PLR 1118015: IRS disregards a REIT's proportionate partnership loan income in specified REIT tests

Plain-English summary

The IRS considered a public corporation that elected to be treated as a real estate investment trust and conducted most of its business through a partnership. The corporation planned to borrow through a debenture offering and lend the proceeds to the partnership. The IRS ruled that the portion of the loan, including related interest, proportionate to the corporation's capital interest in the partnership would be disregarded when applying the REIT asset tests and income tests. The ruling addressed only the specified treatment under section 856 and did not determine whether the corporation otherwise qualified as a REIT.

Ruling snapshot

• Question: Should the portion of a REIT's loan to its partnership, including related interest, proportionate to the REIT's capital interest be disregarded under the specified REIT asset and income tests?
• Outcome: Approved.
• Key authorities: IRC §§ 856(c)(2), 856(c)(3), and 856(c)(4); Treas. Reg. § 1.856-3(g); IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201118015
Release Date: 5/6/2011 Person To Contact:
------------------------, ID No. -------------
Telephone Number:
---------------------
Refer Reply To:

                                                            CC:FIP:B01

                                                            PLR-151881-10

------------- Date:
--------------------------------------- February 2, 2011

Legend:

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

OP = ----------------------------------------------------

State A = ------------

State B =--------------------

a = ----

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

   This is in reply to a letter dated December 8, 2010, requesting a ruling on behalf

of Taxpayer under section 856 of the Internal Revenue Code (the Code). The ruling
concerns the consequences of a loan made by Taxpayer to OP.

Facts:

    Taxpayer is a State A public corporation that has elected to be treated as a real

estate investment trust (REIT) for federal income tax purposes. Taxpayer owns
substantially all of its assets and conducts substantially all of its business through OP, a
State B limited partnership. Taxpayer owns approximately a percent of the equity
interests of OP.

PLR-151881-10 2

   Taxpayer plans to raise capital through a public offering of debentures. The

proceeds of the debenture offering will be loaned by Taxpayer to OP (the Loan) with
terms substantially similar to the debentures. The Loan will not be secured by an
interest in real property.

Law & Analysis:

   Section 856(c)(2) provides that a REIT must derive at least 95 percent of its

gross income from certain enumerated sources, including dividend, interest, and rents
from real property.

Section 856(c)(3) provides that a REIT must derive at least 75 percent of its gross

income from certain enumerated real estate sources, including rents from real property
and qualified temporary investment income.

   Section 856(c)(4)(A) requires that at the close of each quarter of a REIT’s taxable

year, at least 75 percent of the value of its total assets is represented by real estate
assets, cash and cash items (including receivables), and Government securities.

   Section 856(c)(4)(B) requires that at the close of each quarter of a REIT’s

taxable year, (i) not more than 25 percent of the value of its total assets is represented
by securities (other than those includible under section 856(c)(4)(A)), (ii) not more
than 25 percent of the value of its total assets is represented by securities of one or more
taxable REIT subsidiaries, (iii) except with respect to a taxable REIT subsidiary and
securities includible under section 856(c)(4)(A), (I) not more than 5 percent of the value
of a REIT’s total assets is represented by securities of any one issuer, (II) the trust does
not hold securities possessing more than 10 percent of the total voting power of the
outstanding securities of any one issuer, and (III) the trust does not hold securities
having a value of more than 10 percent of the total value of the outstanding securities of
any one issuer.

  Under § 1.856-3(g) of the Income Tax Regulations, a REIT that is a partner in a

partnership is deemed to own its proportionate share of each of the assets of the
partnership and to be entitled to the income of the partnership attributable to that share.
For purposes of section 856, the interest of a partner in the partnership's assets is
determined in accordance with the partner's 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 retain the same character in the hands of the partners for all
purposes of section 856.

Taxpayer is required to account for its proportionate share of OP’s income and

assets pursuant to § 1.856-3(g). Therefore, the assets or income with which OP would
repay the loan to Taxpayer will be accounted for by Taxpayer in accordance with
§ 1.856-3(g). If payments on the debt from OP to Taxpayer are treated as income by
Taxpayer, double counting of income will result. Accordingly, to the extent payments on
the loan from Taxpayer to OP are reflected in Taxpayer’s income and assets derived
from its capital interest in OP, those payments should not be treated by Taxpayer as
separate items of income or assets, but rather should be disregarded for purposes of
section 856(c).

PLR-151881-10 3

Conclusion:

The amount of the Loan, including interest income thereon, that is proportionate to

the capital interest of Taxpayer in OP will be disregarded in applying the asset tests of
section 856(c)(4) and the income tests of sections 856(c)(2) and (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 provision
of the Code. Specifically, we do not rule whether Taxpayer otherwise qualifies as a
REIT under part II of subchapter M of Chapter 1 of the Code. Additionally, the ruling
does not apply to the portion of the Loan reflecting the proportionate capital interest of
OP’s other partners.

  This ruling is directed only to the taxpayer requesting it. Taxpayer should attach

a copy of this ruling to each tax return to which it applies. Section 6110(k)(3) of the
Code provides that this ruling 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 representatives.

                                               Sincerely,



                                               Diana Imholtz
                                               Diana Imholtz
                                               Chief, Branch 1
                                               Office of Associate Chief Counsel
                                               (Financial Institutions & Products)