Hotel owner receives relief for a late first-year REIT election

Plain-English summary

A limited liability company was formed to acquire and indirectly own hotel properties in several states and always intended to elect REIT status for its first tax year. Its governing agreement expressly required that election, and it had already made a taxable REIT subsidiary election for a corporate subsidiary. An outside accounting firm mistakenly failed to submit the company's Form 7004 extension by the deadline, which also made the planned Form 1120-REIT election late. The company sought relief promptly, represented that it was not using hindsight, and stated that the affected limitations periods remained open and relief would not reduce aggregate tax liability. The IRS granted an extension to make the REIT election effective from the first day of the initial tax year. The ruling addressed timeliness only and did not decide whether the company otherwise qualified as a REIT.

Ruling snapshot

• Question: Could the hotel-owning company make its first-year REIT election late after its accounting firm missed the return-extension filing?
• Outcome: approved as to timeliness only
• Key authorities: IRC § 856(c); Treas. Reg. §§ 1.856-2(b), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201705007 Third Party Communication: None
Release Date: 2/3/2017 Date of Communication: Not Applicable
Index Number: 856.00-00, 9100.00-00
Person To Contact:
---------------------------- ----------------------, ID No. ------------------
--------------------- Telephone Number:
----------------------------- ----------------------
------------------------------------------------ Refer Reply To:
------------------------------------ CC:FIP:B01
PLR-123791-16
Date:
October 21, 2016

Legend

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

Subsidiary = ------------------

Parent = ---------------------------

Company 1 = ---------------------------------------

Company 2 = -------------------------------------

Company 3 = --------------------------------------

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

Hotel 1 Properties = ------------------------------------------------------------------------

Hotel 2 Properties = -----------------------------------------

Individual 1 = ----------------------------

Individual 2 = --------------------

State A = --------------

State B = --------------

Date 1 = ----------------------------
PLR-123791-16 2

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

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

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

Date 5 = ----------------------

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

a = ----

b = ----

c = --

d = ----

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

This responds to a letter dated July 27, 2016, submitted on behalf of Taxpayer.
Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to make an election under § 856(c) of the
Internal Revenue Code to be treated as a real estate investment trust (“REIT”).

Facts

Taxpayer is a State A limited liability company that was formed on Date 1 to purchase
from Company 1 and indirectly own through various single-member limited liability
companies a hotel properties, which include b Hotel 1 Properties and c Hotel 2
Properties (collectively, “Hotel Properties”). Hotel Properties are located in d states
across the United Sates. Taxpayer commenced operations on Date 2.

Taxpayer is owned by Parent, a joint venture owned by various entities associated with
Company 2 and Company 3. Subsidiary is Taxpayer’s corporate subsidiary. Hotel
Properties are operated and managed by an affiliate of Company 2 through Subsidiary.
Taxpayer represents that Taxpayer and Subsidiary timely filed Form 8875, Taxable
REIT Subsidiary Election, to elect for Subsidiary to be treated as a taxable REIT
subsidiary (“TRS”) of Taxpayer within the meaning of § 856(l).

Taxpayer represents that it always intended that Taxpayer would elect to be treated as
a REIT by filing Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment
Trusts, for its initial taxable year.
PLR-123791-16 3

Taxpayer represents that the limited liability company agreement for Taxpayer
specifically identifies Taxpayer as “the REIT” and provides that “the REIT will elect to be
taxed as a real estate investment trust under §§ 856-860 of the Code.” The limited
liability company agreement also provides that Parent “shall use commercially
reasonable efforts to cause the REIT to qualify for U.S. Federal income tax treatment as
a real estate investment trust under §§ 856 through 860 of the Code.” Excerpts from
the limited liability agreement were submitted together with the ruling request.

