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

Plain-English summary

A real estate investment trust and its subsidiary asked for extra time to file a joint election treating the subsidiary as a taxable REIT subsidiary effective from the REIT's intended start date. The subsidiary provided tenant services that could create impermissible tenant service income if it was not treated as a taxable REIT subsidiary. The accounting firm responsible for the filings missed both an entity-classification election and the taxable REIT subsidiary election, then discovered the second omission while reviewing its election-tracking schedule. The IRS found that the taxpayers acted reasonably and in good faith and that relief would not prejudice the government's interests. It granted 90 days to make the election effective on the originally intended date, without deciding whether the taxpayer otherwise qualified as a REIT or the subsidiary otherwise qualified as a taxable REIT subsidiary.

Ruling snapshot

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

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202421004                                              Third Party Communication: None
Release Date: 5/24/2024                                        Date of Communication: Not Applicable
Index Number: 856.00-00, 9100.00-00
                                                               Person To Contact:
----------------------                                         --------------------------, ID No. ----------------
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---------------------------------------------------            Telephone Number:
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----------------------------                                   Refer Reply To:
------------                                                   CC:FIP:B02
----------------------------                                   PLR-116696-23
                                                               Date:
                                                               February 22, 2024

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Legend:

Taxpayer                   =         -----------------------------------------------------
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Subsidiary                 =         ------------------------------------------
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Entity A                   =        ------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------

Entity B                   =        --------------------------------

Entity C                   =        ------------------------------------------------------------------------------------
                           --------------

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

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

Property                   =         ---------------------------------------------------------------
-------------------------------------------------------------------

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

PLR-116696-23                                            2

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

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

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

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

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

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

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

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

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

Date 11                  =     ----------------

Date 12                  =     -----------------

Date 13                  =     ------------------

Year 1                   =     -------

Year 2                   =     -------

x                        =     ---------


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

       This ruling responds to a letter dated August 1, 2023, 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 (the “Regulations”) to make an election under
section 856(l) of the Internal Revenue Code (the “Code”) to treat Subsidiary as a taxable
REIT subsidiary (“TRS”) of Taxpayer effective as of Date 10.

PLR-116696-23                                 3

                                          FACTS

        Taxpayer is a State limited liability company that has elected to be taxed as a real
estate investment trust (REIT) under sections 856 through 859 of the Code commencing
with its taxable year that began on Date 10. Entity A holds an indirect interest in Taxpayer
through an x percent interest in Entity C. Taxpayer, through Entity B (an entity disregarded
from Taxpayer for federal income tax purposes), owns and operates Property. Subsidiary
provides services to tenants of Property under a tenant services agreement (the
“Agreement”) with Entity B. Taxpayer uses an accrual method as its overall method of
accounting, and Taxpayer’s taxable year is the calendar year.

       Entity A was initially formed on Date 1. Entity A elected on Date 3 to be treated as
a corporation for U.S. federal income tax purposes by timely filing Form 8832, Entity
Classification Election, and elected to be treated as a REIT by timely filing Form 1120-
REIT for its taxable year ended Date 4.

       Taxpayer was originally formed as a State limited partnership on Date 2. Taxpayer
converted to a limited liability company on Date 6. As of Date 7, Taxpayer was a
disregarded entity for federal income tax purposes wholly owned by Entity C.

       Subsidiary was formed on Date 5 as a State entity disregarded from Taxpayer for
federal income tax purposes. On Date 9, Subsidiary filed Form 8832, Entity Classification
Election, electing to be treated as a corporation effective Date 8. Also on Date 9, a Form
8875, Taxable REIT Subsidiary Election, was filed electing to treat Subsidiary as a TRS of
Entity A. Subsidiary uses an accrual method as its overall method of accounting, and its
taxable year is the calendar year.

       On Date 12, effective Date 10, Taxpayer filed, with the intent to make a REIT
election effective Date 10, Form 8832, electing to be treated as a corporation for U.S.
federal income tax purposes. Taxpayer made the REIT election by timely filing, including
extensions, its Year 2 (a year which includes Date 10) Form 1120-REIT tax return.
Taxpayer represents that, as a result of Taxpayer's election to be treated as a corporation,
Entity C was treated as having contributed both Property and the stock of Subsidiary to
Taxpayer in exchange for stock of Taxpayer.

       The Agreement was executed on Date 7 and requires Subsidiary to provide certain
services (which may have resulted in impermissible tenant service 1 income to Entity A if
not provided through a TRS) to the tenants of Property. Taxpayer represents that the
Agreement has remained in effect through Taxpayer’s election to be treated as a
corporation and is now treated for federal income tax purposes as an agreement between
Taxpayer and Subsidiary. As part of the plan for Taxpayer to become a REIT, Taxpayer
represents that it was intended that Subsidiary would become a TRS of Taxpayer. Thus,
Taxpayer and Subsidiary intended to timely file Form 8875 with an effective date of Date
10.

1
    See generally section 856(d)(7).

PLR-116696-23                                   4

        Accounting Firm prepares all relevant tax filings for Entity A, Entity C, and Taxpayer
based on information provided by Taxpayer. Accounting Firm's responsibilities also
include ascertaining Taxpayer's compliance with the quarterly and annual REIT
qualification requirements. Accounting Firm had prepared the initial elections in Year 1 for
Subsidiary to be treated as a corporation and as a TRS of Entity A. Accounting Firm
prepared the election for Taxpayer to be treated as a corporation and was aware of its
intent to be treated as a REIT. Taxpayer and Accounting Firm discussed the need for
Taxpayer and Subsidiary to file a TRS election effective as of Date 10 and determined that
Accounting Firm would prepare and file the TRS election. Notwithstanding these
considerations, Accounting Firm inadvertently failed to timely prepare the Form 8832 and
Form 8875 and, as a result, Taxpayer failed to timely file Form 8832 to elect to be treated
as a corporation and Taxpayer and Subsidiary also failed to timely file Form 8875 to elect
to treat Subsidiary as Taxpayer’s TRS. On Date 12, while Accounting Firm was carrying
out an unrelated REIT qualification and maintenance process, it was discovered that
Taxpayer had not yet filed Form 8832 to make a corporate election effective Date 10, as it
intended.

         Accounting Firm immediately brought the missed entity classification election filing
to Taxpayer’s attention and the election was filed with the Service the same day. Such
corporate election requested an effective date of Date 10 and included a request for late
election relief under Section 4.01 of Revenue Procedure 2009‐41, 2009-39 I.R.B. 439.
Whereas the review of the tax election tracking schedule showed that the Taxpayer had
not filed the Form 8832 timely, at that time Accounting Firm did not identify that the TRS
election for Subsidiary had not been made. However, approximately one month later,
Accounting Firm identified the missed TRS election while reviewing and updating the tax
election tracking schedule. A TRS election was promptly prepared for Subsidiary, and it
was filed with the Service on Date 13, with an effective date of Date 11, which represented
a date within the period of two months and 15 days prior to the filing date. Notwithstanding
having filed the TRS election effective as of Date 11, Taxpayer and Subsidiary are seeking
relief to have the TRS election effective as of Date 10 as originally intended in order to
ensure that any tenant services provided pursuant to the Agreement are provided by a
TRS.

        Taxpayer relied on Accounting Firm and its experienced tax professionals who
advised Taxpayer regarding (i) Taxpayer's election to be treated as a corporation and its
intent to elect to be treated as a REIT and (ii) Taxpayer's intention for Subsidiary to elect to
be treated as a TRS of Taxpayer. Taxpayer also hired Accounting Firm to handle any
compliance obligations, including the preparation and filing of the TRS election. Taxpayer
did not have any reason to believe that the TRS election would not be filed.

PLR-116696-23                                  5

                                   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 and 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 and Subsidiary.

    6. The period of limitations on assessment under section 6501(a) of the Code has not
      expired for Taxpayer and Subsidiary for the taxable year for which the election
      should have been filed, nor for any taxable years 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 Announcement,
this form is to be used for taxable years beginning after 2000 for eligible entities to elect

PLR-116696-23                                   6

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 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 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 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

PLR-116696-23                                    7

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 10. 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 10.

                                           CAVEATS

        This ruling is limited to the timeliness of the filing 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. Further, no opinion is
expressed or implied regarding the classification of any entity under section 301.7701-3 or
the consequences of any entity’s election to be treated as a corporation for federal income
tax purposes.

        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 U.S. 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.

       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 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.

PLR-116696-23                                     8

       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,


                                              ___________________________
                                              Bernard J. Audet, Jr.
                                              Chief, Branch 2
                                              Office of the Associate Chief Counsel
                                              (Financial Institutions & Products)




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