REIT receives 90 days to make a late taxable-subsidiary election

Plain-English summary

A real estate investment trust formed a subsidiary to lease and operate a hotel and intended to elect taxable REIT subsidiary status from the REIT conversion date. The election was missed because the REIT's accounting firm and two law firms had different understandings about who would prepare and file Form 8875. A later compliance review revealed that the subsidiary's operations had been combined with the REIT instead of treated as a separate corporation. The IRS found that the REIT and subsidiary acted reasonably and in good faith and that late relief would not prejudice the government's interests. It granted them 90 days to make the election effective from the requested redacted date. The ruling addresses only timeliness and does not decide whether the parent qualifies as a REIT or the subsidiary otherwise qualifies as a taxable REIT subsidiary.

Ruling snapshot

• Question: May the REIT and its hotel-operating subsidiary file a late joint election for taxable REIT subsidiary status?
• Outcome: Approved, with 90 days to file Form 8875
• 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: 202314010                                                 Third Party Communication: None
 Release Date: 4/7/2023                                            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-113723-22
                                                                   Date:
                                                                   January 09, 2023




Legend

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

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

Corporation                =        -----------------------------

LLC                        =        -------------------

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

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

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

Taxpayer Law Firm =                 --------------------------------

Advisor Law Firm           =        ----------------------------------------------

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

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

Date 1                     =        --------------------------
PLR-113723-22                                         2


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

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

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

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

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

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

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

Year                    =    -------

a                       =    ---

b                       =    --


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

       This letter responds to a letter dated July 12, 2022, 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

      Taxpayer is a State corporation that has elected to be taxed as a real estate
investment trust (“REIT”) under Subchapter M of the Code. Taxpayer was formed on
Date 1 to indirectly own and operate the Hotel. Taxpayer formed Corporation and LLC
as subsidiaries to own and operate the Hotel.

       Corporation is a wholly owned subsidiary of Taxpayer. Corporation was formed
on Date 3. Corporation is a C corporation for federal income tax purposes. Taxpayer
treats Corporation as a qualified REIT subsidiary which is disregarded as an entity
separate from its owner pursuant to section 856(i).

       LLC is a limited liability company. LLC was formed on Date 2. LLC is treated as
a disregarded entity for federal income tax purposes. LLC owns title to the real property
PLR-113723-22                                 3

where the Hotel is located. Taxpayer owns a percent of the membership interest in
LLC. Corporation owns the remaining b percent of the membership interest in LLC.
The entire ownership of LLC is attributed to Taxpayer for federal income tax purposes
because Corporation is a disregarded entity.

        On Date 6, Taxpayer converted to a REIT. As part of the restructuring
associated with the REIT conversion, Taxpayer formed Subsidiary, a State corporation,
as a wholly owned subsidiary of Taxpayer on Date 4, with the intention that Taxpayer
and Subsidiary would jointly make an election to treat Subsidiary as a TRS under
section 856(l) beginning Date 6. Subsidiary began leasing the Hotel from LLC on Date

5. On Date 5, Subsidiary entered into a management agreement with an eligible
independent contractor to manage the Hotel. Corporation and LLC stopped
participating in the operation of the Hotel on Date 5. Because Taxpayer and Subsidiary
wanted TRS treatment for Subsidiary beginning Date 6, they were required to make the
election by Date 7.

       As a result of miscommunication among Taxpayer’s advisors, Taxpayer and
Subsidiary did not make a timely TRS election for Subsidiary. Taxpayer used
Accounting Firm as its accounting firm. Accounting Firm represented Taxpayer and
certain of its subsidiaries for many years, including the years before the conversion of
Taxpayer to a REIT. Taxpayer uses Taxpayer Law Firm as its primary law firm with
respect to real estate matters. Taxpayer engaged Taxpayer Law Firm to assist with the
REIT conversion. The primary shareholder of Taxpayer is Fund. Fund has engaged
Investment Advisor as its qualified professional asset manager. Investment Advisor
engaged Advisor Law Firm as its primary law firm to assist with its role as the qualified
professional asset manager to Fund.

         Accounting Firm handled certain of Taxpayer's tax filings and, with data provided
by Taxpayer, compliance review (including ascertaining compliance with the quarterly
and annual REIT qualification requirements), including handling Taxpayer's final Form
1120, U.S. Corporation Income Tax Return, for the tax year ended Date 5. Accounting
Firm was aware of the formation of Subsidiary. The recollection of Taxpayer, Taxpayer
Law Firm, and Advisor Law Firm is that a discussion was held with Accounting Firm
where a determination was made that Accounting Firm would handle any REIT related
filings for Taxpayer consistent with Accounting Firm’s historic practice of filing tax forms
on behalf of Taxpayer. Accounting Firm does not recall this discussion or agreeing to
handle the REIT related filings. Accounting Firm also did not believe that it was
engaged as the REIT's accounting firm. Accounting Firm did not know that Taxpayer
Law Firm and Advisor Law Firm expected Accounting Firm to make the TRS election for
Subsidiary. Accounting Firm did not make the TRS election for Subsidiary.

        Taxpayer Law Firm and Advisor Law Firm were involved with the formation of
Subsidiary and the decision to have Subsidiary lease and operate the Hotel. Taxpayer
Law Firm and Advisor Law Firm did not expressly state their intention to prepare any tax
filings as part of this transaction. Neither Taxpayer Law Firm nor Advisor Law Firm
PLR-113723-22                                 4

have submitted tax filings for Taxpayer in the past (and do not generally submit tax
filings for clients). Taxpayer Law Firm and Advisor Law Firm mistakenly assumed that
Accounting Firm would file the TRS election, in Accounting Firm’s capacity as the
accounting firm that prepared and submitted the tax filings for Taxpayer and Subsidiary.
Taxpayer Law Firm and Advisor Law Firm also believed that Accounting Firm had been
assigned to make general REIT filings.

       Taxpayer relied on its various advisors, including experienced tax professionals,
who advised Taxpayer regarding the REIT conversion and the formation of Subsidiary,
to handle any compliance obligations, including the filing of the TRS election for
Subsidiary. Taxpayer did not have any reason to suspect that the TRS election would
not be filed.

       The failure to file the TRS election was discovered in late Month of Year by
Taxpayer Law Firm in its role as the legal advisor to Taxpayer in connection with a
routine diligence review of the quarterly and annual REIT compliance testing performed
by Taxpayer and Accounting Firm (the “REIT Testing”). The REIT Testing consolidated
the operations of the TRS with the REIT rather than correctly treating each as a
separate corporate entity, which caused Taxpayer Law Firm to question whether the
TRS election had been made. Taxpayer Law Firm thereafter contacted Accounting
Firm. Accounting Firm confirmed that it had not made the TRS election. Accounting
Firm was unaware that it was expected to make the election. Taxpayer Law Firm
promptly notified Taxpayer that the TRS election had not been made. Thereafter, this
request was filed for an extension of time to file the TRS election.

                                  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 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.
PLR-113723-22                                 5


    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 sections 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
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
PLR-113723-22                                 6

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,
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.
PLR-113723-22                                  7



                                         CAVEATS

        This ruling is limited to the timeliness of the filing of 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
verified any of the material submitted in support of the request for a 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,



                                            K. Scott Brown
                                            Senior Technician Reviewer, Branch 2
                                            Office of the Associate Chief Counsel
                                            (Financial Institutions & Products)




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