. The CFO of Taxpayer likewise did not notice the
   discrepancy on the effective date of Taxpayer’s REIT status when he signed the Form
   1120-REIT.

   Taxpayer’s Form 1120-REIT was filed on or around Date 8 and included all its
   

   activity as a REIT from Date 5 to Date 4.

   In early Year, the financial statements of Parent 2 were audited by a third-party
   

   public accounting firm. At this time the discrepancy between Taxpayer’s representation
   that it was a REIT effective Date 5 and the date on the Form 1120-REIT for tax year
   ended on Date 4 was discovered. Taxpayer subsequently submitted this request for an
   extension of time to make a REIT election under section 856(c) and section 1.856-2(b)
   of the Income Tax Regulations to be treated as a REIT effective Date 5.

   Taxpayer makes the following additional representations:

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

   2. Granting the relief will not result in Taxpayer having a lower tax liability in the
      aggregate for all years to which the regulatory election applies than Taxpayer
      would have had if the election had been timely made (taking into account the
      time value of money).

   3. Taxpayer is not seeking to alter a return position for which an accuracy
      related penalty has been or could have been imposed under Section 6662 at
      the time Taxpayer 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, the Taxpayer did not choose to not file the election.

   5. Taxpayer is not using hindsight in requesting relief. No facts have changed
      PLR-129056-20 4

      between the time the election should have been made and the time this
      request for relief was filed that would make the election advantageous to
      Taxpayer.

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

   Affidavits on behalf of Taxpayer have been provided with the submission as
   required by section 301.9100-3(e).

                              LAW AND ANALYSIS
   

   Section 856(c)(1) provides that a corporation, trust, or association shall not be
   considered a REIT for any taxable year unless it files with its return for the taxable year
   an election to be a REIT or has made such an election for a previous taxable year, and
   such election has not been terminated or revoked. Pursuant to section 1.856-2(b) of the
   Income Tax Regulations, the election shall be made by the trust by computing taxable
   income as a REIT in its return for the first taxable year for which it desires the election to
   apply.

   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 six 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 to mean an election whose due date is prescribed by a regulation,
   revenue ruling, revenue procedure, notice, or 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
   PLR-129056-20 5

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
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 a 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)(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 the representations made, we conclude

that Taxpayer has satisfied the requirements for granting a reasonable extension of time
to elect under § 856(c) to be treated as a REIT beginning on Date 5. Accordingly,
Taxpayer has 90 calendar days from the date of this letter to amend its Form 1120-
REIT to make an election under § 856(c) to be treated as a REIT effective Date 5.

    This ruling is limited to the timeliness of the filing of Taxpayer’s REIT election

under § 856(c). This ruling's application is limited to the facts, representations, Code
and regulation sections cited herein. No opinion is expressed with regards to whether
Taxpayer otherwise qualifies as a REIT under part II of subchapter M of Chapter 1 of
the Code. Furthermore, no opinion is expressed regarding the timeliness of Taxpayer’s
entity classification election or federal income tax return.

   Except as specifically provided otherwise, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  The rulings contained in this letter are based upon information and

representations submitted by the Taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
PLR-129056-20 6

material submitted in support of the request for rulings, 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,



                                    Andrea M. Hoffenson
                                    Branch Chief, Branch 2
                                    Office of Associate Chief Counsel
                                    (Financial Institutions & Products)