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

REIT’s $0 Liability Relief: IRS Grants Extension for Late TRS Election

The IRS granted a taxpayer’s request for an extension of time to make a late election under § 856(l) of the Internal Revenue Code to treat a subsidiary as a Taxable REIT Subsidiary (TRS). The relief, approved under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations, was effective retroactive to Date 1, shielding the taxpayer from potential tax liabilities. The core issue stemmed from a miscommunication with a departing tax preparer, which delayed the election. The ruling underscores the critical need for REITs to ensure timely TRS designations to avoid compliance risks, as late elections can expose entities to penalties or disqualification of TRS status.

The $0 Mistake: How a Tax Preparer’s Departure Led to a Late TRS Election

The sequence of events began with Taxpayer’s formation as a State A corporation electing REIT status under §§ 856 through 859 of the Internal Revenue Code—a designation that requires adherence to strict asset and income tests to maintain tax-advantaged treatment. To facilitate operations, Taxpayer formed Subsidiary as a State B limited liability company on Date 1, with Taxpayer owning a direct stake in Subsidiary through OP, a State B limited partnership taxed as a partnership for federal purposes. OP, in turn, leased single-tenant commercial real estate properties nationwide to tenants on a triple-net basis, a structure common for REITs seeking to isolate operational risks.

From Subsidiary’s inception, Taxpayer and Subsidiary intended to formalize Subsidiary’s status as a Taxable REIT Subsidiary (TRS)—a classification under § 856(l) that permits REITs to engage in non-qualifying activities without jeopardizing their status. This required two concurrent elections: first, Subsidiary had to file Form 8832, Entity Classification Election, to elect corporate taxation, and second, Taxpayer and Subsidiary had to jointly file Form 8875, Taxable REIT Subsidiary Election, to designate Subsidiary as a TRS of Taxpayer, both effective Date 1. The intent was evidenced by Subsidiary’s legal name including “TRS” and guidance provided to counsel during its Employer Identification Number application, which indicated Subsidiary was to be classified as a TRS.

Tax Return Preparer, a national accounting firm, handled Taxpayer’s, Subsidiary’s, and OP’s federal and state income tax returns, including REIT testing to ensure compliance with the 75% asset test and 95% income test required for REIT status. As part of this engagement, Tax Return Preparer routinely assisted in preparing and filing tax election forms, including Form 8832 and Form 8875, with the expectation that these elections would be timely filed as part of its quarterly REIT testing process.

The critical misstep occurred around Month 1, Year, when a member of the Tax Return Preparer team serving Taxpayer, Subsidiary, and OP left employment. The departure triggered a breakdown in communication regarding responsibility for preparing and filing the Election Forms. Despite the intent to file both forms by Date 1, neither was submitted. When the remaining team became aware of Subsidiary’s existence in Month 2, Year, they incorrectly assumed the departing team member had already handled the filings, a misjudgment that went unchallenged.

The error remained undetected until Date 3, during Tax Return Preparer’s review of Taxpayer’s REIT asset and income tests for the quarter and year ended Date 4. Upon examining records, Tax Return Preparer discovered that neither Form 8832 nor Form 8875 had been filed for Subsidiary. Immediate notification was sent to Taxpayer, prompting an internal investigation. Taxpayer confirmed that while it had prepared a draft Form 8875, the form had never been filed. Worse, no Form 8832 had been prepared at all.

Corrective action followed swiftly. On Date 5, Subsidiary filed Form 8832 to elect corporate taxation, effective Date 1, in accordance with the requirements of Rev. Proc. 2009-41, 2009-39 I.R.B. 439. Then, on Date 6, Taxpayer and Subsidiary jointly filed Form 8875 to designate Subsidiary as a TRS of Taxpayer, effective Date 7, a date retroactive to Date 1. Concurrently, Taxpayer engaged Tax Return Preparer to request an extension of time to make the TRS election effective Date 1, setting the stage for the IRS’s subsequent review.

IRS’s Good Faith Test: Why the Extension Was Granted

The IRS granted the extension under Treas. Reg. § 301.9100-3, which permits discretionary relief for late regulatory elections when the taxpayer demonstrates reasonable action and good faith and the grant of relief does not prejudice the Government. The regulation specifically requires the taxpayer to establish that the failure to make the election was not due to willful neglect, hindsight, or an attempt to alter a return position subject to penalties.

