REIT receives more time to make consent-dividend election

Plain-English summary

A limited liability company elected real estate investment trust treatment on its first tax return but did not claim the dividends-paid deduction required for REIT qualification. Its accounting firm overlooked the issue because the return showed no tax due and did not advise the company to make a consent-dividend election. The company discovered the omission itself and proposed obtaining shareholder consents on Forms 972 and claiming the deduction through Form 973 on an amended return. The IRS found that the company had acted reasonably and in good faith and granted 45 days to make the IRC § 565 election. The ruling did not decide whether the company otherwise qualified as a REIT.

Ruling snapshot

• Question: Should the REIT receive more time to make a consent-dividend election after its accounting firm missed the dividends-paid deduction?
• Outcome: Approved, with 45 days from the ruling date to file the required forms
• Key authorities: IRC §§ 561, 565, and 857(a)(1); Treas. Reg. §§ 1.565-1 and 301.9100-3; Rev. Rul. 78-296

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201628015                                                Third Party Communication: None
Release Date: 7/8/2016                                           Date of Communication: Not Applicable
Index Number: 565.00-00, 9100.00-00
                                                                 Person To Contact:
--------------------------------                                 --------------------------
-----------------------------------                              --------------------------
------------------------                                         Telephone Number:
                                                                 --------------------
---------------------------                                      Refer Reply To:
---------------------------                                      CC:ITA:B01
                                                                 PLR-136545-15
                                                                 Date:
                                                                 April 12, 2016


         EIN: -----------------------
         TY: ------------


Legend

Taxpayer                  =           --------------------------------
Date 1                    =           ---------------------------
Date 2                    =           ---------------------------
Date 3                    =           --------------------------
Date 4                    =           ---------------
State                     =           ------------
Amount 1                  =           ---------
Accounting Firm           =           --------------
Senior Manager            =           ---------------------


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

This letter is in response to a ruling request dated November 3, 2015, requesting an
extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations for Taxpayer to make a consent dividend election pursuant
to § 565 of the Internal Revenue Code.

                                                       FACTS

Taxpayer was organized on Date 1 as a State limited liability company for the purpose
of investing in residential real estate. Taxpayer hired Accounting Firm to advise it on tax
matters, prepare its income tax returns, and ensure its compliance with Federal tax filing
obligations. On Date 2, Taxpayer timely filed its first income tax return on a Form 1120-
PLR-136545-15                                 2

REIT for the taxable year ending Date 3, reporting taxable income of Amount 1, and
electing to be treated as a Real Estate Investment Trust (REIT).

In Date 4, Taxpayer discovered the absence of a dividend paid deduction on Taxpayer’s
initial income tax return for the taxable year ending Date 3, as required under
§ 857(a)(1), and notified Accounting Firm. Taxpayer’s Form 1120-REIT was prepared
by staff at Accounting Firm and reviewed by Senior Manager. In his affidavit, Senior
Manager stated that through an oversight he did not recognize the need for a dividend
paid deduction due to the fact that Taxpayer’s income tax return indicated that there
was no tax due. Senior Manager further stated that had he realized the need for the
dividend paid deduction he would have advised Taxpayer to take remedial action, such
as making a consent dividend election under § 565.

Accounting Firm has advised Taxpayer of the need to correct its error and
recommended that Taxpayer request an extension of time to make a consent dividend
election for the taxable year ending Date 3. Taxpayer represents that upon the granting
of this request it will obtain and file executed consents on Forms 972, Consent of
Shareholder to Include Specific Amount in Gross Income, from the two common
unitholders it had as of Date 3, and will file Forms 973, Corporation Claim for Deduction
for Consent Dividends, on an amended Form 1120-REIT. Taxpayer further represents
that it has otherwise met all the requirements to be classified as a REIT.

                                  LAW AND ANALYSIS

Section 565(a) provides that if any person owns consent stock (as defined in § 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 § 565(b), constitute a consent dividend for
purposes of § 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 § 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 § 1.565-1(b). 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 § 1.565-1(b)(3)
includes the extended due date of a return filed pursuant to an extension of the time to
file.
PLR-136545-15                                 3

Section 301.9100-3 of the Procedure and Administration regulations generally provides
extensions of time for making regulatory elections. For this purpose § 301.9100-1(b)
defines the term “regulatory election” to include an election whose deadline is
prescribed by a revenue ruling, revenue procedure, notice or announcement published
in the Internal Revenue Bulletin.

Section 301.9100-3 provides that requests for extensions of time for regulatory elections
will be granted when the taxpayer provides evidence (including affidavits described in
paragraph (e) of this section) 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) inadvertently 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, and the tax professional failed to
make, or advise the taxpayer to make, the election.

The affidavits presented show that Taxpayer acted reasonably and in good faith
because it: (1) requested relief before the failure to make the election was discovered
by the Service, (2) failed to make the election, after exercising due diligence, because it
was unaware of the need, and (3) reasonably relied on Accounting Firm, a qualified tax
professional, who failed to make or advise Taxpayer to make the election.

Under § 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 § 6662 at the time the taxpayer requests relief (taking into
account § 1.6664-2(c)(3) of the Income Tax Regulations) and the new position requires
a regulatory election for which relief is requested;

(ii) was informed in all material respects of the required election and related tax
PLR-136545-15                                  4

consequences, but chose not to file the election; or

(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.

Taxpayer has represented that it is not seeking to alter a return position for which an
accuracy-related penalty has been or could be imposed under § 6662 at the time
Taxpayer requests relief, and was not informed in all material respects of the required
election, and its related tax consequences, but chose not to file the election.
Furthermore Taxpayer has represented that it is not using hindsight in requesting relief
and that specific facts have not changed since the original deadline that made the
election advantageous to Taxpayer.

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 these
criteria, the interests of the government are not prejudiced in this case.

Accordingly, the consent of the Commissioner is hereby granted for an extension of
time to file the forms necessary to make the § 565 consent dividend election for the
taxable year ending Date 3. This extension shall be for a period of 45 days from the
date of this ruling.

Except as expressly 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 hereby expressed or implied regarding whether
Taxpayer otherwise qualifies as a REIT under the Internal Revenue 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
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-136545-15                               5


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 material submitted
in support of the request for rulings, it is subject to verification on examination.

                                     Sincerely,



                                     Lewis K. Brickates
                                     Chief, Branch 1
                                     (Income Tax & Accounting)



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