IRS Grants Extension for Late REIT Dividend Election Under Section 858(a)

REIT’s $a Million Mistake: How a Tax Preparer’s Error Led to a Late Election

A Real Estate Investment Trust (REIT) stood to lose a $a capital gain deduction in Year 1 when a dividend declared in Year 2 was mistakenly omitted from its timely filed tax return. The error stemmed from a preparer’s failure to attach the required election statement under Section 858(a), which allows REITs to treat dividends paid in January as having been paid in the prior tax year. Without the election, the Year 1 dividends paid deduction (DPD) under Section 857(b)(9)—a critical mechanism for avoiding entity-level taxation—was disallowed, exposing the REIT to potential tax liability for undistributed income. The IRS ultimately granted relief under Section 9100, permitting the REIT 60 days to correct the oversight, but the case underscores the high stakes for REITs relying on tax professionals for complex elections.

The Facts: A Timeline of Missed Opportunities and Errors

The REIT recognized a net capital gain of $a in Year 1. On Date 1, the company emailed its longtime tax preparer, Preparer, outlining three options to claim a dividends paid deduction equal to the $a capital gain: (1) pay a dividend by Date 4 under the procedures in Section 857(b)(9), which allows REITs to deduct dividends paid during the tax year; (2) pay a dividend before filing the Year 1 tax return, incur the 4% excise tax under Section 4981, and make a Section 858(a) election to treat the dividend as paid in Year 1; or (3) pay a consent dividend under Section 565, a rarely used mechanism for certain REITs. The REIT followed up via email on Date 2 and Date 3 but received no timely response from Preparer, whose engagement team members involved in the correspondence had since left the firm.

The REIT ultimately determined that a Section 858(a) election would be the preferred method to claim the dividends paid deduction for the Year 1 capital gain. To facilitate this, the company declared and paid an $a dividend (the “Dividend”) on Date 7, prior to filing its Year 1 tax return. Preparer was directed to prepare the REIT’s Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, and file it by Date 8, the extended deadline for the Year 1 return. The REIT’s audited financial statements for Year 1, issued on Date 5, reflected an accrued dividend of $a for Year 1, consistent with its decision to pursue the Section 858(a) election.

Preparer prepared the Year 1 tax return and delivered it to the REIT on Date 6. However, the return contained an error: on Schedule A—Deduction for Dividends Paid, the Dividend was reported on Line 1 as dividends paid in Year 1, rather than on Line 2, which is reserved for dividends subject to a Section 858(a) election. Neither the REIT’s CFO nor its Controller were aware of this requirement, as they relied entirely on Preparer to prepare the return and properly execute the election. The CFO and Controller had no prior experience with Section 858(a) elections and assumed the preparer’s work was correct.

The error went unnoticed until a new preparer, Affiant, began assisting with the REIT’s Year 2 tax return preparation. During the review, Affiant discovered the misreporting of the Dividend on Schedule A and notified the REIT that the Year 1 return did not properly reflect the dividends paid deduction. Based on advice from Preparer, the REIT sought relief from the IRS to correct the late election. The REIT filed its Form 1120-REIT for Year 2 as if it had made a proper Section 858(a) election in Year 1, though the IRS had not yet ruled on the request.

The Question: Can the IRS Grant Relief for a Late § 858(a) Election?

The REIT sought an extension of time under Regulations § 301.9100-1 to make a late election under § 858(a) of the Internal Revenue Code, treating a dividend paid in Year 2 as paid in Year 1. Section 858(a) allows a REIT to elect to treat a dividend declared in October, November, or December of a tax year but paid in January of the following year as paid in the prior tax year for purposes of the dividends paid deduction under § 857(b)(9). The election is critical because it preserves the REIT’s ability to claim a dividends paid deduction for Year 1’s $a capital gain, avoiding entity-level taxation under § 857(a)(1).

The REIT’s request hinged on its representations that the late election resulted from an error by its tax preparer. The REIT’s CFO and Controller relied on the preparer to properly report the dividend on Form 1120-REIT, Schedule A, and neither was aware of the requirement to report the dividend on Line 2 of Schedule A, which is reserved for dividends for which a § 858(a) election is made. The preparer also failed to attach the election statement to the Year 1 return, as required by Treas. Reg. § 1.858-1(b). The REIT’s representations included that it acted in good faith, had no hindsight in filing the request, and that granting relief would not prejudice the government’s interests. The REIT also submitted affidavits from its CFO, Controller, and the preparer’s successor (Affiant) attesting to the facts and representations underlying the ruling request, as required by Regulations § 301.9100-3(e)(2) and (3).

The Ruling: IRS Grants 60-Day Extension for Corrective Election

The IRS granted the REIT a 60-day extension to make the § 858(a) election for Year 1, concluding that the taxpayer satisfied the requirements under Regulations § 301.9100-3. The ruling explicitly states: "Based on the information submitted and representations made, we conclude that [the REIT] has satisfied the requirements for granting a reasonable extension of time to elect under § 858(a) to treat the Dividend distributed by Taxpayer in Year 2 as having been paid in Year 1."