Taxpayer has no employees. Pursuant to the joint venture agreement for Parent,
Taxpayer’s manager, a Company 3 affiliate, is responsible for the day-to-day operations
of the joint venture. This includes tax matters associated with Taxpayer and other
entities that are part of the joint venture. However, Company 3 does not have an
internal tax department. Company 3’s internal administrative staff members have a
general understanding of REITs but they are unfamiliar with the tax rules applicable to
them. Company 3 has thus engaged Accounting Firm to provide it with guidance on
tax-related matters and assistance with tax compliance. Included within the scope of
Accounting Firm’s engagement was the preparation of certain federal and state tax
filings, including extensions and returns, for entities affiliated with the joint venture.
Company 3’s Corporate Controller, Individual 1, was aware of the need to make an
election for Taxpayer to be treated as a REIT. Individual 1 is also Vice President of
Taxpayer.

Pursuant to its engagement, Accounting Firm prepared Forms 7004, Application for
Automatic Extension of Time to File Certain Business Income Tax, Information, and
Other Returns, for the joint venture entities with tax years ending on Date 3, to be filed
electronically by their due date, Date 4. However, due to an administrative oversight,
the Form 7004 for Taxpayer was not filed timely. Accounting Firm believed the
extension was timely filed electronically on Date 4. On Date 5, upon checking to
confirm that the extensions had been submitted and accepted, Accounting Firm
determined that the extension for Taxpayer had not been filed. Accounting Firm then
submitted the Form 7004 on Date 5, and, following this submission, received
confirmation of acceptance from the software. However, because the Form 7004 was
submitted after the filing deadline of Date 4, the extension request was late and was not
accepted by the Service.

Shortly after the extension was filed on Date 5, it was identified that the election to treat
Taxpayer as a REIT would also be late. On Date 6, Individual 2, a partner in
Accounting Firm's State B office, discussed the missed election with Accounting Firm's
national tax practice, as well as the availability of relief to make the election after the
due date. After learning that such relief was available, Individual 2 spoke with Individual
1 at Company 3. During the course of this discussion, Individual 1 made the
determination to proceed with submitting a request for relief to make the late REIT
election, pursuant to the authority of §§ 301.9100-1 and 301.9100-3. Taxpayer
PLR-123791-16 4

represents that if the requested relief is not granted by the time Taxpayer’s tax return is
filed, a Form 1120-REIT will nevertheless be filed with appropriate disclosure of this
request, and that, therefore, an amended return will not be necessary if the requested
relief is granted.

Taxpayer makes the following additional representations:

   1. To its knowledge, Taxpayer filed the request for relief before the failure
   to make the regulatory election was discovered by the Service.

   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
   it would have had if the election had been timely made (taking into
   account the time value of money).

   3. Taxpayer does not seek to alter a return position for which an accuracy-
   related penalty has been or could have been imposed under § 6662 at the
   time it 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 did not choose to not file the election.

   5. Taxpayer is not using hindsight in requesting relief. No specific facts
   have changed since the due date for making the election that makes this
   election advantageous to Taxpayer.

   6. The period of limitations on assessment under § 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.

The affidavits required by § 301.9100-3(e) were provided with Taxpayer’s request.

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 § 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.
PLR-123791-16 5

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, or
a revenue ruling, revenue procedure, notice, or announcement published in the Internal
Revenue Bulletin.

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
§ 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 is deemed to have acted reasonably
and 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 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 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 and the new position requires or permits a regulatory election
for which relief is requested; (ii) was informed of the required election, but chose not to
file the election; or (iii) uses hindsight in requesting relief.

Section 301.9100-3(c) 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)(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 § 6501(a) before the taxpayer's receipt of a ruling granting relief under this
section.
PLR-123791-16 6

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 effective as of the first day of the taxable
year that commenced on Date 2 and ended on Date 3.

This ruling is limited to the timeliness of the filing of Taxpayer's election under § 856(c).
This ruling's application is limited to the facts, representations, Code sections, and
regulations cited herein. No opinion is expressed with regard to whether Taxpayer
otherwise qualifies as a REIT under subchapter M of the Code.

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.

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.

This ruling is directed only to the taxpayer requesting 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, copies of this letter are
being sent to your authorized representatives.

                                   Sincerely,


                                   _______________________________
                                   Jason G. Kurth
                                   Assistant to the Branch Chief, Branch 1
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes

cc: