PLR 1027022: Parking facility receipts were not passive investment income

Plain-English summary

The IRS ruled that an S corporation's receipts from operating, managing, and leasing commercial parking facilities were not passive investment income for purposes of section 1362(d)(3). The corporation and its management company provided extensive services, including inspection, maintenance, billing, security, and other operating functions. Because the rents were derived from an active trade or business with significant services and substantial costs, they were excluded from the definition of passive investment income. The ruling separately noted that the section 1362 passive-investment-income analysis does not determine whether the activity remains passive under section 469.

Ruling snapshot

• Question: Were the S corporation's parking facility receipts passive investment income?
• Outcome: approved
• Key authorities: IRC §§ 1361 and 1362; Treas. Reg. § 1.1362-2(c)(5)(ii)(B)(2)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201027022 Third Party Communication: None
Release Date: 7/9/2010 Date of Communication: Not Applicable
Index Number: 1362.02-03
Person To Contact:
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---------------------------------------- Telephone Number:
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------------- Refer Reply To:
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PLR-144583-09
Date:
March 09, 2010

Legend

X = -------------------------------------------------------------------
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State = --------

Properties = -------------------------------------------------------------------
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D1 = -------------------------------------------------------------------
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Year = -------------------------------------------------------------------
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a = -------------------------------------------------------------------
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x = -------------------------------------------------------------------
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y = ---------------
PLR-144583-09 2

Dear ---------------:

This responds to a letter dated September 30, 2009, and subsequent correspondence,
submitted on behalf of X by X's authorized representative, requesting a ruling that
receipts from its parking facility business are not passive investment income within the
meaning of § 1362(d)(3)(C)(i) of the Internal Revenue Code.

FACTS

The information submitted states that X is incorporated in State. X elected to be treated
as an S corporation effective D1. X has accumulated earnings and profits.

X owns, operates, manages, and leases commercial real estate consisting of parking
facilities (the Properties) among its other real estate businesses. X represents that it
owns some of the Properties through qualified subchapter S subsidiaries and the others
through partnerships with a third party. X manages the partnerships and the Properties
they hold for a management fee paid by the partnerships.

X has a employees who spend time performing work related to the Properties. X has
also made strategic use of a third-party national parking management company to
provide labor and field management at X’s direction. Through its staff, as well as
through the management company, X provides various services to the Properties in its
parking facility business. These services include accounting and bookkeeping; internal
auditing; billing and collections; daily property inspection; common area maintenance;
janitorial services; landscaping; maintenance and repair of building structural
components and systems (plumbing, electrical, and mechanical); elevator maintenance
and repair; provision of utilities; pest control; and provision of security services through
a third-party. In addition, X handles the usual leasing and administrative functions
involved in leasing portions of its parking facilities for use by other businesses.

For Year, X received $x in receipts and X paid or incurred $y expenses (other than
depreciation) with respect to the Properties.

LAW AND ANALYSIS

Section 1361(a)(1) defines an “S corporation” as a small business corporation for which
an election under § 1362(a) is in effect for the taxable year.

Section 1362(d)(2)(A) provides than an election under § 1362(a) shall be terminated
whenever (at any time after the first day of the first taxable year for which the
corporation is an S corporation) such corporation ceases to be a small business
corporation.

Section 1362(d)(3)(A) provides that an election under § 1362(a) shall be terminated
PLR-144583-09 3

whenever the corporation has accumulated earnings and profits at the close of each of
3 consecutive taxable years, and has gross receipts for each of such taxable years
more than 25 percent of which are passive investment income. Any termination under
this paragraph shall be effective on and after the first day of the first taxable year
beginning after the third consecutive taxable year referred to above.

Section 1362(d)(3)(C)(i) provides that except as otherwise provided, the term “passive
investment income” means gross receipts derived from royalties, rents, dividends,
interest, annuities, and sales or exchanges of stock or securities.

Section 1.1362-2(c)(5)(ii)(B)(2) of the Income Tax Regulations provides that “rents”
does not include rents derived in the active trade or business of renting property. Rents
received by a corporation are derived in an active trade or business of renting property
only if, based on all the facts and circumstances, the corporation provides significant
services or incurs substantial costs in the rental business. Generally, significant services
are not rendered and substantial costs are not incurred in connection with net leases.
Whether significant services are performed or substantial costs are incurred in the rental
business is determined based upon all the facts and circumstances including, but not
limited to, the number of persons employed to provide the services and the types and
amounts of costs and expenses incurred (other than depreciation).

CONCLUSION

Based solely on the facts and the representations submitted we conclude that the
receipts that X derives from the Properties are not passive investment income as
described in § 1362(d)(3)(C)(i).

Except as specifically set forth above, we express no opinion as to the federal tax
consequences of the transaction described above under any other provision of the
Code. Specifically, we express no opinion on whether X is a small business corporation
eligible to make an S election. Further, the passive investment income rules of § 1362
are completely independent of the passive activity rules of section § 469; unless an
exception under § 469 applies, the rental activity remains passive for purposes of § 469.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
PLR-144583-09 4

Pursuant to the power of attorney on file with this office, a copy of this letter is being
sent to X’s authorized representative.

                                    Sincerely,



                                    Bradford R. Poston
                                    Senior Counsel, Branch 2
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes