REIT uses its proportionate partnership income in its gross-income tests

Plain-English summary

The IRS ruled for a real estate investment trust that planned to invest in commercial real estate through partnerships and wholly owned subsidiaries. For purposes of the REIT gross-income tests, the trust must include its proportionate share of each property partnership's gross income, measured by its capital interest. The character of that partnership income remains the same in the trust's hands. The ruling addresses the section 856(c)(2) and (3) income tests but expresses no opinion on other listed federal tax issues, including section 704(b) allocations, REIT taxable income, or whether the taxpayer otherwise qualifies as a REIT.

Ruling snapshot

• Question: How should a REIT treat its proportionate share of property partnership income for the section 856 gross-income tests?
• Outcome: Approved
• Key authorities: IRC § 856(c)(2), (3); Treas. Reg. § 1.856-3(g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201115017 Third Party Communication: None
Release Date: 4/15/2011 Date of Communication: Not Applicable
Index Number: 856.01-00
Person To Contact:
---------------------- ---------------------, ID No. -------------
----------------------------- Telephone Number:
---------------------------------- ---------------------
------------------------------------ Refer Reply To:
---------------------------------------------- CC:FIP:B03
PLR-149311-09
Date:
October 26, 2010

Legend

Taxpayer = ----------------------------------

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

   This responds to a letter and subsequent correspondence on behalf of Taxpayer

requesting a ruling regarding the treatment of Taxpayer’s investments in certain
partnerships (the “Property Partnerships”) for purposes of the gross income tests in
sections 856(c)(2) and 856(c)(3) of the Internal Revenue Code.

                                                  Facts

    Taxpayer is a domestic corporation that has elected to be treated as a real estate

investment trust (REIT) under part II of subchapter M of the Code. Taxpayer owns a
portfolio of commercial properties on its own behalf as well as through joint ventures
with unrelated third parties, each of which are formed as either limited partnerships or
limited liability companies for state law purposes and taxable as partnerships for federal
income tax purposes (each, a Property Partnership). Taxpayer intends to form and
invest, directly or through one or more wholly-owned subsidiary entities (Subsidiary
Entities), in one or more Property Partnerships that will acquire and hold commercial
real estate properties. Taxpayer will contribute capital to, and will be the general partner
or managing member of, each Property Partnership.

     In general, each of the partners of the Property Partnerships will share in the

income and distributions of such partnership proportionately, -----------------------------------

---------------------------------------------------------------------------------------------------------------------

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PLR-149311-09 2

----------------------------------------------------------------------------------------------.

                                         Law and Analysis

   To qualify as a REIT for any taxable year under part II of subchapter M, an entity

must derive at least 95% of its gross income from sources listed in section 856(c)(2)
and at least 75% of its gross income from sources listed in section 856(c)(3).

    Section 1.856-3(g) of the Income Tax Regulations provides that in the case of a

real estate investment trust which is a partner in a partnership, as defined in
section 7701(a)(2) and the regulations thereunder, the trust will be deemed to own its
proportionate share of each of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. For purposes of
section 856, the interest of a partner in the partnership's assets shall be determined in
accordance with his capital interest in the partnership. The character of the various
assets in the hands of the partnership and items of gross income of the partnership
shall retain the same character in the hands of the partners for all purposes of
section 856. Thus, for example, if the trust owns a 30-percent capital interest in a
partnership which owns a piece of rental property the trust will be treated as owning 30
percent of such property and as being entitled to 30 percent of the rent derived from the
property by the partnership. Similarly, if the partnership holds any property primarily for
sale to customers in the ordinary course of its trade or business, the trust will be treated
as holding its proportionate share of such property primarily for such purpose. Also, for
example, where a partnership sells real property or a trust sells its interest in a
partnership which owns real property, any gross income realized from such sale, to the
extent that it is attributable to the real property, shall be deemed gross income from the
sale or disposition of real property held for either the period that the partnership has
held the real property or the period that the trust was a member of the partnership,
whichever is the shorter.

                                               HOLDING

   Consistent with section 1.856-3(g), we conclude that Taxpayer must include in its

gross income for purposes of sections 856(c)(2) and 856(c)(3) the proportionate amount
of gross income of each Property Partnership which is determined in accordance with
Taxpayer’s capital interest ------------------------------------------------------------------in each
Property Partnership, and that the character of such income in the hands of each
Property Partnership will retain the same character in the hands of Taxpayer for all
purposes of section 856.
PLR-149311-09 3

    Except as specifically ruled upon above, no opinion is expressed concerning any

federal income tax consequences relating to the facts herein under any other provisions
of the Code, including any issues regarding the validity of the allocations of the Property
Partnership income to Taxpayer for purposes of section 704(b) of the Code or under
any other partnership provision, or the determination of REIT taxable income under
section 857 of the Code, or whether Taxpayer otherwise qualifies as a REIT under part
II of subchapter M.

   This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent. In accordance with the Power of
Attorney on file with this office, a copy of this letter is being sent to your authorized
representative.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

                               Sincerely,


                               David B. Silber
                               David B. Silber
                               Chief, Branch 2
                               Associate Chief Counsel
                               (Financial Institutions & Products)

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