IRS issues favorable PLRs on REIT issues

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April 2020

Overview

The IRS recently issued two private letter rulings (PLRs), PLRs 202012003 and 202012012, addressing REIT issues.

In PLR 202012003, the IRS ruled that income from leasing warehouse space, including services represented as customary such as temperature control and handling, as well as lease of space to a taxable REIT subsidiary (TRS) (if more than 90% of space is leased to unrelated parties) was treated as rents from real property. The IRS also ruled that certain reimbursements among the REIT, operating partnership, and the TRS were excluded from gross income for REIT income test purposes. Finally, the IRS ruled that the contribution by partners of their interest in a partnership in exchange for stock in a REIT was not a transfer to an investment company under Section 351(e).

In PLR 202012012, the IRS ruled that the landlord’s right, title, and interest in ground leases were intangible assets that were qualifying assets for purposes of the REIT asset tests. The IRS also ruled that to the extent the REIT received a percentage rent of gross income reduced by fees reimbursed to the tenant by such tenant’s customers, this is not rent based on the net income or profit of any person.

The takeaway

In the first PLR, the IRS ruled that (i) income derived from the lease of storage space (including freezing) and handling provided by a TRS or independent contractor qualifies as rents from real property; (ii) space leased to the TRS in the warehouses qualifies as rents from real property if 90% of the space is leased to third-party tenants and the TRS pays arm’s-length rent comparable to what an unrelated party would pay for a similar space;  (iii) reimbursements between members of the REIT Group did not constitute gross income of the recipient member; and (iv) the contribution by certain members of the OP of their interests in the OP in exchange for stock in the REIT will not be a transfer to an investment company within the meaning of Section 351(e).

In the second PLR, the IRS provided additional guidance regarding when an intangible asset may be treated as a qualifying asset for purposes of the REIT asset tests and when a deduction from gross proceeds as part of a rent calculation will not cause the income to be non-qualifying income for purposes of the REIT income tests.

Although a PLR may not be used as precedent, these rulings indicate that the IRS may be willing to rule favorably in cases involving similar property types with similar income and assets or adjustments to gross receipt percentage rent.

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Julanne Allen

Partner, M&A Tax, PwC US

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