REIT owners received 90 days to make late taxable REIT subsidiary elections

Plain-English summary

Several real estate investment trusts indirectly owned a corporation formed to hold a shared parking garage. The owners and corporation intended the corporation to be a taxable REIT subsidiary from its formation date but did not timely file the joint Form 8875 elections. Their outside accounting firm learned of the corporation only after the elections would have been late, and the parties had consistently treated it as a taxable REIT subsidiary. The IRS concluded that the parties met the good-faith and government-prejudice standards and granted 90 days to file the elections with the requested effective date. The ruling addressed only timeliness and did not decide whether the owners qualified as REITs or whether the corporation otherwise qualified as a taxable REIT subsidiary.

Ruling snapshot

• Question: Could the REIT owners and their indirectly owned corporation receive extra time to jointly elect taxable REIT subsidiary status?
• 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: 201736008                                              Third Party Communication: None
Release Date: 9/8/2017                                         Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.07-00
                                                               Person To Contact:
--------------------------                                     ----------------------, ID No. ------------------
---------------------------------------------------------      Telephone Number:
---------------------------                                    ----------------------
--------------------------------                               Refer Reply To:
                                                               CC:FIP:B01
                                                               PLR-112064-17
                                                               Date: June 12, 2017




Legend

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

Company A                  =         -----------------------------------------------------------
-------------------------------------------------------------

Company B                  =         -----------------------------------------------------------
-------------------------------------------------------------

Company C                  =         -------------------------------------------------------------------
-------------------------------------------------------------

Company D                  =         -----------------------------------------------------------
-------------------------------------------------------------

Partnership                =        -----------------------------------------------------

Advisor                    =        ----------------------------------------

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

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

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

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

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

Year 1                     =        -------
PLR-112064-17                                2

a                    =      --


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

       This responds to a letter dated April 3, 2017, submitted on behalf of Company A,
Company B, Company C, and Company D (collectively, “Owners”) and Subsidiary.
Each Owner and Subsidiary request an extension of time under sections 301.9100-1
and 301.9100-3 of the Procedure and Administration Regulations to jointly make an
election under section 856(l) of the Internal Revenue Code ("Code") to treat Subsidiary
as a taxable REIT subsidiary ("TRS") of the respective Owner effective as of Date 2.

                                         FACTS

       Each Owner is a State A limited liability company that was formed on Date 1 to
hold a parcel of land for development of office, retail, multi-family, and hotel properties
in State B and has elected for federal income tax purposes to be treated as a real estate
investment trust (“REIT”) under sections 856 – 860 of the Code effective as of Date 1.

       Subsidiary is a State B corporation that was formed on Date 2 to hold a parcel of
land that would contain a parking garage to be to be shared by the other property types.
Since Subsidiary was intended to hold a “common interest development” (i.e., the
parking garage) under State B law, Subsidiary was also required to be formed as a
nonprofit corporation under State B law.

       Each Owner owns Subsidiary indirectly through other entities described below.
Subsidiary is directly owned by a entities, each of which is a State A limited liability
company that is classified as a disregarded entity for U.S. federal income tax purposes,
and each of which is directly and wholly owned by Partnership. Partnership is a State A
limited liability company that is classified as a partnership for U.S. federal income tax
purposes. Partnership has a partners: Owners.

      Upon the granting of the requested ruling letter, Subsidiary will be identified on
each Owners’ Year 1 Form 1120-REIT, U.S. Income Tax Return for Real Estate
Investment Trusts, Schedule 0, Consent Plan and Apportionment Schedule for a
Controlled Group. Any dividend distributions by Subsidiary will be included on the
respective Form 1120-REIT. Each Owner intends to file a Form 7004, Application for
Automatic Extension of Time to File Certain Business Income Tax, Information, and
Other Returns, and will file its Form 1120-REIT on or before the extended due date.

       Owners and Subsidiary were formed by, and are managed by, Advisor. Advisor
is a real estate investment and development company based in State B. Advisor
handles all aspects of the investment and development process, including
PLR-112064-17                                3

acquisition/disposition, financing, planning/government entitlement, design,
construction, leasing, and property management.

        Advisor has no internal tax department and therefore relies on the advice of
outside tax professionals relating to the tax obligations of the entities it manages. None
of the employees of Advisor have particular experience or knowledge of U.S. federal tax
law. Consequently, Advisor engages Accounting Firm to assist with U.S. federal and
state tax compliance services for numerous entities managed by Advisor. Advisor fully
relies on Accounting Firm's advice and preparation of relevant tax forms in order to
meet the managed entities' federal and state tax compliance obligations.

        Owners and Subsidiary represent that by the time Accounting Firm learned of
Subsidiary’s formation and informed Advisor of the advisability of the TRS election, the
election would have been considered late. Accordingly, Advisor was advised that relief
for the late election could be pursued by Owners and Subsidiary pursuant to section
301.9100-1, and, soon thereafter, a ruling request was submitted on behalf of Owners
and Subsidiary pursuant to that recommendation.

       Owners and Subsidiary represent that notwithstanding the fact that no TRS
election was made by Owners and Subsidiary, Subsidiary has continually been treated
as a TRS as of Date 2, the desired effective date for the late TRS election at issue.

      Owners and Subsidiary make the following additional representations:

      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 Owners 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. Owners 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 elections and related tax
      consequences, Owners and Subsidiary did not choose to not file the
      election.

      5. Owners and Subsidiary are not using hindsight in making the decision
      to seek the relief requested. No specific facts have changed since the due
PLR-112064-17                                 4

       date for making the election that makes the election advantageous to
       Owners or Subsidiary.

       6. The period of limitations on assessment under section 6501(a) has not
       expired for Owners 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 Owners and Subsidiary have been provided as
required by sections 301.9100-3(e)(2) and (3).

                                  LAW AND ANALYSIS

        Section 856(l) of the Code 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 new 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) of the Procedure and Administration Regulations 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 Internal Revenue 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, 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
PLR-112064-17                                 5

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 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
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 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 this section.

                                      CONCLUSION

      Based on the information submitted and representations made, we conclude that
Subsidiary and each Owner have satisfied the requirements for granting a reasonable
extension of time to elect under section 856(l) to treat Subsidiary as a TRS of the
respective Owner, effective as of Date 2. Accordingly, Subsidiary and each Owner
have 90 days from the date of this letter to file their intended election.
PLR-112064-17                                  6

       This ruling is limited to the timeliness of the filing of Form 8875. This ruling's
application is limited to the facts, representations, Code sections, and regulations cited
herein.

        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 expressed as to whether any Owner
qualifies as a REIT, or whether Subsidiary otherwise qualifies as a TRS under part II of
subchapter M of the Code.

       No opinion is expressed with regard to whether the tax liability of each Owner
and Subsidiary is not lower in the aggregate for all years to which the election applies
than such tax liability would have been if the election had been timely made (taking into
account the time value of money). Upon audit of the federal income tax returns
involved, the director's office will determine such tax liability for the years involved. If
the director's office determines that such tax liability is lower, that office will determine
the federal income tax effect.

      The ruling contained in this letter is based upon information and representations
submitted by Owners and Subsidiary and accompanied by penalty of perjury statements
executed by 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 taxpayers requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

        In accordance with the Powers of Attorney on file with this office, copies of this
letter are being sent to your authorized representatives.


                                       Sincerely,

                                       _____________________________
                                       Robert A. Martin
                                       Senior Technician Reviewer, Branch 1
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)


Enclosures (2):

       Copy of this letter
       Copy for section 6110 purposes