Late taxable REIT subsidiary election treated as effective

Plain-English summary

A publicly traded REIT and its foreign corporate subsidiary intended to file Form 8875 so the subsidiary would be treated as a taxable REIT subsidiary from its formation date. The REIT's tax department believed the election had been filed, but staff turnover, heavy filing obligations, a responsible employee's serious family matter, and later pandemic disruptions contributed to the omission and delayed its discovery. The REIT consistently reported as though the election were effective and eventually found the failure while strengthening internal controls. Although the election year was closed, an independent auditor certified that granting relief would not prejudice the government's interests. The IRS treated the late joint election as effective from the requested date, without deciding whether the entities otherwise qualified as a REIT and taxable REIT subsidiary.

Ruling snapshot

• Question: Could the REIT and its subsidiary treat their late Form 8875 election as effective from the subsidiary's formation date?
• Outcome: Approved
• Key authorities: IRC § 856(l); Treas. Reg. § 301.9100-3; Announcement 2001-17

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202324003                                             Third Party Communication: None
 Release Date: 6/16/2023                                       Date of Communication: Not Applicable
 Index Number: 9100.00-00, 856.00-00
                                                               Person To Contact:
 ------------------------                                      ----------------, ID No. ------------
 ----------------                                              Telephone Number:
 ------------------------                                      -------------------
 -----------------------------------                           Refer Reply To:
 ---------------------------                                   CC:FIP:2
                                                               PLR-117148-22
                                                               Date:
                                                               March 24, 2023




Legend

Taxpayer         =        ------------------------------------------
State            =        -------------
Subsidiary       =        ----------------------------------------------------
Country          =        --------
Facilities       =        --------------------------------------------------------------
Year 1           =        -------
Year 2           =        -------
Year 3           =        -------
Year 4           =        -------
Year 5           =        -------
Year 6           =        -------
Month 1          =        -----
Date 1           =        -------------------
Date 2           =        -------------------
Date 3           =        ----------------
Date 4           =        ----------------------
Date 5           =        --------------------



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

       This ruling responds to a letter dated September 2, 2022, 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 make a joint election under section 856(l) of the Internal Revenue Code (“Code”) to
treat Subsidiary as a taxable REIT subsidiary (“TRS”) of Taxpayer effective as of Date
2.
PLR-117148-22                                2

                                         FACTS

        Taxpayer is a publicly traded State corporation that has elected to be taxed as a
real estate investment trust ("REIT") under sections 856 through 859 of the Code,
beginning with its Year 1 tax year. Subsidiary is a Country limited liability company that
is an indirect subsidiary of Taxpayer. Taxpayer and Subsidiary represent that
Subsidiary is a corporation for federal income tax purposes under section 301.7701-
3(b)(2)(i)(B) and a foreign corporation under section 7701(a)(5).

       Taxpayer is a calendar-year, accrual-basis taxpayer that owns, acquires, leases
from others, develops, and builds Facilities throughout the United States and in several
foreign countries. In addition, Taxpayer leases space within those Facilities to tenants,
and provides certain related services to such tenants.

        Taxpayer makes elections on Form 8875, Taxable REIT Subsidiary Election for
certain domestic and foreign subsidiaries to be treated as TRSs. Taxpayer has filed
numerous TRS elections for subsidiaries to each be treated as a TRS of Taxpayer. The
elections are made once Taxpayer is satisfied that sufficient diligence and operational
controls are in place. Taxpayer’s tax department believed that a TRS election for
Subsidiary was timely filed in order for Subsidiary to be treated as a TRS of Taxpayer
effective as of Date 2.

       Taxpayer represents that, at all times from and after Subsidiary’s formation on
Date 2, Subsidiary was: (i) an entity classified as a corporation for federal income tax
purposes, (ii) not operating or managing a health care facility or lodging facility within
the meaning of section 856(l)(3), and (iii) jointly owned by Taxpayer (which owned 50%
indirectly through a qualified REIT subsidiary) and an unrelated third party. Since Date
2, Taxpayer’s tax reporting has reflected Taxpayer’s intent that its Country operations
be conducted through a subsidiary taxed as a corporation for federal income tax
purposes (for which a TRS election would be necessary in order for Taxpayer to comply
with the requirements of section 856(c)(4)). Taxpayer’s return for the Year 3 tax year
was prepared and filed in the same manner as if the TRS election had been timely
made.

        Taxpayer’s tax department experienced staff turnover in Year 3, including the
period from and after Date 2. On or before Date 1, an employee that ordinarily assisted
in the preparation of the Forms 8875 announced her intent to end her employment with
Taxpayer on Date 3. This employee was not replaced until Date 4. Before the due date
for the intended TRS election for Subsidiary, Taxpayer’s tax department was short-
staffed and overwhelmed by the tasks of (a) preparing and filing Year 2 tax returns on
extension and (b) preparing Taxpayer’s quarter 2 Year 3 global tax provisions. Also, the
employee with primary oversight responsibility of the TRS election for Subsidiary was
focused on a serious family matter. These factors caused the TRS election for
Subsidiary to be inadvertently missed. The subsequent Covid-19 pandemic put further
strains on Taxpayer’s tax department so that the failure could not be easily identified.
PLR-117148-22                                3


       Contemporaneous with increased internal control procedures implemented by
Taxpayer’s tax department, Taxpayer discovered in Month 1 of Year 6 the failure of
Taxpayer and Subsidiary to file Form 8875. On Date 5, Taxpayer and Subsidiary filed
by certified mail, a joint election on Form 8875 for Subsidiary to be treated as a TRS of
Taxpayer intended to be effective as of Date 2. An election effective as of Date 2
should have been filed prior to Date 5. Taxpayer and Subsidiary represent that they
have not received any notice of communication from the Service regarding the TRS
election for which relief has been requested.

      Taxpayer and Subsidiary make the following additional representations in
connection with this 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
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 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 relief. 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 expired for the
taxable year in which the election should have been filed. However, pursuant to section
301.9100-3(c)(1)(ii), Taxpayer has provided a certificate from an independent auditor
(other than an auditor providing an affidavit pursuant to section 301.9100-3(e)(3))
certifying that the interests of the Government would not be prejudiced under the
standards set forth in section 301.9100-3(c)(1)(i) if relief were granted as requested by
Taxpayer and Subsidiary. Furthermore, granting the relief will not result in Taxpayer or
Subsidiary having increased gross income, lower deductions, or increased tax liability
allocated to taxable years that are closed by the period of limitations on assessment
under section 6501(a) before receipt of a favorable ruling from the Service.
PLR-117148-22                                 4

      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 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 section 301.9100-3 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 section
301.9100-3 before the failure to make the regulatory election is discovered by the
PLR-117148-22                                 5

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 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 section 301.9100-3. The Service may condition a grant of relief on the
taxpayer providing the Service with a statement from an independent auditor (other than
an auditor providing an affidavit pursuant to section 301.9100-3(e)) certifying 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 the representations made, we conclude
that Taxpayer and Subsidiary have satisfied the requirements for granting a reasonable
extension of time to jointly elect under section 856(l) to treat Subsidiary as a TRS of
Taxpayer, effective as of Date 2. Accordingly, the election made on Date 5 to treat
Subsidiary as a TRS of Taxpayer will be treated as effective as of Date 2.

                                        CAVEATS

       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 regulation sections
cited herein. Except as provided herein, no opinion is expressed or implied concerning
PLR-117148-22                                  6

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.

      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,


                                        ___________________________
                                        K. Scott Brown
                                        Senior Technician Reviewer, Branch 2
                                        Office of Associate Chief Counsel
                                        (Financial Institutions & Products)




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