A REIT that botched a dividend-carryback election gets extra time to file deficiency-dividend forms and fix its distribution shortfall

Plain-English summary

A real estate investment trust (REIT) must distribute at least 90% of its taxable income each year to keep its favorable tax status. This REIT expected an unusually large gain and planned to use a section 858(a) election to carry back dividends paid the following year to cover the shortfall. Its tax director was told (incorrectly) the special dividend only had to be declared by a later date, and then the pandemic led the board to suspend dividends, so the dividends that would have cured the shortfall were not declared and paid on time. That made the 858(a) election invalid. To fix it, the REIT sought an extension under section 301.9100-3 to instead make a "determination" under section 860(e)(4) and claim a deficiency-dividend deduction, which lets a REIT deduct later-paid dividends to correct an income adjustment. The IRS found the taxpayer acted reasonably and in good faith (it relied on its tax advisors and requested relief before the IRS caught the error) and granted 90 days to file the needed Forms 8927 and 976. The ruling is limited to the timeliness of those filings; it does not decide whether the REIT otherwise qualifies.

Ruling snapshot

• Question: Should a REIT get an extension under section 301.9100-3 to make a late section 860(e)(4) determination and file the deficiency-dividend forms after its section 858(a) carryback election failed?
• Outcome: Approved (90 days from the ruling to file Forms 8927 and 976; ruling limited to timeliness).
• Key authorities: IRC § 860(a), (e)(4), (f), (g); IRC § 858(a); Treas. Reg. §§ 301.9100-1, 301.9100-3; Rev. Proc. 2009-28.

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 202207002                                               Third Party Communication: None
Release Date: 2/18/2022                                         Date of Communication: Not Applicable
Index Number: 860.00-00, 9100.00-00
                                                                Person To Contact:
---------------                                                 ------------------, ID No. -----------------
---------------------------------------                         Telephone Number:
------------------------------                                  --------------------
------------------------------------------------------          Refer Reply To:
------------------------------------                            CC:FIP:B03
----------------------------                                    PLR-111711-21
                                                                Date:
                                                                November 22, 2021




LEGEND:


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

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

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

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

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

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

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

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

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

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

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

Date 10                           =        ------------------

Year 1                            =        -------
PLR-111711-21                                  2


Year 2                     =      -------

Year 3                     =      -------

a                          =      ---------------

b                          =      ---------------



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

      This ruling responds to a letter dated May 26, 2021, and subsequent
correspondence, submitted on behalf of Taxpayer. Taxpayer requests a ruling granting
an extension of time under sections 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations (the “Regulations”) to make a determination under section
860(e)(4) of the Internal Revenue Code (the “Code”) for the taxable year that ended
Date 1 (the “Year 1 Tax Year”).

                                            FACTS

       Taxpayer was formed on Date 2, as a C corporation. In Year 2, Taxpayer made
an election under section 856 of the Code to be treated as a real estate investment trust
(“REIT”) for federal income tax purposes. Taxpayer invests in various partnerships that
develop and own condominiums and hotels. Taxpayer’s taxable year is the calendar
year.

       At the beginning of each calendar year, Taxpayer works with its tax advisor,
Accounting Firm, on Form 1099-DIV statements issued to shareholders and on cash-
flow projections. In early Year 1, Taxpayer’s Tax Director (“Tax Director”) informed
Accounting Firm that Taxpayer would distribute at least 90 percent of Taxpayer's Year 1
taxable income to shareholders through regular monthly distributions.

        In Date 3, Tax Director contacted Accounting Firm for advice related to a large
unanticipated gain Taxpayer would be recognizing in Year 1. Tax Director was
concerned that the payment of regular monthly dividends would not be sufficient to
distribute at least 90 percent of Taxpayer's Year 1 taxable income. To address this
situation, Accounting Firm informed Tax Director about the option of making an election
under section 858(a) to carry back to Year 1 dividends that are actually distributed in
Year 3, provided that the dividends are declared by the extended due date of the Year 1
return (Date 4), and paid by the end of Year 3. Tax Director and Accounting Firm
concluded that Taxpayer would have sufficient distributions during Year 3 to be in a
position to carry back a portion of those dividends to Year 1 by making a section 858(a)
election (the “Section 858 Dividends”). Tax Director then informed Taxpayer’s
PLR-111711-21                                 3

executives that Taxpayer could make a section 858(a) election to adequately cover the
Year 1 dividend distribution shortfall. Tax Director, however, incorrectly informed
Taxpayer’s executives that Section 858 Dividends only needed to be declared by
Date 5.

       On Date 6, Taxpayer's Board of Directors (the “Board”) met to discuss concerns
regarding the preservation of Taxpayer’s liquidity in light of business uncertainty caused
by the onset of the COVID-19 pandemic. Among other measures, the Board voted to
suspend monthly dividends.

        Taxpayer filed by the extended due date of Date 4, Taxpayer’s Form 1120-REIT
for the Year 1 Tax Year (the “Tax Return”). On the Tax Return, Taxpayer made an
election under section 858(a) to treat a of Year 3 dividend distributions as having been
paid in Year 1 in order to cover the Year 1 distribution shortfall. On Date 7, the Board
declared a special dividend of b. The Board intended a portion of the special dividend
to cover the Year 1 distribution shortfall. On Date 8, the special dividend was
distributed to shareholders.

        During a meeting in late Date 9, Accounting Firm and Taxpayer discovered that
Taxpayer failed to timely declare and distribute the Section 858 Dividends. As a result,
the section 858(a) election for the Year 1 Tax Year made on the Tax Return was not
valid because the Section 858 Dividends had to be declared no later than Date 4, and
distributed by Date 5.

      Taxpayer requested Accounting Firm to research options to rectify the problem.
Accounting Firm determined that the best option was to request relief to make a
determination under section 860(e)(4) effective for the Year 1 Tax Year. Accordingly,
Taxpayer submitted a request for a ruling under sections 301.9100-1 and 301.9100-3
seeking an extension of time to file with the Internal Revenue Service (the “Service”) the
necessary forms to make a determination under section 860(e)(4) for the Year 1 Tax
Year.

      Taxpayer makes the following additional representations in connection with its
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 having a lower U.S. federal
tax liability in the aggregate for all years to which the election applies than it 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 of the Code at the
PLR-111711-21                                4

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 did not choose to not file the election.

5. Taxpayer is 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.

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 have been provided as required by
section 301.9100-3(e).

                                  LAW AND ANALYSIS

        Section 860(a) generally provides that if a determination with respect to any
qualified investment entity results in any adjustment for any taxable year, a deduction
shall be allowed to such entity for the amount of deficiency dividends for purposes of
determining the deduction for dividends paid (for purposes of section 852 or section
857, whichever applies) for such year. Section 860(b)(2) provides that the term
“qualified investment entity” includes a real estate investment trust.

       Section 860(e)(4) provides that the term “determination” includes a statement by
the taxpayer attached to its amendment or supplement to a return of tax for the relevant
tax year.

       Section 860(f)(1) provides, in part, that no distribution of property shall be
considered as deficiency dividends for purposes of section 860(a) unless distributed
within 90 days after the determination, and unless a claim for a deficiency dividend
deduction with respect to such distribution is filed pursuant to section 860(g).

       Section 860(g) provides that no deficiency dividend deduction shall be allowed
under section 860(a) unless (under regulations prescribed by the Secretary) claim
therefor is filed within 120 days after the date of the determination. Section 1.860-
2(b)(2) of the Income Tax Regulations provides that the claim required by section
860(g) shall be made on Form 976 (Claim for Deficiency Dividends Deductions by a
Personal Holding Company, Regulated Investment Company, or Real Estate
Investment Trust).

      Revenue Procedure 2009-28, 2009-20 I.R.B. 1011, provides procedures for a
REIT to follow to make a self-determination under section 860(e)(4) for purposes of the
PLR-111711-21                                5

deficiency dividends procedures of section 860. Section 4.01(1) of Rev. Proc. 2009-28
provides that if a REIT properly completes Form 8927 (Determination Under Section
860(e)(4) by a Qualified Investment Entity) and files Form 8927 with the Service, in
accordance with the applicable instructions, then that form will be treated for purposes
of section 860(e)(4) as “a statement by the taxpayer attached to its amendment or
supplement to a return of tax for the relevant tax year.”

       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 for an automatic extension under section 301.9100-2.
Section 301.9100-3(a) provides that requests for relief subject to section 301.9100-3 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 section
301.9100-3 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, 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
PLR-111711-21                                        6

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 section 301-9100-3.

                                            CONCLUSION

        Based on the information submitted and representations made, we conclude that
Taxpayer has satisfied the requirements for granting a reasonable extension of time to
file Form 8927 to make a determination under section 860(e)(4) dated Date 8 for
purposes of section 860(f)(1) and (g), and to file Form 976 to claim a deficiency dividend
deduction under section 860(g) for the dividends distributed on Date 8 that relate to that
determination. The Form 976 will be deemed filed on the last available filing day after
the Date 8 date of determination, i.e. Date 10.1 Consistent with this ruling, Taxpayer is
granted a period of 90 calendar days from the date of this letter to file Forms 8927 and
976 with the Service.

        This ruling is limited to the timeliness of the filing of Forms 8927 and 976. This
ruling’s application is limited to the facts, representations, and Code and Regulations
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 under section 856.

       No opinion is expressed with regard to whether the tax liability of Taxpayer 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.



1  Section 860(g) provides that the claim must be filed within 120 days after the date of determination.
However, section 7503 provides, in part, that when the last day for performing any act falls on a Saturday,
the performance of such act shall be considered timely if it is performed on the next succeeding day
which is not a Saturday, Sunday, or a legal holiday.
PLR-111711-21                                 7

      The ruling contained in this letter is based upon information submitted and
representations made by Taxpayer 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 terms of a power of attorney on file in this office, a copy of
this letter is being sent to your authorized representatives.


                                                  Sincerely,


                                                  ______________________
                                                  K. Scott Brown
                                                  Senior Technician Reviewer, Branch 3
                                                  Office of the Associate Chief Counsel
                                                  (Financial Institutions & Products)



Enclosure:
      Copy for section 6110 purposes

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