IRS Grants Extension for Late TRS Election Under Section 856(l)

REIT's $0 Tax Liability Gamble: Late TRS Election Granted

The IRS granted a REIT’s request for a late election under Section 856(l) of the Internal Revenue Code to treat its subsidiary as a Taxable REIT Subsidiary (TRS), effective as of Date 3. The taxpayer sought an extension under Sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to file the election late, and the IRS approved the relief despite the missed deadline. The ruling, issued as PLR-104408-26, is non-precedential and applies only to the specific taxpayer. The decision underscores the IRS’s willingness to grant discretionary relief for late elections when reasonable cause and good faith are demonstrated, even in cases where the tax impact is minimal.

The Oversight: How a Missed Meeting Led to a Late Election

The taxpayer, a real estate investment trust (REIT) specializing in senior living facilities, formed a subsidiary in State 2 to acquire a new facility. The REIT intended to elect Taxable REIT Subsidiary (TRS) status for the subsidiary, effective on the acquisition date (Date 3), by filing Form 8875. To ensure compliance, the REIT relied on its accounting firm to handle the election process.

The accounting firm was scheduled to meet quarterly with the REIT to discuss tax planning and filing requirements. Early in Year 2, scheduling conflicts prevented the firm from attending the quarterly meeting that followed the subsidiary’s formation and the facility’s acquisition. The failure to file Form 8875—along with Form 8832, which elects corporate classification for the subsidiary—was not discovered until Date 4, more than 75 days after Date 3. At that point, the accounting firm realized the oversight and promptly informed the REIT of the missed filings.

The IRS's Yardstick: Reasonable Cause and Good Faith

The IRS evaluated the taxpayer’s late TRS election under Section 301.9100-3, which grants discretionary relief for missed regulatory elections when the taxpayer demonstrates reasonable cause and good faith. To satisfy these standards, the taxpayer submitted six sworn representations—each designed to ensure the IRS was not prejudiced by the delay and that the election’s late filing did not result in a lower tax liability.

The taxpayer affirmed that the request was filed before the IRS discovered the omission, eliminating any risk of strategic timing. They also certified that granting relief would not reduce their aggregate federal tax liability, accounting for the time value of money, and that the election did not seek to alter a return position subject to an accuracy-related penalty under Section 6662. Crucially, the taxpayer attested that the failure to file was not a deliberate choice but arose from oversight, and that they were not employing hindsight to justify the late election. Finally, they confirmed that the statute of limitations under Section 6501(a) remained open for all affected tax years.

To substantiate these claims, the taxpayer provided affidavits from key personnel, including the accounting firm and REIT management, detailing the oversight and subsequent corrective actions. The IRS determined that the taxpayer’s reliance on professional advice—coupled with the prompt disclosure of the error—demonstrated good faith, while the lack of any prejudice to the Government (e.g., no lost revenue or altered tax positions) satisfied the reasonable cause standard. This case underscores that documented reliance on advisors and immediate corrective action are critical factors in securing §301.9100-3 relief.

The Rationale: Why the IRS Granted the Extension

The IRS grounded its decision in a precise application of statutory and regulatory provisions, emphasizing that the taxpayer’s failure to file Form 8875 on time did not stem from willful neglect but from an accounting firm’s oversight—a factor explicitly recognized under §301.9100-3(b)(v) as grounds for reasonable cause. The agency first examined the requirements of §856(l), which mandates that a REIT and its subsidiary jointly elect TRS status by filing Form 8875. The election, once made, is irrevocable without mutual consent, and the statute permits the election to be filed without the IRS’s prior approval. However, Announcement 2001-17 clarifies that Form 8875 must be filed during the taxable year, with the effective date constrained to no more than 2 months and 15 days prior or 12 months after the filing date—unless no date is specified, in which case the election takes effect on the filing date.

The IRS then turned to its discretionary authority under §301.9100-1(c), which allows the Commissioner to grant extensions for regulatory elections, including those under §301.9100-1(b), where the due date is set by an IRS announcement. The agency applied §301.9100-3(a), which requires that relief be granted only when the taxpayer demonstrates reasonable cause and the granting of relief does not prejudice the Government’s interests. The taxpayer met both conditions. Under §301.9100-3(b), reliance on a qualified tax professional—here, the accounting firm—constitutes reasonable cause, provided the taxpayer provided full and accurate information and acted in good faith. The IRS found that the taxpayer had documented board approval for the TRS election and promptly disclosed the error upon discovery, satisfying the "no prejudice" standard under §301.9100-3(c)(1). Since the late election did not alter the taxpayer’s tax liability or close any statute of limitations periods, the IRS concluded that the Government’s interests remained unaffected.

The IRS’s conclusion underscored that documented reliance on advisors and immediate corrective action are pivotal in securing §301.9100-3 relief, reinforcing that procedural errors—when corrected transparently—do not equate to willful neglect.

Implications: What This Means for REITs and Their Advisors

The IRS’s decision in this PLR underscores the critical importance of proactive communication between REITs and their accounting firms. The taxpayer’s ability to secure relief hinged on documented reliance on advisors and immediate corrective action—a pattern that should serve as a blueprint for other REITs. The ruling also signals that the IRS may grant similar extensions under §301.9100-3 when taxpayers can demonstrate reasonable cause, particularly in cases involving procedural oversights rather than substantive noncompliance. However, the IRS’s emphasis on the fact-specific nature of this ruling and its non-precedential status under §6110(k)(3) means REITs cannot rely on this outcome as a blanket precedent.

For tax practitioners, the case highlights the risks of hindsight adjustments—altering return positions or making retroactive elections without prior documentation can undermine a taxpayer’s position. Instead, REITs should implement robust internal controls to ensure TRS elections (Form 8875) are filed concurrently with their annual returns, with board approvals and advisor communications memorialized in writing. The IRS’s focus on no prejudice to the Government further suggests that taxpayers must act swiftly to correct errors, as delays in discovery or remediation could jeopardize relief.

Best practices for REITs include:

• Annual compliance checklists for TRS elections, tied to board meeting cycles.
• Quarterly reviews of ownership structures to ensure compliance with the 10% asset test under §856(c)(4)(B).
• Third-party documentation of intercompany transactions to withstand IRS scrutiny under §857(b)(6).

While this PLR provides a glimmer of flexibility, the IRS’s fact-specific analysis and non-precedential nature of the ruling mean REITs and advisors must proceed with caution. The agency’s willingness to grant relief in this case does not guarantee similar outcomes in future audits, particularly where substantive compliance issues (e.g., improper TRS activities under §856(l)) are involved.