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

Plain-English summary

A real estate investment trust intended for a service-provider subsidiary to be treated as a taxable REIT subsidiary effective when the subsidiary began operations. Outside counsel formed the entity and prepared its classification election but failed to prepare Form 8875, while the compliance team believed the form had been filed. The missed filing was discovered during an internal records review, and the REIT had consistently treated the subsidiary as a taxable REIT subsidiary. The IRS found that the taxpayers acted reasonably and in good faith and that relief would not prejudice the government's interests. It granted them 90 days to jointly file the election with the intended effective date.

Ruling snapshot

• Question: Could the REIT and its subsidiary make a late Section 856(l) taxable REIT subsidiary election?
• Outcome: approved, with 90 days to file Form 8875
• Key authorities: IRC § 856(l); 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: 202414004                                            Third Party Communication: None
 Release Date: 4/5/2024                                       Date of Communication: Not Applicable
 Index Number: 856.00-00, 856.07-00,
               9100.00-00                                     Person To Contact:
                                                              -----------------------------------, ID No. -------
 -----------------------                                      -----------------
 -------------------                                          Telephone Number:
 ----------------------------------                           --------------------
 ----------------------------------                           Refer Reply To:
                                                              CC:FIP:B01
                                                              PLR-118259-23
                                                              Date:
                                                              January 05, 2024


 Taxpayer                      = -------------------------------------------------------------------------------
                                 --------------------
 Subsidiary                    = -------------------------------------------------------------------------------
                                 -----------------------
 Trustee                       = ---------------------------------------
 Acquisition                   = -------------------------------------------------------------------------------
 Corporation                     ------------------------
 Holding Partnership           = -------------------------------------------------------------------------------
                                 ------------------------
 Compliance Team               = ------------------------------------------------------------
 Law Firm                      = ----------------------------------------
 Accounting Firm               = -----------------------
 Month 1                       = --------------------
 State                         = -------------
 Investment Property           = ------------------------------------------------------------------------
 Date 1                        = ----------------------
 Date 2                        = ----------------------
 Date 3                        = --------------------------
 Date 4                        = -----------------------
 Year 1                        = ------

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

        This ruling responds to a letter dated September 22, 2023, and 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 jointly make an election under section 856(l) of the Internal Revenue
Code (“Code”) to treat Subsidiary as a taxable REIT subsidiary (“TRS”) of Taxpayer
effective on Date 1.
PLR-118259-23                                2

                                         FACTS

         Trustee is the trustee and manager of various investment funds that indirectly
own the common shares of Taxpayer. Taxpayer was formed in Year 1 as a limited
liability company under the laws of State. Taxpayer was formed for the purpose of
investing in real estate investment property being developed for mixed use, including
residential and retail space. Taxpayer has elected to be treated as a real estate
investment trust (“REIT”) under sections 856 through 859 of the Code for federal
income tax purposes beginning with Taxpayer’s taxable year commencing on Date 2.

      Taxpayer is the sole member of Acquisition Corporation. Acquisition Corporation
was formed as a limited liability company under the laws of State. Acquisition
Corporation previously elected to be classified as a corporation for federal income tax
purposes and is a qualified REIT subsidiary of Taxpayer.

       Acquisition Corporation owns a 99% interest in Holding Partnership. An
unrelated third party owns the remaining 1% interest. Holding Partnership was formed
under the laws of State as a limited liability company. Holding Partnership is classified
as a partnership for federal income tax purposes. Holding Partnership owns the
Investment Property through an entity that is disregarded for federal income tax
purposes.

        Holding Partnership is also the sole member of Subsidiary. Subsidiary is a
limited liability company that was formed under the laws of State on Date 3 and began
operations on Date 1. Subsidiary was formed for the purpose of being a service
provider for the Investment Property. Taxpayer represents that it intended to make an
election to treat Subsidiary as a TRS of Taxpayer effective on Date 1.

       Compliance Team is a division that oversees the tax compliance obligations of
Trustee’s investment funds and Taxpayer. Compliance Team engaged Law Firm to
assist with the Investment Property. Law Firm was involved in discussions relating to
the formation and intended operations of Subsidiary including the intended treatment of
Subsidiary as a TRS of Taxpayer. Correspondence between Law Firm and Compliance
Team routinely referred to Subsidiary as the “TRS Entity.”

        Law Firm prepared Subsidiary’s Certificate of Formation and LLC Agreement
which were both filed with State. Law Firm also prepared Subsidiary’s (1) Form SS-4,
Application for Employer Identification Number; (2) Form W-9, Request for Taxpayer
Identification Number and Certification; and (3) Form 8832, Entity Classification
Election, on which Subsidiary elected to be classified as an association taxable as a
corporation, effective on Date 1. However, while Law Firm was aware of the intention to
treat Subsidiary as a TRS, it failed to prepare the requisite Form 8875, Taxable REIT
Subsidiary Election, with respect to Subsidiary.
PLR-118259-23                               3

      Based on prior engagements with legal professionals, Compliance Team
expected Law Firm to file Form 8875 for Subsidiary. When Compliance Team received
the documents relating to Subsidiary for execution it believed that Law Firm had also
prepared and filed Form 8875.

       In Month 1, during an internal records review, Compliance Team became aware
that Form 8875 was not filed by Law Firm. Specifically, on Date 4, Compliance Team
contacted Law Firm to request a copy of Form 8875 that was filed to make a TRS
election for Subsidiary. Shortly thereafter, Taxpayer became aware that Law Firm failed
to prepare and file Form 8875.

        Compliance Team requested advice from Accounting Firm on how to remedy the
failure to file Form 8875. Accounting Firm advised Taxpayer to submit a request for
relief under Treas. Reg. § 301.9100-1 for an extension of time to file the election.

       Taxpayer represents that it has consistently treated Subsidiary as a TRS of
Taxpayer beginning on Date 1, because Taxpayer believed that Subsidiary’s Form 8875
was timely filed.

      Taxpayer and Subsidiary make the following additional 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 Internal Revenue Service (“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.

      5) Taxpayer and Subsidiary are not using hindsight in requesting relief. No
         specific facts have changed since the due date for making the election that
         make the election more advantageous to Taxpayer or Subsidiary.

      6) The period of limitations on assessment under section 6501(a) has not
         expired for Taxpayer and Subsidiary for the taxable year in which the election
PLR-118259-23                                 4

          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) of the Code 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) of the Procedure and Administration 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, 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 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.
PLR-118259-23                                 5

        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
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 the 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 as of Date 1. 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 as of Date 1.

       This ruling is limited to the timeliness of the filing of Form 8875. This ruling's
application is limited to the facts, representations, Code sections 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. No opinion is expressed as to whether Taxpayer otherwise
PLR-118259-23                                           6

qualifies as a REIT or whether Subsidiary otherwise qualifies as a TRS under
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 taxpayers that requested 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,



                                                            ______________________________
                                                            Steven Harrison
                                                            Branch Chief, Branch 1
                                                            Office of Associate Chief Counsel
                                                            (Financial Institutions & Products)


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