IRS Grants Extension for Late TRS Election Due to Employee Turnover and Communication Breakdown

REIT Seeks Relief After Missing TRS Election Deadline Due to Employee Turnover

A Real Estate Investment Trust (REIT) petitioned the IRS for an extension under Section 301.9100-3 to retroactively elect to treat a subsidiary as a Taxable REIT Subsidiary (TRS) under Section 856(l) of the Internal Revenue Code. The IRS granted the relief, allowing the subsidiary to be treated as a TRS effective as of the originally intended date. The late election stemmed from employee turnover and a breakdown in internal communication, which prevented the timely filing of Form 8875, the sole mechanism for making a TRS election. This ruling underscores the IRS’s willingness to grant discretionary relief for late regulatory elections when taxpayers demonstrate reasonable cause, offering critical guidance for REITs and similar entities navigating compliance challenges.

The Question: Can a REIT Fix a Late TRS Election?

The taxpayer—a State limited liability company classified as a real estate investment trust (REIT) under §§ 856 through 859 of the Internal Revenue Code—sought an extension of time under §§ 301.9100-1 and 301.9100-3 to make a late election under § 856(l) of the Code. Section 856(l) authorizes a REIT to treat a subsidiary as a taxable REIT subsidiary (TRS), a corporate entity that may engage in activities not permitted for REITs while remaining subject to corporate income tax. The election is made by filing Form 8875, the sole mechanism for making a TRS election, and must be filed jointly by the REIT and the subsidiary.

The taxpayer and its wholly owned subsidiary intended to file Form 8875 by Date 4 to elect TRS treatment effective as of Date 1. However, the late election was filed on Date 8, missing the original deadline. The taxpayer requested relief under §§ 301.9100-1 and 301.9100-3 to validate the late election retroactively to Date 1, ensuring the subsidiary would be treated as a TRS of the REIT for all relevant tax purposes.

The Facts: How Employee Turnover Led to a Missed Election

Taxpayer, a State limited liability company that elected REIT status under §§ 856–859 of the Internal Revenue Code beginning with its taxable year ending Date 2, owned its operations through a complex structure involving Limited Partnership and Entity, a joint venture partner. Taxpayer’s wholly owned subsidiary, Subsidiary, was a State limited liability company wholly owned by Company, which Taxpayer co-owned with Entity. Company, treated as a partnership for federal tax purposes, held real property and used Subsidiary to provide services to tenants, hold certain assets, and receive income. Subsidiary commenced operations and acquired assets on Date 3.

Company was formed to develop, own, and operate a senior living facility in Township (the “Project”), intended to qualify as a “qualified healthcare property” under § 856(e)(6)(D). Taxpayer and Subsidiary planned to file Form 8875, the Taxable REIT Subsidiary Election, to elect TRS treatment for Subsidiary effective Date 1, with the joint filing deadline set for Date 4. However, the election was never filed.

In Year 1, discussions among the Tax Return Preparer, employees in Limited Partnership’s tax, finance, and asset management department (the “Department”), and a tax director at Entity concluded that the TRS election would be delayed until the Project became operational. The rationale was that the election’s necessity would only arise once construction was complete and the facility began generating income.

During the summer of Year 2, the tax director at Entity who had participated in these discussions left the company. Then, on Date 5, Limited Partnership experienced employee turnover, and the lead asset manager for Entity departed. Entity was responsible for notifying the Department, legal counsel, and the Tax Return Preparer once construction of the Project was complete—a milestone that would trigger the need for the TRS election. Due to the departures and the resulting communication breakdown, this notification never occurred.

Construction on the Project was completed on Date 6, and the facility became operational. However, because of the employee turnover at both Limited Partnership and Entity, the Department and Tax Return Preparer remained unaware of the Project’s completion until Date 7, when the Tax Return Preparer requested an update on the Project’s status. Only then did the parties realize that the TRS election had not been filed.

Upon discovering the missed deadline, Taxpayer and Subsidiary filed Form 8875 on Date 8, electing TRS treatment with the earliest possible effective date of Date 9. They subsequently sought a private letter ruling to validate the late election retroactively to Date 1, arguing that the failure to file was unintentional and due to intervening events beyond their control.

The Ruling: IRS Grants Extension Under § 301.9100-3

The IRS granted Taxpayer and Subsidiary a discretionary extension under § 301.9100-3 to treat Subsidiary as a Taxable REIT Subsidiary (TRS) effective Date 1, despite the late filing of Form 8875 on Date 8. The ruling hinged on the taxpayers’ demonstration that they acted reasonably and in good faith, and that granting relief would not prejudice the Government’s interests.

