A REIT gets 9100 relief to make a late election treating its subsidiary as a taxable REIT subsidiary

Plain-English summary

A real estate investment trust (REIT) set up a subsidiary to hold and operate a hotel through a common structure (a "RIDEA" arrangement) in which the subsidiary is treated as a taxable REIT subsidiary (TRS) and hires an independent contractor to run the hotel. To get TRS treatment, the REIT and the subsidiary have to jointly file Form 8875 by a deadline tied to the effective date they want, but through miscommunication among the sponsor's outside advisors nobody filed it on time. The REIT asked for relief under Treasury Regulation 301.9100-3, which lets the IRS extend the time to make a regulatory election when the taxpayer acted reasonably and in good faith and granting relief won't prejudice the government. The IRS granted the extension: the REIT and subsidiary have 90 days from the date of the letter to file the TRS election effective the intended date. The ruling only fixes the late filing; it does not decide whether the taxpayer actually qualifies as a REIT or the subsidiary as a TRS.

Ruling snapshot

• Question: Should the IRS grant an extension of time under Treas. Reg. § 301.9100-3 for a REIT and its subsidiary to make a late election under § 856(l) to treat the subsidiary as a taxable REIT subsidiary?
• Outcome: Approved (90-day extension to file Form 8875)
• Key authorities: IRC § 856(l); 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: 202144012 Third Party Communication: None
Release Date: 11/5/2021 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:B02
---------------------------- PLR-103050-21
Date:
August 5, 2021

Legend

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

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

Sponsor = ---------------------------------------------

Fund = ---------------------------------

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

Law Firm X = ---------------------------------------------

Law Firm Y = ---------------------------------------------------

Law Firm Z = -----------------------------

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

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

Hotel = ---------------------------------------------------------------------------------

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

Date 2 = -----------------------
PLR-103050-21 2

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

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

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

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

Month 1 = -----------

Month 2 = ---------

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

x = ---

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

   This letter responds to a letter dated January 29, 2021, and supplemental

correspondence, 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 file an election to treat Subsidiary as a
taxable REIT subsidiary (TRS) of Taxpayer under section 856(l) of the Internal Revenue
Code (the Code) effective Date 6.

                                            FACTS

   Sponsor is a manager of investment partnerships formed to make equity and

debt investments in a diversified portfolio of hotel real estate assets and operating
companies. In Month 1 of Year 1, Sponsor sponsored a new fund, Fund, a State limited
partnership that is classified as a partnership for U.S. federal income tax purposes.
Fund was formed to generate returns for its partners by acquiring, holding, maintaining,
operating, leasing, managing, developing, redeveloping, improving, mortgaging,
encumbering, and selling for profit equity and debt interests in hotel real estate and
related assets. On Date 1, Fund formed Taxpayer as a real estate investment trust
(REIT) to hold Fund’s joint venture interests. Sponsor provides all management
services to Fund and Taxpayer.
PLR-103050-21 3

   In early Year 2, Law Firm X advised Taxpayer on the acquisition of the Hotel

through Partnership, a State limited liability company that is classified as a partnership
for U.S. federal income tax purposes. On Date 5, Taxpayer acquired x percent of the
capital and profits interests of Partnership. On Date 6, Partnership acquired all of the
interests in Subsidiary. Partnership acquired the Hotel on or about Date 3.

    Sponsor, Fund, and Taxpayer intended to have Partnership lease the Hotel to

Subsidiary, have Subsidiary engage an eligible independent contractor within the
meaning of section 856(d)(9) to operate the Hotel on Subsidiary’s behalf, and have
Taxpayer and Subsidiary elect to treat Subsidiary as a TRS of Taxpayer (an
arrangement commonly referred to as a “RIDEA structure”). Consistent with this intent,
Sponsor filed, on behalf of Subsidiary, an election on Form 8832, Entity Classification
Election, to change Subsidiary's classification to a corporation for U.S. federal income
tax purposes effective Date 2. Further, Sponsor engaged Law Firm Y, a national law
firm, to draft the lease agreement to implement the RIDEA structure with respect to the
Hotel. The lease agreement, as entered into by Subsidiary, provides that Subsidiary
would not take any actions that could prevent Subsidiary from qualifying as a TRS, and
that Subsidiary would elect to be treated as a TRS. The lease agreement also provides
that Subsidiary would take best efforts to ensure that the Hotel would qualify as a
qualified lodging facility within the meaning of section 856(d)(9)(D). Additionally,
Sponsor engaged Accounting Firm, a national accounting firm, in relevant part to
prepare Taxpayer’s returns for Year 4 and all subsequent years and to evaluate
whether the Hotel manager would qualify as an EIK.

