IRS grants a late-filed REIT election under § 856(c) after the accounting firm missed the extension deadline

Plain-English summary

A limited liability company wanted to be taxed as a real estate investment trust (REIT), which requires making a formal election on a timely filed tax return. To elect as a REIT for its first year, the company needed to file its return (Form 1120-REIT) by an extended deadline, which meant its accounting firm first had to file an extension request (Form 7004). Because of administrative oversights, the firm never filed the extension for the company or for its parent fund, so the extended deadline was lost. The mistake was not caught until months later, after the responsible tax partner retired and the accounts moved to a new partner who assumed the extension had gone out. Once the firm discovered the problem, it filed the REIT return and advised the company to ask the IRS for relief. The company requested an extension of time under the "9100 relief" regulations (sections 301.9100-1 and 301.9100-3), which let the IRS forgive a missed regulatory election when the taxpayer acted reasonably and in good faith and the government is not harmed. The IRS granted relief. It found the company always intended to be a REIT (shown in its LLC agreement and its early steps to line up the required 100-plus shareholders), reasonably relied on a qualified accounting firm that failed to file, and met all the representations, so its late REIT return counts as a timely election. It matters to entities that rely on outside advisors and miss an election deadline through no fault of their own.

Ruling snapshot

• Question: Should the IRS grant an extension of time under §§ 301.9100-1 and -3 to make a late REIT election under § 856(c)?
• Outcome: approved (extension granted; late-filed Form 1120-REIT treated as a timely election)
• Key authorities: IRC § 856(c); Treas. Reg. § 1.856-2(b); Treas. Reg. §§ 301.9100-1, 301.9100-3; IRC § 6501(a); IRC § 6662

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                               Washington, DC 20224

Number: 202336001                                              Third Party Communication: None
Release Date: 9/8/2023                                         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-100586-23
                                                               Date:
                                                               June 13, 2023

Legend

Taxpayer                   =         ------
Fund                       =         ------
Accounting Firm            =         ------
State                      =         ------
Date 1                     =         ------
Date 2                     =         ------
Date 3                     =         ------
Date 4                     =         ------
Date 5                     =         ------
Date 6                     =         ------
Month 1                    =         ------
Month 2                    =         ------
Month 3                    =         ------
Year 1                     =         ------
Year 2                     =         ------
x                          =         ------
y                          =         ------

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

       This letter responds to a letter dated December 19, 2022, submitted on behalf of
Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to make an election under
section 856(c) of the Internal Revenue Code (the Code) to be treated as a real estate
investment trust (REIT) effective Date 2.

                                           FACTS

       Taxpayer is a State limited liability company that was formed on Date 1 as a
disregarded entity of Fund. Taxpayer always intended to be a REIT, which is evident
from multiple provisions in its Limited Liability Company Agreement (LLC Agreement).
For example, the LLC Agreement provides that Taxpayer was established to provide for
the governance and operation of the company as a REIT within the meaning of sections
856 through 860 of the Code. The LLC Agreement also provides that the Board of
Managers shall cause the company to issue up to y preferred units to a sufficient
number of persons to permit the company to qualify as a REIT. Consistent with this
provision, on Date 3, Taxpayer added y preferred shareholders to permit it to qualify as
a REIT for Year 1. The LLC Agreement also provides that the Board of Managers shall
use commercially reasonable efforts to take actions as are necessary or appropriate for
the company to qualify as a REIT and to preserve its status as a REIT.

        Taxpayer does not have employees and engages Accounting Firm to ensure it
complies with federal and state tax obligations, including extensions. Accounting Firm
is a reputable national accounting firm with a sophisticated real estate tax practice and
strong expertise in REITs. Accounting Firm has a longstanding relationship with Fund,
preparing and filing federal and state tax returns for Fund and more than x of its related
entities, including Taxpayer (collectively, the Fund Group). In addition, Accounting Firm
performed quarterly REIT asset testing for Taxpayer through Year 1 and annual gross
receipts testing at Year 1 end.

       Accounting Firm intended to electronically file Fund's Year 1 Form 7004,
Application for Automatic Extension of Time To File Certain Business Income Tax,
Information, and Other Returns, by Date 4. Accounting Firm also intended to
electronically file a Year 1 Form 7004 for Taxpayer by Date 5 to extend the time to file
Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, for
Taxpayer's first REIT taxable year. Due to administrative oversights, Accounting Firm
did not file Form 7004s for Fund or Taxpayer for Year 1. Because Taxpayer's Form
7004 was not timely filed, the deadline for Taxpayer's REIT election was not extended
from Date 5 to Date 6.

