REIT gets more time to elect taxable-REIT-subsidiary treatment after a law firm dropped the ball

Plain-English summary

A real estate investment trust (REIT) and its wholly owned subsidiary wanted the
subsidiary treated as a "taxable REIT subsidiary" (TRS), a taxable corporation a
REIT can own to hold assets or earn income that would otherwise put its REIT
status at risk. To do that, the two must jointly file Form 8875 by a deadline.
Because of personnel turnover and a breakdown in the law firm's internal
procedures, the form was never filed on time. The lapse was found during a
year-end compliance review; the parties then filed the form (fixing a later
year) and asked the IRS for an extension under section 301.9100 to make the
election effective as of the originally intended date. The IRS found they acted
reasonably and in good faith and that relief would not prejudice the government,
so it treated the Form 8875 as timely filed with the earlier effective date. The
ruling covers only the timeliness of the election, not whether the entities
actually qualify as a REIT or a TRS.

Ruling snapshot

• Question: Should the REIT and its subsidiary get more time to make the section 856(l) election to treat the subsidiary as a taxable REIT subsidiary?
• Outcome: Approved (extension granted; Form 8875 treated as timely with the earlier effective date)
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1, 301.9100-3; Announcement 2001-17 (Form 8875)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202329004                                              Third Party Communication: None
Release Date: 7/21/2023                                        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:B01
                                                               PLR-120504-22
                                                               Date:
                                                               April 21, 2023




Legend

Taxpayer                =     -----------------------------------------------------------------------
                              -------------------------
Subsidiary              =     -----------------------------------------------------------------------
                              -------------------------
Law Firm                =     ---------------------------

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

State 1                 =     -------------

State 2                 =     -------------

Year 1                  =     -------

Year 2                  =     -------

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

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

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

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

Date 5                  =     --------------------------
PLR-120504-22                                        2

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

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



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

       This ruling responds to a letter dated October 11, 2022, submitted by Law Firm
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 an election under section 856(I) of the Internal Revenue Code
(“Code”) to treat Subsidiary as a taxable REIT subsidiary (“TRS”) of Taxpayer effective
Date 3.

                                                   FACTS

       Taxpayer was formed on Date 1 under the laws of State 1. Taxpayer has elected
to be a real estate investment trust (“REIT”) under sections 856 through 859 of the
Code. Taxpayer invests in income-generating real estate assets and holds all of the
interests in Subsidiary.

         Subsidiary is a State 2 limited liability company formed on Date 2 to hold certain
assets and receive certain income in furtherance of Taxpayer’s qualification as a REIT.
At all times since its formation, Subsidiary has been wholly owned by Taxpayer. On
Date 7, Subsidiary filed Form 8832, Entity Classification Election, to elect to be treated
as an association taxable as a corporation effective Date 3. Taxpayer and Subsidiary
intended to make an election on Form 8875, Taxable REIT Subsidiary Election, to treat
Subsidiary as a TRS effective as of Date 3. The Form 8875 needed to be filed no later
than Date 4 to be effective on Date 3.

        Law Firm is an advisor to Taxpayer and Subsidiary and formed Subsidiary. As a
result of breakdowns in Law Firm’s internal procedures, Taxpayer and Subsidiary
inadvertently failed to file the Form 8875 by Date 4. In connection with the formation of
an entity intended to be a TRS, Law Firm ordinarily informs the accountants for the
entity (here, Accounting Firm) of the need to file Form 8875. The accountants then
work with the entity’s internal tax department to timely file the Form 8875, and Law Firm
follows up prior to the deadline to ensure that the Form 8875 was timely filed.

        Here, the Form 8875 was intended to be filed after Subsidiary’s formation.
Turnover in personnel at Law Firm during the delay between the formation of Subsidiary
(Date 2) and the effective date of Subsidiary’s Form 8832 (Date 3) caused Law Firm’s
failure to inform Accounting Firm and to ensure the timely filing of the Form 8875.
PLR-120504-22                                 3

        The failure to file the TRS election was discovered on Date 6 upon review by Law
Firm and Accounting Firm of Taxpayer’s and Subsidiary’s calendar Year 1 federal tax
compliance. Upon advice of Law Firm and Accounting Firm, Taxpayer and Subsidiary
filed a Form 8875 to treat Subsidiary as a TRS of Taxpayer effective Date 5 to cure the
error for Year 2 and requested an extension of time to file a TRS election effective Date
3.

                                  REPRESENTATIONS

       Taxpayer and Subsidiary make the following 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 Internal Revenue Service (“Service”).

    2. Granting the relief requested will not result in Taxpayer or Subsidiary having a
      lower U.S. federal 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 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 making the decision to seek
      the relief requested. No facts have changed since the respective effective dates
      of Taxpayer and Subsidiary’s desired elections that make the 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 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.

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

                                  LAW AND ANALYSIS

        Section 856(I) 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,
PLR-120504-22                                  4

section 856(I)(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(I) 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
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
PLR-120504-22                                  5

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.

                                       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(I) to treat Subsidiary as a TRS of Taxpayer
effective Date 3. Because of the reasonable extension of time, the Form 8875 already
filed by Taxpayer and Subsidiary will be considered timely filed, and the effective date of
the TRS election is Date 3.

        This ruling is limited to the timeliness of 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.

        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 a ruling, it is subject
to verification on examination.
PLR-120504-22                                          6

      This ruling is directed only to the taxpayers 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,



                                                _________________________
                                                Steven Harrison
                                                Chief, Branch 1
                                                Office of Associate Chief Counsel
                                                (Financial Institutions & Products)




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