    As a result of miscommunication and oversight, Taxpayer and Subsidiary did not

make a timely TRS election for Subsidiary. For an effective date of Date 6, the TRS
election for Subsidiary should have been made by Date 4. Taxpayer assumed that one
or more of its qualified outside tax advisors would have handled any REIT-specific
filings. Along the same lines, Sponsor believed that Accounting Firm would handle all
REIT matters in connection with projects Accounting Firm was engaged to advise on.
However, although Law Firm X advised on the acquisition of the Hotel, Law Firm X was
not engaged to advise on REIT tax matters, such as the need for a TRS election in
connection with the acquisition. Accounting Firm was engaged to prepare returns and
advise on certain discreet projects in connection with this acquisition; however,
Accounting Firm was not engaged to prepare a TRS election for Subsidiary and
believed that Sponsor's other advisors would prepare and file the election.1

   In early Year 3, Sponsor began to evaluate the acquisition of another hotel asset

by another one of its managed funds. During this process, proposed acquisition
vehicles and structures were considered, including the use of one or more REITs and a
RIDEA structure. In Month 2 of Year 3, Law Firm Z, who was advising on the
acquisition, asked Accounting Firm to confirm that Accounting Firm planned to file the
TRS elections for the relevant entities. Accounting Firm indicated it was not previously
1 For example, Law Firm X had prepared Forms 8875 for Taxpayer in connection with certain hotel real

estate acquisitions prior to Year 2.
PLR-103050-21 4

engaged to prepare TRS elections. At that point, Sponsor's Chief Financial Officer
realized that neither Law Firm Z nor Accounting Firm was generally engaged to prepare
TRS elections and wanted to ensure all TRS elections were timely filed so immediately
began to take a full inventory of TRS elections for each corporation directly or indirectly
owned by a REIT that was directly or indirectly owned by an investment partnership
managed by Sponsor. At the conclusion of this process, Sponsor identified the failure
to file a timely TRS election for Subsidiary. Immediately thereafter, Sponsor engaged
Accounting Firm to prepare this request for an extension of time with respect to
Subsidiary.

                              REPRESENTATIONS

  Taxpayer makes the following representations in connection with this request for

an extension of time:

1. The request for relief was filed by Taxpayer and Subsidiary before the failure to
   make the regulatory election was discovered by the Service.

2. Granting the relief will not result in Taxpayer and 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 did 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 requesting this relief. No
   specific facts have changed since the due date for making the election that make
   this election advantageous to Taxpayer and Subsidiary.

6. The period of limitations on assessment under section 6501(a) of the Code has
   not expired for Taxpayer and Subsidiary for the taxable year for which the
   election should have been filed, nor for any taxable years 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)(2) and (3).

                             LAW AND ANALYSIS
   

   PLR-103050-21 5

   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.
   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 generally 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,
   PLR-103050-21 6

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, however, 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

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 6. 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 6.

                                    CAVEATS

    This ruling is limited to the timeliness of the filing the 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 or implied regarding whether
Taxpayer otherwise qualifies as a REIT, or whether Subsidiary otherwise qualifies as a
TRS of Taxpayer under part II of subchapter M of chapter 1 of the Code.

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

representations made by Taxpayer and Subsidiary and accompanied by penalties of
perjury statements executed by the appropriate parties. While this office has not
PLR-103050-21 7

verified any of the material submitted in support of the request for ruling, 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.

     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,


                                       Bernard J. Audet___________________
                                       Bernard J. Audet, Jr.
                                       Assistant to the Branch Chief, Branch 2
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)