REIT receives more time for taxable subsidiary election

Plain-English summary

A property company intended to elect REIT status after it ceased being closely held and wanted its wholly owned service subsidiary treated as a taxable REIT subsidiary from the same date. Its earlier Form 8875 election was ineffective because the parent was not yet a REIT, and its advisers did not timely file a new form. The IRS found that the parent and subsidiary acted reasonably and in good faith and that relief would not prejudice the government. It granted 90 days to file the joint taxable REIT subsidiary election, contingent on the parent making its represented REIT election, but did not decide whether either entity otherwise qualified for the requested status.

Ruling snapshot

• Question: May the parent and subsidiary file a late Form 8875 election effective with the parent's intended REIT election?
• Outcome: Approved. They have 90 days from the ruling date to make the election.
• 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: 202111003 Third Party Communication: None
Release Date: 3/19/2021 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-110921-20
Date:
October 16, 2020

Legend:

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

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

AdvisorCo = -------------------------------------------------

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

Predecessor = ----------------------------------------------
Corporation

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

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

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

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

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

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

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

Date 8 = -----------------------
PLR-110921-20 2

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

Firm 2 = -------------------------------

Investment = ----------------------------------------
Advisor

Senior = --------------------
Manager

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

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

Year 1 = -------

Year 2 = --------

Year 3 = -------

Year 4 = -------

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

    This letter responds to a letter dated April 10, 2020, as supplemented by

subsequent correspondence, that was submitted on behalf of Taxpayer and Subsidiary.
Taxpayer and Subsidiary request a ruling under sections 301.9100-1 and 301.9100-3 of
the Procedure and Administration Regulations to extend the time to file an election to
treat Subsidiary as a taxable REIT subsidiary (“TRS”) of Taxpayer under section 856(l)
of the Internal Revenue Code (“Code”) effective as of Date 5.

                                           FACTS

  Taxpayer is a State A Corporation that was originally formed as Predecessor

Corporation on Date 1. Taxpayer adopted its current name on Date 2 by filing Articles
of Amendment with State A. Taxpayer’s tax year is a calendar year.

   Taxpayer’s operations have involved the acquisition of and investment in

multifamily and hotel properties. Taxpayer, at formation, intended to elect to be treated
as a Real Estate Investment Trust (“REIT”) upon meeting all REIT qualification
requirements of section 856. However, prior to Year 4, Taxpayer was closely held for
purposes of section 856(a)(6) and thus did not qualify as a REIT.
PLR-110921-20 3

    Subsidiary, which is wholly owned by Taxpayer, was formed on Date 3 as a State

B corporation. Subsidiary’s purpose is to serve as a TRS of Taxpayer and to perform
tenant services or other impermissible activities that are incident to Taxpayer’s
investment in multifamily assets. A Form 8875, Taxable REIT Subsidiary Election, was
filed jointly by Taxpayer and Subsidiary on Date 4, to be effective Date 3 (the “Initial
TRS Election”). Taxpayer believed that the Initial TRS Election was valid. However,
Taxpayer did not make an election under section 856(c)(1) to be treated as a REIT in
Year 3 because it was still closely held at that time.

   Taxpayer was indirectly acquired by Parent on Date 7, with the result that

Taxpayer was no longer closely held for purposes of section 856(a)(6) for Year 4.
Taxpayer represents that it will elect REIT status for Year 4 under section 856(c)(1) as
of Date 5 by filing an election to be a REIT with its Year 4 return (which will be filed by
Date 8).1 Taxpayer and Subsidiary, however, did not file the Form 8875 by Date 6, the
last day to file to be effective as of Date 5.

    Taxpayer utilizes both internal and external advisers to assist in tax compliance

matters. Specifically, AdvisorCo engaged Firm 1, a law firm, to give advice on Federal
income tax matters, including REIT issues generally and, in particular, REIT issues
arising in Year 4. At no point in Year 4 did Firm 1 inform Taxpayer of the necessity of
filing Form 8875 to treat Subsidiary as a TRS of Taxpayer effective Date 5.

    In the summer of Year 4, a Senior Manager at Investment Advisor, who was

acting as a tax advisor to Taxpayer, discovered that a valid TRS election to allow
Subsidiary to be treated as a TRS of Taxpayer, effective Date 5, had not been made.
At that time, it was too late to file a Form 8875 to be effective Date 5.

After realizing it had been receiving inadequate tax advice and that the Initial TRS
Election was invalid, Taxpayer sought additional advice from new outside counsel.
Taxpayer retained Firm 2 in the summer of Year 4 for the purpose of determining
Taxpayer’s eligibility to elect REIT status. In the fall of Year 4, the Senior Manager at
Investment Advisor informed Firm 2 of the invalid Initial TRS Election. Firm 2 submitted
a request on behalf of Taxpayer and Subsidiary for relief under sections 301.9100-1 and
301.9100-3 for an extension of time to file a Form 8875 and jointly elect under section
856(l) to treat Subsidiary as a TRS of Taxpayer effective Date 5.

                                       REPRESENTATIONS

  Taxpayer and Subsidiary make the following additional representations in

connection with the request for an extension of time:

1 Taxpayer further represents that it satisfies all other requirements to make a valid REIT election under

section 856(c)(1) for Year 4.
PLR-110921-20 4

  1. The request for relief was filed by Taxpayer and Subsidiary before the failure

to make the regulatory election was discovered by the Internal Revenue Service.

   2. Granting the relief requested will not result in either Taxpayer or Subsidiary

having a lower tax liability in the aggregate for all years to which the regulatory 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 at
the time Taxpayer 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 either 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 have been provided as required by

sections 301.9100-3(e)(2) and 301.9100-3(e)(3).

                               LAW AND ANALYSIS

    Section 856(l) 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.
PLR-110921-20 5

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) 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
PLR-110921-20 6

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, including that the

Taxpayer will file its return and make the election to be a REIT by Date 8, 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 Date 5. 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 Date 5.

                                      CAVEATS

    This ruling is limited to the timeliness of filing 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. 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. More specifically, no opinion is expressed as to whether
Taxpayer at any time was closely held within the meaning of section 856(a)(6).

   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.

  The ruling contained in this letter is based upon information submitted and

representations made by the Taxpayer and accompanied by statements executed under
the penalties of perjury 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 taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.
PLR-110921-20 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,


                                             John W. Rogers III____________________

                                             John W. Rogers III
                                             Senior Technician Reviewer, Branch 2
                                             Office of Associate Chief Counsel
                                             (Financial Institutions & Products)

cc: ----------------------------------

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