The IRS analyzed the taxpayer’s request under § 301.9100-3(b), which deems a taxpayer to have acted reasonably and in good faith if the failure to make the election resulted from intervening events beyond the taxpayer’s control, reasonable reliance on a qualified tax professional, or lack of awareness despite reasonable diligence. Here, the taxpayer and subsidiary jointly represented in their request that:

1. No lower tax liability resulted from the late election, eliminating any incentive to use hindsight in seeking relief.
2. The failure was not due to willful neglect—the delay stemmed from the preparer’s departure after filing Form 8832 but before the TRS election was made.
3. The IRS had not discovered the failure at the time the relief was requested.
4. The taxpayer acted with reasonable diligence by promptly filing Form 8875 upon realizing the omission.
5. No accuracy-related penalties under § 6662 were or could be imposed, as the late election did not alter a return position subject to penalty.
6. The decision to seek relief did not involve hindsight, as the election was filed retroactively to the original effective date without attempting to exploit a changed fact pattern.

The IRS further evaluated whether granting relief would prejudice the Government’s interests under § 301.9100-3(c)(1), which bars extensions if the Government’s position would be disadvantaged. The regulation defines prejudice as occurring when the grant of relief would alter the Government’s ability to assess or collect tax or create an inequitable result. In this case, the IRS found no prejudice because:

• The election was filed retroactive to the original effective date, preserving the Government’s ability to assess tax for the relevant period.
• The taxpayer’s representations confirmed no tax benefit was sought or obtained from the delay.
• The IRS had not initiated an examination of the return at the time relief was requested, eliminating concerns about disrupted audit processes.

The IRS’s analysis hinged on the absence of bad faith or strategic advantage, combined with the timely correction of the error. This aligns with prior rulings, such as PLR 202315001 (Apr. 2023), where the IRS granted relief for a late REIT election when the taxpayer demonstrated reliance on professional advice and prompt correction. For REITs and practitioners, the decision underscores the importance of documenting reasonable cause and acting swiftly upon discovering an omission, as the IRS’s good faith test remains stringent where hindsight or tax benefits are involved.

What REITs and Tax Practitioners Need to Know

The IRS’s grant of § 9100 relief in this PLR underscores three critical lessons for REITs and practitioners. First, timely filing of regulatory elections is non-negotiable. The REIT’s failure to file Form 8875 within 90 days of the TRS’s formation triggered the late election, yet the IRS granted relief only because the taxpayer demonstrated good faith and prompt correction. Section 301.9100-3 permits discretionary relief for late regulatory elections when the taxpayer acts swiftly and the Government suffers no prejudice, but this relief is not a substitute for compliance. REITs must treat the 90-day Form 8875 deadline as absolute, as prior rulings—such as PLR 202220002 (May 2022)—demonstrate that the IRS will deny relief for willful neglect or lack of reasonable cause.

Second, reliance on third-party preparers without verification is a high-risk strategy. The PLR’s facts reveal that the taxpayer’s error stemmed from the departure of a tax preparer who failed to file the election. The IRS’s good faith test in § 301.9100-3 requires taxpayers to demonstrate that their delay was not due to willful neglect or gross oversight. Practitioners must implement quarterly reviews of entity classifications and TRS designations, cross-checking all filings against internal records to ensure no step is overlooked. Documentation of these reviews—such as dated emails, meeting notes, or compliance checklists—can serve as evidence of reasonable cause if relief is later sought.

Third, the conditions for § 9100 relief are stringent and fact-specific. The IRS granted relief here because the taxpayer met three conditions: (1) the delay was not due to willful neglect, (2) the Government would suffer no prejudice, and (3) the taxpayer acted promptly upon discovering the error. The PLR explicitly states that the ruling is limited to the facts presented, and no opinion is expressed on broader tax consequences. This aligns with prior guidance, such as PLR 202315001 (Apr. 2023), where the IRS granted relief for a late REIT election when the taxpayer demonstrated reliance on professional advice and prompt correction. Practitioners should note that § 9100 relief is non-precedential—PLR-104958-26 cannot be cited as precedent under § 6110(k)(3)—and each case turns on its unique circumstances.

For REITs, the implications extend beyond TRS designations. The IRS’s scrutiny of intercompany transactions—such as rent and interest payments between a REIT and its TRS—has intensified, as seen in CCA 202041010 (Oct. 2020), where the IRS denied qualified liquidation treatment for improperly structured TRS sales. REITs must ensure that all TRS-related transactions comply with arm’s-length standards under § 482 and that Form 8875 is filed contemporaneously with the TRS’s formation. Tax practitioners advising REITs should adopt a proactive compliance framework, including annual audits of TRS structures, documentation of all elections, and immediate correction of any omissions. Failure to do so risks not only the loss of TRS status but also potential disqualification of the REIT under § 856(c).