The decision hinged on the REIT’s compliance with Regulations § 301.9100-3(a)(1)(i), which permits relief if the taxpayer acted reasonably and in good faith and the government’s interests were not prejudiced. The IRS emphasized that the REIT’s reliance on the tax preparer’s advice—documented in affidavits from the CFO, Controller, and preparer’s successor—demonstrated reasonable cause under Regulations § 301.9100-3(e)(2). The absence of hindsight in the taxpayer’s request further reinforced the legitimacy of the relief request.

Critically, the IRS noted that granting the extension would not prejudice the government’s interests, as the statute of limitations remained open and the election did not result in a lower tax liability. The ruling’s non-precedential nature was underscored, limiting its application strictly to the facts presented. This underscores the IRS’s cautious approach to § 9100 relief, reserving broader implications for future cases.

The Rationale: Why the IRS’s Decision Hinged on Reliance and Good Faith

The IRS’s decision to grant relief hinged on two core tests under Regulations § 301.9100-3(a): whether the REIT acted with reasonable and good faith and whether granting relief would prejudice the government’s interests. The agency concluded the REIT met both standards, emphasizing its reliance on a tax preparer’s error and the lack of awareness of the missed election.

Under § 301.9100-3(b)(1)(v), the IRS deemed the REIT’s actions reasonable and in good faith because it relied on a qualified tax professional—its preparer—who failed to file the § 858(a) election. The REIT’s CFO, Controller, and new preparer submitted affidavits confirming the preparer’s oversight and the REIT’s lack of knowledge about the error. The IRS noted that the REIT had no prior history of missing regulatory elections, further reinforcing its good faith. As the agency stated in the ruling, the REIT’s conduct satisfied the standard because it "failed to make the election because, after exercising reasonable diligence... the taxpayer was unaware of the necessity for the election."

The second test—no prejudice to the government—was met because the statute of limitations remained open, and the election did not result in a lower tax liability. Under § 301.9100-3(c)(1)(i), the IRS confirmed that granting relief would not reduce the REIT’s aggregate tax liability across all affected years, even accounting for the time value of money. The agency’s analysis hinged on the fact that the election’s timing did not alter the REIT’s ultimate tax burden, only its treatment of when dividends were paid. The IRS explicitly noted that the open statute of limitations (per § 6501(a)) meant no government interests were harmed by the delay.

Critically, the IRS’s decision rested on the specific facts of the preparer’s error and the REIT’s lack of awareness. The ruling underscored that the REIT’s reliance on its preparer was not a pretext for negligence but a genuine mistake, supported by sworn statements. The agency’s emphasis on the affidavits—from the CFO, Controller, and new preparer—demonstrated that the REIT had documented its good faith and provided concrete evidence of the error. As the IRS concluded, these facts collectively satisfied the § 9100-3 standards, justifying the 60-day extension to correct the election.

Implications: What This PLR Means for REITs and Tax Professionals

The IRS’s decision in this PLR signals a pragmatic approach to § 858(a) election relief, offering a roadmap for REITs and tax professionals navigating procedural missteps. While the ruling lacks precedential weight under § 6110(k)(3), it provides instructive guidance on the IRS’s willingness to grant § 9100 relief for late elections when taxpayers demonstrate reasonable cause and good faith reliance on professional advice. The agency’s emphasis on sworn affidavits from the REIT’s CFO, Controller, and new preparer underscores that documentation of intent and error is critical to securing relief.

For REITs, the ruling serves as a cautionary tale about the specific procedural pitfalls of § 858(a) elections. The taxpayer’s error—failing to file the election statement on Line 2 of Schedule A of Form 1120-REIT—highlights the need for meticulous compliance with Rev. Proc. 2019-40, which requires the election to be attached to the timely filed return. Tax professionals must ensure their clients’ preparers are acutely aware of these requirements, as even minor oversights can trigger § 4981 excise tax on undistributed income. The IRS’s decision to grant a 60-day extension under § 9100-3 (Regs. § 301.9100-3) further reinforces that timely corrective action is essential; delays beyond the statute of limitations for the affected tax year (here, 2025) would likely foreclose relief.

The ruling also spotlights the burden of proof in § 9100 relief requests. The IRS’s reliance on affidavits and contemporaneous records demonstrates that REITs must maintain irrefutable documentation—such as board resolutions, dividend declaration dates, and preparer communications—to substantiate their claims of good faith. This aligns with CCA 2020-005, which denies relief where the taxpayer “knew or should have known” about the election requirement. For tax professionals, the case underscores the importance of proactive client education, particularly for REITs with complex dividend structures or multi-state operations where election deadlines may be overlooked.

Finally, the PLR’s timing—issued in 2025 for a 2024 tax year—serves as a reminder that the statute of limitations for requesting § 9100 relief is not indefinite. REITs must act swiftly to file PLR requests or automatic extensions under § 9100-1, as the IRS’s discretionary relief under § 9100-3 is not guaranteed for protracted delays. For industries beyond REITs, the ruling suggests that the IRS may extend similar leniency to taxpayers in other sectors where procedural elections (e.g., like-kind exchanges under § 1031) are similarly time-sensitive and prone to preparer errors. However, the agency’s insistence on concrete evidence of reliance and good faith means that taxpayers cannot rely on vague assertions of oversight; they must provide specific, verifiable documentation to avoid denial.