Under § 856(l), a REIT and a corporation may jointly elect to treat the corporation as a TRS, provided the REIT directly or indirectly owns stock in the corporation. The election is irrevocable unless both parties consent to revocation and must be made via Form 8875, as outlined in Announcement 2001-17. The instructions to Form 8875 specify that the election may be filed at any time during the taxable year, but the effective date is constrained to no more than 2 months and 15 days prior to filing or 12 months after filing, unless no date is specified, in which case the election is effective on the filing date.

The IRS analyzed the request under § 301.9100-3(a), which permits extensions for regulatory elections when the taxpayer establishes that they acted reasonably and in good faith, and that granting relief would not prejudice the Government. The IRS concluded that Taxpayer and Subsidiary met these requirements. Specifically, the IRS found that the taxpayers demonstrated reasonable cause for the late election, as the failure was due to intervening events beyond their control—namely, employee turnover that disrupted the filing process. The IRS further noted that the taxpayers had not sought to alter a return position for which an accuracy-related penalty could be imposed, nor did they rely on hindsight in requesting relief.

The IRS also verified that granting the extension would not prejudice the Government’s interests under § 301.9100-3(c)(1). The interests of the Government are not prejudiced if the taxpayer’s aggregate tax liability is not reduced as a result of the election, and if the statute of limitations on assessment for the affected taxable years remains open. The IRS confirmed that the taxpayers represented that the election did not result in a lower tax liability and that the statute of limitations had not expired for the relevant periods.

The ruling is limited to the timeliness of the Form 8875 filing and does not opine on whether Taxpayer qualifies as a REIT or Subsidiary as a TRS under part II of subchapter M of chapter 1 of the Code, nor does it address any tax liability of Subsidiary. The determination is based solely on the representations made by Taxpayer and Subsidiary, supported by penalties of perjury statements, and is subject to verification on examination. The ruling is directed only to the requesting taxpayer and may not be used or cited as precedent under § 6110(k)(3).

Implications: What This Ruling Means for REITs and Similar Taxpayers

The IRS’s grant of relief under § 301.9100-3 in this ruling underscores the critical importance of clear communication and documentation in complex organizational structures like REITs. The taxpayer’s failure to file Form 8875 on time stemmed from employee turnover, which disrupted internal processes and prevented timely compliance. This case demonstrates that even well-intentioned taxpayers can face unforeseen operational challenges that delay regulatory elections. Taxpayers must implement robust internal controls—such as designated compliance officers, automated filing reminders, and documented handoff procedures—to mitigate such risks.

This ruling also highlights the potential for relief under § 301.9100-3 when elections are missed due to reasonable causes like employee turnover. Section 301.9100-3 allows the IRS to grant discretionary extensions for late regulatory elections if the taxpayer acts reasonably and in good faith. The IRS emphasized in its ruling that the taxpayer’s request was supported by penalties of perjury statements and verified representations, demonstrating the taxpayer’s diligence in attempting to comply. However, taxpayers should not assume this relief is automatic; the IRS scrutinizes each request individually, and the burden of proof rests on the taxpayer to demonstrate reasonable cause and no prejudice to the government.

Tax practitioners must recognize the non-precedential nature of Private Letter Rulings (PLRs) under § 6110(k)(3), which explicitly states that PLRs "may not be used or cited as precedent." While this ruling provides valuable insight into the IRS’s current stance on late TRS elections, it does not bind the IRS in future cases. Each PLR is issued based on specific facts and representations, and the IRS reserves the right to apply different standards in other situations. Tax advisors should therefore treat this ruling as guidance rather than binding authority and consult with legal and tax professionals to assess the applicability of § 301.9100-3 to their clients’ circumstances.

The IRS’s emphasis on taxpayers acting reasonably and in good faith in this ruling serves as a reminder of the standards required to support a request for relief. The ruling states that the determination was based solely on the representations made by the taxpayer and subsidiary, supported by penalties of perjury statements, and subject to verification on examination. Taxpayers seeking similar relief must provide detailed documentation of the reasons for the delay, the steps taken to comply, and the absence of any tax avoidance motive. This includes maintaining records of internal communications, employee turnover documentation, and prior attempts to file the election.

Finally, taxpayers and tax practitioners should note that this ruling is limited to the specific facts and representations made by the taxpayer. The IRS explicitly declined to opine on whether the taxpayer qualifies as a REIT or whether the subsidiary qualifies as a TRS under part II of subchapter M of chapter 1 of the Code. The ruling only addresses the timeliness of the Form 8875 filing and does not provide broader guidance on TRS qualification or tax liability. As such, REITs and similar taxpayers should not rely on this ruling as a substitute for a thorough analysis of their own structures and compliance obligations. Consulting with tax advisors to assess the full scope of their obligations remains essential.