IRS grants late taxable REIT subsidiary election relief after an adviser missed Form 8875

Plain-English summary

A newly formed REIT owned senior-housing facilities and formed a corporate subsidiary that held an interest in the operating partnership leasing those facilities. The REIT intended to elect taxable REIT subsidiary status for the corporation from its formation date. Its investment manager relied on an outside tax adviser, but the adviser did not remind the tax department to file Form 8875 before the deadline. The omission was found while the adviser was helping with the subsidiary's first estimated tax payments, and the parties then filed the form and requested relief. The IRS treated Form 8875 as timely for the intended date because the parties met the good-faith and no-prejudice standards. The ruling did not decide whether the parent otherwise qualified as a REIT, whether the subsidiary otherwise qualified as a taxable REIT subsidiary, or whether the relief reduced their aggregate tax liability.

Ruling snapshot

• Question: Could the REIT and its subsidiary make their taxable REIT subsidiary election effective from the subsidiary's formation date after an adviser failed to prompt a timely filing?
• Outcome: approved (the late Form 8875 is treated as timely with the requested effective date)
• Key authorities: IRC §§ 856(l), 6501(a), 6662; Treas. Reg. §§ 301.9100-1, 301.9100-3; Announcement 2001-17

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202051004                                              Third Party Communication: None
Release Date: 12/18/2020                                       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:B02
--------------------------------                               PLR-107760-20
                                                               Date:
                                                               September 14, 2020




Legend:

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

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

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

Company 2                      ----------------------------------------

Partnership 1           =      -----------------------------

Partnership 2           =      --------------------------------------------

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

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

State C                 =      ---------------------

State D                 =      ----------------

State E                 =      ------------------

State F                 =      --------
PLR-107760-20                                           2

 State G                =   -----------

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

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

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

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

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

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

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

 Date 8                 =   ----------------------

 Date 9                 =   -----------------------

 Firm 1                 =   ----------------

 a                      =   ---

 b                      =   ---

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

       This ruling responds to a letter dated March 11, 2020, 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 an election under section 856(l) of the Internal Revenue Code (“Code”) to treat
Subsidiary as a taxable REIT subsidiary (“TRS”) of Taxpayer effective Date 3.

                                                  FACTS

       Company 1 is an alternative investment management firm with investments that
include real estate owned through Real Estate Investment Trusts (“REITs”). Company 1
formed Taxpayer on Date 1 under the laws of State A to own senior housing facilities in
State B, State C, State D, State E, State F and State G. Taxpayer intends to elect to be
taxable as a REIT beginning with its first taxable year ended Date 2. Taxpayer owns
real property interest in senior housing facilities through its a% ownership of the
membership interest of Partnership 1.
PLR-107760-20                                 3


         Subsidiary was formed on Date 3 under the laws of State A. Subsidiary made an
initial classification election on Form 8832, Entity Classification Election, to be treated
as a corporation for U.S. income tax purposes effective on the date of formation. Since
formation, Subsidiary has been wholly owned by Taxpayer. Subsidiary owns b% of the
membership interest of Partnership 2 which leases the real property owned by
Partnership 1. Taxpayer represents that the real property Partnership 1 leases to
Partnership 2 is qualified health care property as defined under section 856(e)(6)(D)(i),
and is operated on behalf of Partnership 2 by Company 2, an eligible independent
contractor as defined in section 856(d)(9)(A).

       Pursuant to an investment management agreement, Company 1 and its affiliates
provide certain administrative and management services to Taxpayer. These services
generally include oversight of tax elections. Company 1 prepares and files tax elections
internally in its tax department or externally with a tax advisor during times of high work
volume. On Date 4, Company 1 engaged Firm 1 to assist with the tax due diligence of
the real property owned by Partnership 1. On Date 5, Company 1 and Firm closed the
investment interest of real property owned by Partnership 1. On Date 6, Company 1
engaged Firm 1 to assist with certain income tax compliance matters related to the
closed investment including the preparation and timely filing of its U.S. federal and state
income tax returns. For the election to be effective Date 3, Taxpayer and Subsidiary
needed to file a Form 8875, Taxable REIT Subsidiary Election, no later than Date 7.
Taxpayer received advice from Firm 1 prior to Date 7 to elect to treat Subsidiary as a
TRS of Taxpayer under subchapter M of the Code for the calendar year that ended
Date 2. Company 1 relied on Firm 1 to ensure the TRS election was filed timely.
However, Firm 1 did not remind Company 1’s tax department to file the TRS election
and Company 1’s tax department inadvertently failed to file Form 8875 on behalf of
Taxpayer and Subsidiary by the due date to be effective Date 3.

       On Date 8, while assisting Subsidiary with its first quarterly estimated tax
payments, Firm 1 discovered and made Company 1’s tax department aware that Form
8875 had not been filed on behalf of Taxpayer and Subsidiary. On Date 9, Company 1’s
tax department filed Form 8875 but because the desired effective date of the TRS
election was more than 2 months and 15 days prior to the discovery of the oversight,
the Form 8875 could not be timely filed. After this late filing, Taxpayer engaged Firm 1
to submit a request for relief under sections 301.9100-1 and 301.9100-3 for an
extension of time to file the election under section 856(l) to treat Subsidiary as a TRS of
Taxpayer effective as of Date 3.

       Taxpayer makes 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”).
PLR-107760-20                                 4

       2. The interest of the government are not prejudiced within the meaning of
section 301.9100-3(c). Granting the relief requested will not result in Taxpayer having a
lower tax liability in the aggregate for all years to which the election applies than
Taxpayer 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 section 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 and Subsidiary 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 make the election more
advantageous to Taxpayer.

       6. The period of limitations on assessment under section 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.

      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(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 such corporation, and the REIT and such corporation must jointly elect such
treatment. The election is irrevocable once made, unless both the REIT and the
corporation consent to its revocation. In addition, section 856(l) specifically provides that
the election, and any revocation thereof, may be made without 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 of the election cannot be more
than 2 months and 15 days prior to the date of filing the election, or more than 12
PLR-107760-20                                  5

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 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
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
PLR-107760-20                                   6

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 the representations made we conclude
that Taxpayer and Subsidiary have satisfied the requirements for granting a reasonable
extension of time to elect under section 856(l) to treat Subsidiary as a TRS of Taxpayer,
effective as of Date 3. Accordingly, the Form 8875 filed by Taxpayer and Subsidiary on
Date 9 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, Code sections, and regulations 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. No opinion is expressed as to whether Taxpayer otherwise qualifies as a REIT, or
whether Subsidiary otherwise qualifies as a TRS, under part II of subchapter M of
chapter 1 of the Code.

       No opinion is expressed with regard to whether the tax liability of Taxpayer 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 U.S. 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
U.S. federal income tax effect.

       This ruling is directed only to the taxpayers that requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.
PLR-107760-20                                 7


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

                                       Sincerely,


                                       _________________________
                                       Matthew Howard
                                       Senior Counsel, Branch 2
                                       Office of Associate Chief Counsel
                                       (Financial Institutions and Products)