IRS grants extra time for a taxable REIT subsidiary election

Plain-English summary

A company intending to qualify as a real estate investment trust acquired an indirect interest in a subsidiary and planned to elect taxable REIT subsidiary status for that entity. The election was not filed by the deadline because the company, its adviser, its law firm, and a return preparer misunderstood who was responsible for preparing and filing Form 8875. After discovering the omission, the company and subsidiary requested an extension under the section 9100 regulations. The IRS concluded that they satisfied the requirements for relief and gave them 90 days to make the election effective as of the requested earlier date. The ruling addresses only the election's timeliness and does not determine whether either entity otherwise qualifies as a REIT or taxable REIT subsidiary.

Ruling snapshot

• Question: May the company and its subsidiary receive an extension to make their joint election under IRC § 856(l)?
• Outcome: Approved. They received 90 days to file Form 8875 with the requested effective date.
• Key authorities: IRC § 856(l); Treas. Reg. §§ 301.9100-1 and 301.9100-3; Announcement 2001-17

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202104002                                              Third Party Communication: None
 Release Date: 1/29/2021                                        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:B03
                                                                PLR-111341-20
                                                                Date:
                                                                October 26, 2020




LEGEND

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

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

Adviser           =        ------------------------------------------------------

Firm              =        ---------------------------------------------------

Preparer          =        -------------------------------

State             =        -------------

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

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

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

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

Month             =        --------------

Year              =        -------

a                 =        --




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

        This ruling responds to a letter dated May 1, 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
(the “Regulations”) to make an election under section 856(l) of the Internal Revenue
Code (the “Code”) to treat Subsidiary as a taxable REIT subsidiary (“TRS”) of Taxpayer
effective as of Date 1.

                                          FACTS

       Taxpayer is a State limited liability company formed on Date 2. Taxpayer timely
filed Form 8832, Entity Classification Election, to be treated as a corporation for federal
income tax purposes effective as of the date of formation on Date 2. Taxpayer intends
to elect to be treated as a real estate investment trust (“REIT”) for federal income tax
purposes effective as of the date of formation on Date 2. Taxpayer uses an accrual
method of accounting. Taxpayer’s taxable year is the calendar year.

      Subsidiary is a State limited liability company that was formed on Date 3.
Subsidiary timely filed Form 8832, Entity Classification Election, to be treated as a
corporation for federal income tax purposes effective as of the date of formation on Date

3. Subsidiary uses an accrual method of accounting. Subsidiary’s taxable year is the
calendar year.

       Taxpayer, through a tiered partnership structure, acquired a a percent
interest in Subsidiary on Date 1. Taxpayer, through a tiered partnership structure,
acquired during Year real estate associated with skilled nursing facilities (“Properties”).
Simultaneous with the acquisition of each of the Properties, Taxpayer leased the
Properties to Subsidiary through a partnership indirectly owned by Taxpayer. Each of
the leases is a triple net lease. Simultaneous with the lease of each of the
Properties, Subsidiary engaged an eligible independent contractor, within the
meaning of section 856(d)(9), to manage the Properties.

        Firm was involved in the formation of Taxpayer and Subsidiary. Firm was
involved in Taxpayer’s acquisition of its interest in Subsidiary. Firm was responsible for
advising Adviser on a number of investments. Firm also filed Form 8832 on behalf of
Subsidiary. Adviser manages or advises investment funds which own Taxpayer.
Preparer was responsible for preparing income tax returns for certain entities
associated with the tiered partnership structure. Preparer did not specifically prepare
any tax returns for Taxpayer or Subsidiary. Taxpayer and Subsidiary intended to file
Form 8875, Taxable REIT Subsidiary Election, to treat Subsidiary as a TRS of Taxpayer
effective as of the date Taxpayer acquired its interest in Subsidiary on Date 1. The

deadline to file Form 8875 with an effective date of Date 1 was Date 4. Due to a
miscommunication between Taxpayer, Subsidiary, and Firm, Form 8875 was not timely
filed. Specifically, Taxpayer believed Firm would prepare and file Form 8875.
Alternatively, Taxpayer believed Preparer would prepare and file Form 8875. However,
Firm believed Taxpayer or Preparer would prepare and file Form 8875. Preparer was
not aware that Taxpayer acquired an interest in Subsidiary until after the due date for
the election.
       In Month of Year, as part of drafting a private placement memorandum for
Taxpayer, Firm requested confirmation from Adviser that Form 8875 was filed for
Taxpayer and Subsidiary. Shortly thereafter, Taxpayer and Subsidiary were informed
that the TRS election was not made. Preparer then prepared and submitted a request
for an extension of time under sections 301.9100-1 and 301.9100-3 to elect under
section 856(l) to treat Subsidiary as a TRS of Taxpayer with an effective date of Date 1.

      Taxpayer and Subsidiary make the following additional representations in
connection with their 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 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 specific facts have changed since the due date for
making the election 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 section 301.9100-3(e).


                                      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 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 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 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 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 1. Accordingly, Taxpayer and Subsidiary have 90 calendar days
from the date of this letter to make the intended election to treat Subsidiary as a TRS of
Taxpayer effective as of Date 1.

       This ruling is limited to the timeliness of the filing of 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 as to whether Taxpayer otherwise qualifies
as a REIT or whether Subsidiary otherwise qualifies as a TRS of Taxpayer under part II
of subchapter M of the Code. Further, no opinion is expressed in regard to the leasing
structure between Taxpayer and Subsidiary.

       No opinion is expressed with regard to whether the tax liability of Taxpayer or
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 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 rulings, it is subject to verification on
examination.

      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 representatives.

                                                 Sincerely,


                                                 ________________________________
                                                 K. Scott Brown
                                                 Branch Chief, Branch 3
                                                 Office of the Associate Chief Counsel
                                                 (Financial Institutions & Products)

Enclosures -----

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