        After Date 5, the tax partner at Accounting Firm who was assigned to the Fund
Group retired. In Month 1 of Year 2, Taxpayer's return and the returns of the entire
Fund Group were transitioned to a new tax partner. At that time, the new tax partner
believed that Taxpayer's Year 1 Form 7004 had been timely filed by Date 5, along with
the many other federal and state extensions of the Fund Group that were previously
due. In late Month 1/early Month 2 of Year 2, Accounting Firm first became aware that
certain Fund Group federal extensions may not have been filed. At such time, the exact
population was not immediately known to Accounting Firm, or whether Taxpayer was
part of that population. Accounting Firm reviewed the files for each Fund Group entity
to gain clarity on which entities may have been impacted. In early Month 3 of Year 2
(prior to the intended extended due date), upon Accounting Firm's review of Form 1120-
REIT for Taxpayer's first REIT taxable year, it appeared that Taxpayer's Form 7004
may have been part of the population of unfiled extensions. Accounting Firm filed Form
1120-REIT on Date 6 consistent with Taxpayer's intention to be a REIT, including
electing Year 1 as the year of Taxpayer's REIT status election. Subsequently,
Accounting Firm informed Taxpayer of the omission and its potential impact on the
validity of Taxpayer's initial REIT election. Accounting Firm also advised Taxpayer to
seek a ruling under sections 301.9100-1 and 301.9100-3 for an extension of time to
elect under section 856(c) to be treated as a REIT effective Date 2. At all times prior to
discovery, Taxpayer intended to timely file Form 7004 and, subsequently Form 1120-
REIT. Until Month 3 of Year 2, Taxpayer believed that Taxpayer's Form 7004 for the
first REIT taxable year had been timely filed.

                                  REPRESENTATIONS

      Taxpayer makes the following representations in connection with this request for
an extension of time:

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

2. The interests of the government are not prejudiced within the meaning of section
   301.9100-3(c). Granting the relief will not result in Taxpayer having a lower U.S.
   income tax liability in the aggregate for all years to which the regulatory election
   applies than Taxpayer 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 be imposed under section 6662 at the 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 not to file the election.

5. Taxpayer is not using hindsight in requesting this relief. No specific facts have
   changed since the due date for making the election that makes this election
   advantageous to Taxpayer.

6. The period of limitations on assessment under section 6501(a) has not expired for
   Taxpayer for the taxable year for which the election should have been made, nor for
   any taxable year(s) that would have been affected by the election had it been timely
   made.

       In addition, affidavits on behalf of Taxpayer have been provided as required by
section 301.9100-3(e)(2) and (3).

                                   LAW AND ANALYSIS

       Section 856(c)(1) provides that a corporation, trust, or association shall not be
considered a REIT for any taxable year unless it files with its return for the taxable year
an election to be a REIT or has made such an election for a previous taxable year, and
such election has not been terminated or revoked. Pursuant to section 1.856-2(b) of the
Income Tax Regulations, the election shall be made by the trust by computing taxable
income as a REIT in its return for the first taxable year for which it desires the election to
apply.

        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 six 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 to mean an election whose due date is prescribed by a regulation, or
a revenue ruling, revenue procedure, notice, or 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 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 a 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)(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 has satisfied the requirements for granting a reasonable extension of time to
elect under section 856(c) to be treated as a REIT effective Date 2. Accordingly, due to
the reasonable extension of time granted to Taxpayer, Taxpayer's Form 1120-REIT filed
on Date 6 is considered a timely election under section 856(c) for Taxpayer to be
treated as a REIT under subchapter M of the Code effective Date 2.

                                         CAVEATS

       This ruling is limited to the timeliness of the filing of Taxpayer's election under
section 856(c). 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
regarding the timeliness of Taxpayer's federal income tax return. Furthermore, no
opinion is expressed or implied regarding whether Taxpayer otherwise qualifies as a
REIT under part II of subchapter M of chapter 1 of the Code.

      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 representative.

                                           Sincerely,


                                           ___________________________
                                           Andrea M. Hoffenson
                                           Senior Technician Reviewer, Branch 3
                                           Office of Associate Chief Counsel
                                           (Financial Institutions & Products)


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