A REIT and hotel subsidiary received 90 days for a late TRS election

Plain-English summary

A company intended to elect REIT status and formed a wholly owned corporate subsidiary to lease a hotel and hire an eligible independent contractor to operate it. The parent and subsidiary intended the subsidiary to be a taxable REIT subsidiary from its formation date, but outside advisors did not alert them to file Form 8875. They discovered that both the subsidiary's classification election and the joint TRS election had been missed, then obtained late entity-classification relief and requested more time for Form 8875. The taxpayers represented that they had not used hindsight, sought no penalized return-position change, and would not reduce aggregate tax liability. The IRS granted 90 calendar days to make the joint TRS election effective from the requested date.

Ruling snapshot

• Question: Could the intended REIT and its hotel subsidiary make a late joint election to treat the subsidiary as a taxable REIT subsidiary?
• Outcome: Approved
• Key authorities: IRC § 856(l); Announcement 2001-17; Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202301003 Third Party Communication: None
Release Date: 1/6/2023 Date of Communication: Not Applicable
Index Number: 9100.00-00, 856.00-00
Person To Contact:
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--------------------------------------------- Telephone Number:
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---------------------------- Refer Reply To:
-------------------------- CC:FIP:B03
PLR-107893-22
Date:
October 07, 2022

Legend

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

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

Fund = --------------------------------------------
Hotel = ---------------------
Firm = ------------------------------------------------------------------------

State = -------------
Date 1 = ---------------------
Date 2 = -----------------
Date 3 = ---------------------
Date 4 = ------------------
Date 5 = ---------------------
Date 6 = ------------------
Date 7 = --------------------------
Date 8 = ----------------
Date 9 = -----------------
Year 1 = -------

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

   This letter responds to a letter dated April 11, 2022, and subsequent

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
PLR-107893-22 2

taxable REIT subsidiary (TRS) of Taxpayer under section 856(l) of the Internal Revenue
Code (the Code) effective Date 5.
FACTS

   Fund is a State limited partnership formed on Date 1. Fund’s purpose is to make,

improve, operate, hold, sell, and exchange investments in commercial real estate as
well as to engage in any other necessary or related activities.

    Taxpayer is a State limited liability company formed on Date 2 as a wholly-owned

disregarded entity of Fund. In Date 4, Taxpayer filed Form 8832, Entity Classification
Election, to elect to be classified as an association taxable as a corporation, effective
Date 3. Taxpayer intends to elect to be a real estate investment trust (“REIT”) beginning
with its first taxable year ended Date 7.

    Subsidiary is a State limited liability company formed on Date 5 and is wholly

owned by Taxpayer. On Date 9, Subsidiary filed Form 8832 pursuant to the late
classification relief in Revenue Procedure 2009-41, 2009-39 I.R.B. 439, to elect to be
classified as an association taxable as a corporation, effective Date 5.

    Taxpayer and Subsidiary are entities that were formed to, among other things,

provide for the operation of Hotel, a qualified lodging facility as defined in section
856(d)(9)(D), through an arrangement described in section 856(d)(8)(B), wherein
Subsidiary would qualify as a TRS, lease Hotel from Taxpayer, and engage an eligible
independent contractor or contractors, as defined in section 856(d)(9), to operate Hotel
on its behalf.

   Taxpayer intended that it qualify as a REIT and that Subsidiary qualify as a TRS

under section 856 during the Year 1 taxable year and for each taxable year thereafter.
In order to make a timely TRS election effective on Date 5, Taxpayer and Subsidiary
would have had to file Form 8875, Taxable REIT Subsidiary Election, no later than Date
6.

    Taxpayer’s internal tax department prepared and filed forms related to the

formation of Taxpayer. However, outside advisors and Taxpayer’s former outside
counsel did not advise Taxpayer of the need to file the appropriate tax forms with
respect to Subsidiary. In Date 8, during discussions regarding audit reporting for Fund,
Taxpayer discovered that neither the Form 8832 for Subsidiary nor the Form 8875 to
jointly elect to treat Subsidiary as a TRS of Taxpayer had been filed. Firm subsequently
prepared Form 8832, filed by Subsidiary on Date 9, and this request for a private letter
ruling under sections 301.9100-1 and 301.9100-3 to seek an extension of time to allow
Taxpayer and Subsidiary to make an election pursuant to 856(l) for Subsidiary to be
treated as a TRS of Taxpayer effective Date 5.
PLR-107893-22 3

                               REPRESENTATIONS

   Taxpayer and Subsidiary make 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 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 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 or Subsidiary.

6. The period of limitations on assessment under section 6501(a) has not expired
   for Taxpayer or Subsidiary for the taxable year for 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)(2) and (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
   PLR-107893-22 4

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 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.
PLR-107893-22 5

    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 section 301.9100-3.

   Under all the facts and circumstances of this case as presented by Taxpayer and

Subsidiary, we have determined that the interests of the Government are not prejudiced
under the standards set forth in section 301.9100-3(c)(1)(i).

                                  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 5. Accordingly, Taxpayer and Subsidiary have 90 calendar days from the
date of this letter to make the intended joint election.

                                    CAVEATS

    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 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 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-107893-22 6

     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,



                                               Grace Cho
                                               Assistant to the Branch Chief, Branch 3
                                               Office of the Associate Chief Counsel
                                               (Financial Institutions & Products)

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