Outdoor advertising company received REIT income and asset rulings

Plain-English summary

A corporate group that built and leased outdoor advertising displays planned to elect REIT status and to treat specified displays as real property under section 1033(g)(3). The IRS ruled that rents for advertising space on qualifying displays counted as rents from real property and that the company's limited customary services did not create impermissible tenant-service income. It also ruled that specified portfolio-location, unexpired-contract, and goodwill intangibles tied inseparably to the displays were real estate assets. Specified subpart F, section 956, and PFIC inclusions qualified for the REIT's 95 percent income test because of their passive character or close connection to qualifying real estate income. The IRS did not rule that the company otherwise qualified as a REIT or was eligible for the section 1033(g)(3) election.

Ruling snapshot

• Question: Would the company's display rents, services, related intangibles, and specified foreign income qualify under the REIT rules?
• Outcome: Approved on all four requested issues, subject to the stated representations and section 1033 election.
• Key authorities: IRC §§ 856, 951, 956, 1033(g)(3), 1291, and 1293; Treas. Reg. §§ 1.512(b)-1 and 1.856-4

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201431018 [Third Party Communication:
Release Date: 8/1/2014 Date of Communication: Month DD, YYYY]
Index Number: 856.00-00
Person To Contact:
---------------- -----------------, ID No. ------------------
------------------------------- Telephone Number:
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---------------------- Refer Reply To:
--------------------------------------- CC:FIP:B01
PLR-149955-12
Date:
April 22, 2014

Legend:

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

Type A = --------------------

Type B = ------------------------

Type C = ---------------------

Type D = -------------

Type E = ----------------

Type F = -----

Type G = ---------------

Subsidiary = ---------------------------

Exchange = --------------

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

Date 1 = ---------------------------

Date 2 = -------------------

Date 3 = -------
a = --

b = ----

c = --

d = --

Country A = ------------

Country B = -----------------

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

   This letter is in reply to a letter dated November 16, 2012, and supplemental

correspondence, in which Taxpayer requests rulings in connection with its intent to elect
to be taxed as a real estate investment trust (“REIT”) under Section 856 of the Internal
Revenue Code for the taxable year ending Date 1.

     Taxpayer has requested the following rulings:

    (1) The income derived by Taxpayer from customers under its contracts for the

use of advertising space on Qualified Outdoor Advertising Displays (as defined below)
qualifies as “rents from real property” under Section 856(d) for purposes of Section
856(c).

   (2) Any income derived by Taxpayer from the Services (as defined below) is not

treated as impermissible tenant service income under Section 856(d) and the income
derived by Taxpayer from such services does not cause the amounts received under its
contracts to be excluded from treatment as “rents from real property” under Section
856(d).

  (3) Certain intangible assets of Taxpayer, recorded under generally accepted

accounting principles (“GAAP”), qualify as “real estate assets” and “interests in real
property” under Section 856(c).

  (4) Certain items of income that are required to be included in Taxpayer’s

income under Sections 951(a)(1), 1291(a), and 1293(a) constitute qualifying income
under Section 856(c)(2).

Facts:
Taxpayer is the common parent of a group of affiliated corporations that files a
consolidated return for U.S. federal income tax purposes. Taxpayer operates through
its wholly owned subsidiary, Subsidiary. On Date 2, Taxpayer was incorporated in State
A and became the parent of the current holding company structure. Taxpayer and its
predecessors have been publicly traded on Exchange since Date 3.

    Taxpayer builds and maintains various types of outdoor advertising displays and

makes available space on such displays to advertisers. In addition, Taxpayer, through
a taxable REIT Subsidiary (“TRS”), designs and produces advertising materials.
Taxpayer has represented that it intends to make the election under Section 1033(g)(3)
of the Code and the Treasury regulations thereunder for its taxable year ending Date 1
to treat the Type A, Type B, Type C, Type D, and Type E outdoor advertising displays
(each a “Display”) as real property for purposes of chapter 1 of the Code. Displays for
which Taxpayer has made a valid election under Section 1033(g)(3) are referred to as
“Qualified Outdoor Advertising Displays.”

   Taxpayer also rents advertising space on Type F and Type G outdoor advertising

displays. Taxpayer represents that it will either rent space on Type F and Type G
displays through a TRS or treat the revenues from Type F and Type G displays as non-
qualifying income for both the 75% and 95% REIT income tests.

   Contracts with Advertisers

   Taxpayer enters into rental contracts granting advertisers the right to place their

advertising copy on certain Outdoor Advertising Displays. Type B and Type C Displays
allow for multiple rental agreements for each Display to be in place at one time.

    The term of a rental contract for Type A, Type B, Type C, and Type E Displays

typically ranges from a months to b months. Rental contracts on Type D Displays range
from a years to c years. When Taxpayer has space on Type A, Type B, Type C, and
Type E Displays that is not otherwise leased to long-term advertisers, Taxpayer
occasionally enters into contracts for as short as d weeks to accommodate specialty
advertisers desiring short-term advertising. Taxpayer represents that the portion of its
revenue from Type A, Type B, and Type C Displays attributable to these short-term
contracts has been less than 2 percent of its total revenues from Type A, Type B, and
Type C Displays. Taxpayer also represents that the portion of its revenue from Type E
Displays attributable to these short-term contracts has been less than 1 percent of its
total revenues from Type E Displays.

   In connection with the rental of space on the Qualified Outdoor Advertising

Displays, Taxpayer will provide the following services (the “Services”): leasing activities,
the provision of lighting and electricity to Displays, and routine maintenance of the
Displays. Taxpayer represents that it will not provide any other services to advertisers
in connection with the rental of space on its Qualified Outdoor Advertising Displays.
Taxpayer represents that the installation, removal, and replacement of
advertising copy will either be performed by a TRS compensated at arm’s length or an
independent contractor from whom Taxpayer does not derive any income. Taxpayer
also represents that advertising design, artwork and production services with respect to
its Displays will either be performed by a TRS compensated at arm’s length or an
independent contractor from whom Taxpayer does not derive any income.

   Goodwill and Other Intangibles

   In addition to building and acquiring individual Displays, Taxpayer has acquired

many of the Displays it now owns through purchases of entities owning such structures
or through purchases of substantially all of the assets of such entities. Taxpayer
produces financial statements in accordance with generally accepted accounting
principles (“GAAP”).

    Pursuant to GAAP, upon acquiring any interest in a Display or entity that owns

Displays, Taxpayer establishes replacement cost (less depreciation) for the physical
structures being acquired and carries the structure on its financial statements at this
value. Other tangible assets are valued under a similar methodology. Ownership
interests in land and perpetual easements over land are generally valued based on the
projected profitability of that location. Any remaining purchase price paid for the
acquisition must be allocated for GAAP purposes to intangible assets. Taxpayer
allocates a portion of the purchase price to identifiable intangibles, including portfolio
location and unexpired contracts. Any remaining purchase price paid for a Display
(after amounts have been allocated to the physical structure and identifiable intangible
assets) are allocated to goodwill.

    A portfolio location intangible asset represents the collective value to any above

or below market leasehold interests held by Taxpayer, as well as the value of licenses,
permits, or easements associated with the Qualified Outdoor Advertising Displays. The
fair value of each portfolio location asset is estimated by calculating the present value of
the earnings attributable to the portfolio over the expected remaining lives of the
underlying rights and structures.

   The unexpired contracts intangible asset represents Taxpayer’s rights to

payment under existing contracts to lease space on the Displays, to the extent in
excess of the replacement costs and lost profits associated with entering into new
contracts if the existing contracts were to be terminated. The value of the unexpired
contracts intangible asset is based on the value of a lease that is already in place,
including the value of avoiding costs associated with finding new tenants, the costs
associated with holding an unleased property for a period of time, the costs of leasing
commissions and the value of any above or below market leases.
After allocating purchase prices to the Displays and to specifically identified
intangibles, the remainder is allocated to goodwill.

    Taxpayer will transfer any identified intangible or goodwill associated with

Taxpayer’s non-qualifying income or assets to a TRS; these intangibles and goodwill
are not the subject of this ruling. In the case of the remaining goodwill that is associated
with Taxpayer’s Qualified Outdoor Advertising Displays, Taxpayer has represented that
this remaining goodwill has no value apart from the Displays that were purchased by
Taxpayer. Taxpayer further represents that the portfolio location and unexpired contract
intangibles associated with Taxpayer’s Qualified Outdoor Advertising Displays are
inextricably and compulsorily tied to the Qualified Outdoor Advertising Displays.

   Foreign Operations

    Taxpayer operates in foreign countries through one or more foreign subsidiaries.

Taxpayer’s foreign subsidiaries may be partially or wholly owned by Taxpayer.
Taxpayer represents that it will jointly elect TRS status with foreign subsidiaries that are
treated as corporations for U.S. federal income tax purposes (each, a “Foreign TRS”)
and that the value of all of Taxpayer’s TRSs, both foreign and domestic, will together
satisfy the 25 percent limitation of Section 856(c)(4)(B)(ii). These Foreign TRSs are
either controlled foreign corporations under Section 957(a) (“CFCs”) with respect to
which Taxpayer is a United States shareholder under Section 951(b) (“United States
Shareholder”), or passive foreign investment companies under Section 1297(a)
(“PFICs”), with respect to some of which Taxpayer has made an election under Section
1295(a) to treat as qualified electing funds (“QEFs”).

    As a result of being a United States Shareholder with respect to CFCs, Taxpayer

is required by Section 951(a)(1)(A)(i) to include in its gross income its pro rata share of
the subpart F income, as defined in Section 952(a), of any such CFCs. Taxpayer may
also be required by Section 951(a)(1)(B) to include in its gross income inclusions that
arise in connection with the pledge of a CFC’s assets against debt of Taxpayer incurred
to finance the acquisition of real estate assets.

   As a result of being a shareholder in PFICs for which Taxpayer makes QEF

elections, Taxpayer is required under Section 1293(a) to include in its gross income its
pro rata share of the ordinary earnings and net capital gain income of each such QEF.
As a result of being a shareholder in PFICs for which Taxpayer has not made QEF
elections, Taxpayer is required to include amounts in its gross income (as ordinary
income) pursuant to Section 1291(a)(1)(B).

  Taxpayer is required to include in its gross income the Subpart F Inclusions (as

defined below), Section 956 Inclusions (as defined below), and PFIC Inclusions (as
defined below) for purposes of its gross income tests under Section 856(c)(2) and (3).
Taxpayer expects to report on its tax returns:

    Section 951(a)(1)(A) inclusion attributable to one or more CFC’s foreign
   personal holding company income, net of allocable expenses, which is passive
   rental income, interest, dividends and gain from the sale of property that gives
   rise to income such as dividends, interest and rental income (the “Subpart F
   Inclusions”).
   Section 956 ordinary income inclusions resulting from a pledge of assets to
   secure a debt of Taxpayer incurred primarily to finance the acquisition of, or to
   refinance, real estate assets from which is derived income that qualifies under
   Section 856(c)(2) (the “Section 956 Inclusions”).
   Section 1293(a)(1) ordinary income inclusions attributable to passive income
   from numerous PFICs for which QEF elections have been made (the “QEF
   Inclusions”) and Section1291(a) ordinary income inclusions attributable to
   passive income for PFICs for which QEF elections have not been made
   (together with QEF Inclusions, the “PFIC Inclusions”).

  Taxpayer represents that all Subpart F Inclusions, Section 956 Inclusions, and

PFIC Inclusions will have a close nexus to Taxpayer’s business of investing in real
property assets. Taxpayer also represents that all of the activities conducted by a
Foreign TRS will be of the type that also could have been conducted by a TRS
organized in the United States.

Law and Analysis:

  Section 856(c)(2) provides that at least 95 percent of a REIT's gross income

must be derived from, among other sources, rents from real property.

  Section 856(c)(3) provides that at least 75 percent of a REIT's gross income

must be derived from, among other sources, rents from real property.

    Section 856(d)(1) provides that rents from real property include (subject to

exclusions provided in Section 856(d)(2)): (A) rents from interests in real property; (B)
charges for services customarily furnished or rendered in connection with the rental of
real property, whether or not such charges are separately stated; and (C) rent
attributable to personal property leased under, or in connection with, a lease of real
property, but only if the rent attributable to the personal property for the taxable year
does not exceed 15 percent of the total rent for the tax year attributable to both the real
and personal property leased under, or in connection with, the lease.

  Section 856(d)(2)(C) excludes from the definition of “rents from real property” any

impermissible tenant service income as defined in Section 856(d)(7). Section
856(d)(7)(A) provides, in relevant part, that the term impermissible tenant service
income means, with respect to any real or personal property, any amount received or
accrued directly or indirectly by the REIT for managing or operating such property.
Section 856(d)(7)(B) provides that de minimis amounts of impermissible tenant service
income, i.e., amounts less than one percent of all amounts received or accrued by the
REIT with respect to a particular property during the taxable year, will not cause
otherwise qualifying amounts to not be treated as rents from real property.

   Section 1.856-4(a)(1) provides that the term “rents from real property” means,

generally, the gross amounts received for the use of, or the right to use, real property of
the real estate investment trust.

Issue 1: Rents from Real Property

   Provided that Taxpayer is eligible for, and properly elects under Section

1033(g)(3) to treat the Type A, Type B, Type C, Type D, and Type E Displays as real
property for purposes of chapter 1 of the Code, amounts received by Taxpayer under its
contracts with advertisers as compensation for the right to use space on such Qualified
Outdoor Advertising Displays to display advertising copy will constitute amounts
received for the use of real property and, therefore, rents from real property. Taxpayer
does enter into a limited number of short-term contracts; however, such short-term
contracts comprise a small percentage of Taxpayer’s overall revenue. Moreover,
Taxpayer’s short-term contracts are for the use of advertising space and are not
contracts for the provision of services. With respect to Taxpayer’s Type B and Type C
Displays, advertisers share the Displays with other advertisers and any particular
advertiser’s advertising copy is displayed for only certain intervals of time in a rotation
with other advertisers; however, these modifications do not change the character of the
income as rents from real property because the modifications have no bearing on the
passive nature of the income from renting space on Displays, and advertisers pay for
the right to use the Displays for specified intervals of time.

   Accordingly, provided that Taxpayer is eligible for, and properly elects under

Section 1033(g)(3) to treat the Type A, Type B, Type C, Type D, and Type E Displays
as real property for purposes of chapter 1 of the Code, we rule that the income derived
by Taxpayer from customers under its contracts for the use of advertising space on the
Qualified Outdoor Advertising Displays qualifies as “rents from real property” under
Section 856(d) for purposes of Section 856(c).

Issue 2: Services performed by Taxpayer

   Section 856(d)(7)(C) excludes from the definition of impermissible tenant service

income amounts received for services furnished or rendered, or management or
operation provided, through an independent contractor from whom the trust itself does
not derive or receive any income or through a TRS of such trust. Subparagraph (C)
also excludes any amount that would be excluded from unrelated business taxable
income (“UBTI”) under Section 512(b)(3) if received by an organization described in
Section 511(a)(2).

   Section 512(b)(3) provides, in relevant part, that rents from real property are

excluded from the computation of UBTI. Section 1.512(b)-1(c)(5) provides that
payments for the use or occupancy of rooms or other quarters in hotels, boarding
houses, or apartment houses furnishing hotel services, or in tourist camps or tourist
homes, motor courts or motels, or for the use or occupancy of space in parking lots,
warehouses, or storage garages, do not constitute rent from real property. Generally,
services are considered rendered to the occupant if they are primarily for his
convenience and are other than those usually or customarily rendered in connection
with the rental of rooms or other space for occupancy only. The supplying of maid
service, for example, constitutes such service; whereas the furnishing of heat and light,
the cleaning of public entrances, exits, stairways and lobbies, and the collection of trash
are not considered as services rendered to the occupant.

    Section 1.856-4(b)(1) provides that services provided to tenants of a particular

building will be considered customary if, in the geographic market in which the building
is located, tenants in buildings which are of a similar class are customarily provided with
the service. Such services include the furnishing of water, heat, light, air conditioning
and telephone answering services.

     Section 1.856-4(b)(5)(ii) provides that trustees or directors of the REIT are not

required to delegate or contract out their fiduciary duty to manage the trust itself, as
distinguished from rendering or furnishing services to the tenants of its property of
managing or operating the property. Thus, the trustees or directors may do all those
things necessary, in their fiduciary capacities, to manage and conduct the affairs of the
trust itself including establishing rental terms, choosing tenants, entering into and
renewing leases, and dealing with taxes, interest, and insurance relating to the REIT's
property. The trustees or directors may also make capital expenditures with respect to
the REIT's property and may make decisions as to repairs of the property the cost of
which may be borne by the REIT. See also, Rev. Rul. 67-353, 1967-2 C.B. 252.

    Some of the amounts Taxpayer receives under contracts with advertisers may be

attributable to the Services. Taxpayer has represented that it does not intend to provide
any other services to advertisers. Further, Taxpayer represents that any other services
will be provided either by an independent contractor from whom Taxpayer does not
derive any income or by a TRS.

   Accordingly, we rule that any income derived from the Services performed by

Taxpayer with regard to its Qualified Outdoor Advertising Displays is not treated as
impermissible tenant service income under Section 856(d)(7), and the income derived
by Taxpayer from the Services does not cause the amounts received under its contracts
to be other than “rents from real property” under Section 856(d).
Issue 3: Goodwill and other Intangibles

    Section 1.856-2(d)(3) provides that in determining the investment status of a

REIT, the term “total assets” means the gross assets of the REIT determined in
accordance with GAAP. Because Taxpayer derived certain intangible assets in
accordance with GAAP that are attributable to its acquisitions of Qualified Outdoor
Advertising Displays, these intangibles must be analyzed to determine whether they
qualify as “real property” for purposes of section 856. In order to qualify as real property
for this purpose, Taxpayer’s GAAP intangibles must be inseparable from and
inextricably and compulsorily tied to Taxpayer’s real property assets. Assuming that
Taxpayer is eligible for, and properly elects to, treat its Displays as real property under
section 1033(g)(3), the Displays will be treated as real property for all purposes of
Chapter 1 of the Code.

   Taxpayer’s intangible assets include portfolio location, unexpired contracts, and

goodwill. A portfolio location intangible asset is inextricably tied and connected to
Taxpayer’s Displays because it represents the right, authorized through leases and
permits, to maintain Qualified Outdoor Advertising Displays at applicable locations. The
unexpired contracts intangible asset is inextricably tied and connected to Taxpayer’s
Qualified Outdoor Advertising Displays because it represents Taxpayer’s rights to
payment under existing lease contracts with respect to such structures. Taxpayer
represents that its GAAP goodwill represents the anticipated future lease income from
the Qualified Outdoor Advertising Displays. Taxpayer represents that its portfolio
location, unexpired contracts, and goodwill intangibles have no value apart from the
Qualified Outdoor Advertising Displays that were purchased by Taxpayer.

    In the present case, provided that Taxpayer is eligible for, and properly elects to,

treat its Displays as real property under section 1033(g)(3), and based on the
Taxpayer’s representation that portfolio location, unexpired contracts, and GAAP
goodwill are inextricably and compulsorily tied to Taxpayer’s Qualified Outdoor
Advertising Displays, we rule that Taxpayer’s intangibles of portfolio location, unexpired
contracts, and GAAP goodwill (as limited to the excess of the fair market value of the
Qualified Outdoor Advertising Displays acquired over their GAAP replacement cost
(less depreciation) as of the time of the acquisition) each qualify as real property, which
is a “real estate asset” for purposes of section 856(c)(5)(B).

Issue 4: Subpart F, Section 956, and PFIC Inclusions

   Section 856(c)(2) of the Code requires that at least 95 percent of a REIT's gross

income (excluding gross income from prohibited transactions) be derived from
dividends, interest, rents from real property, gain from the sale or other disposition of
stock, securities, and real property (including interests in real property and interests in
mortgages on real property) which is not property described in Section 1221(a)(1), and
certain other sources.

   Section 856(c)(5)(J)(ii) provides, in relevant part, that to the extent necessary to

carry out the purposes of Part II of Subchapter M of the Code, the Secretary is
authorized to determine, solely for purposes of such part, whether any item of income or
gain which otherwise constitutes gross income not qualifying under Section 856(c)(2) or
(3) may be considered as gross income which qualifies under Section 856(c)(2) or (3).

   The legislative history underlying the tax treatment of REITs indicates that the

central concern behind the gross income restrictions is that a REIT's gross income
should largely be composed of passive income. For example, H.R. Rep. No. 2020, 86th
Cong., 2d Sess. 4 (1960) at 6, 1960-2 C.B. 819, at 822-823 states, “[o]ne of the
principal purposes of your committee in imposing restrictions on types of income of a
qualifying real estate investment trust is to be sure the bulk of its income is from passive
income sources and not from the active conduct of a trade or business.”

Subpart F Inclusions

   Section 957 of the Code defines a CFC as a foreign corporation in which more

than 50 percent of the total combined voting power of all classes of stock entitled to
vote, or the total value of the stock is owned by United States shareholders on any day
during the corporation's taxable year. A United States shareholder is defined in Section
951(b) as a United States person who owns 10 percent or more of the total voting
power of the foreign corporation. Taxpayer represents that it will be a United States
shareholder within the meaning of Section 951(b) with respect to certain subsidiaries
that are CFCs.

   Section 951(a)(1)(A)(i) generally provides that, if a foreign corporation is a CFC

for an uninterrupted period of 30 days or more during a taxable year, every person who
is a United States shareholder of the corporation and who owns stock in the corporation
on the last day of the taxable year in which the corporation is a CFC shall include in
income the shareholder's pro rata share of the CFC's subpart F income for the taxable
year.

   Section 952 defines subpart F income to include foreign base company income,

as determined under Section 954. Under Section 954(a)(1), foreign base company
income includes foreign personal holding company income (“FPHCI”), as determined
under Section 954(c). Section 954(c)(1)(A) defines FPHCI income to include (among
other things) dividends, interest, royalties, rents, and annuities. Section 954(c)(1)(B)
also includes gain from the sale or exchange of property which (among other things)
gives rise to income described in Section 954(c)(1)(A) (after application of paragraph
(2)(A)) other than property which gives rise to income not treated as FPHCI by reason
of Section 954(h) or (i) for the taxable year.
Taxpayer has represented that it is a United States shareholder within the
meaning of Section 951(b) with respect to certain of its subsidiaries that are CFCs. As
Taxpayer's CFCs earn subpart F income attributable to foreign base company income
that is FPHCI and such income is generally passive income, treatment of the Section
951(a)(1)(A)(i) inclusion attributable to such passive income as qualifying income for
purposes of Section 856(c)(2) does not interfere with or impede the policy objectives of
Congress in enacting the income test under Section 856(c)(2). Accordingly, we rule that
Subpart F Inclusions attributable to the FPHCI earned by Taxpayer's CFCs are
qualifying income for purposes of Section 856(c)(2), as provided in Section
856(c)(5)(J)(ii).

Section 956 Inclusions

   Section 951(a)(1)(B) provides that, if a foreign corporation is a CFC for an

uninterrupted period of 30 days or more during a taxable year, every person who is a
United States shareholder of the corporation and who owns stock in the corporation on
the last day of the taxable year in which the corporation is a CFC shall include in gross
income the amount determined under Section 956 with respect to the shareholder for
such year (but only to the extent not excluded from gross income under Section
959(a)(2)).

   Section 956(a) provides that in the case of a CFC, the amount determined under

Section 956 with respect to any United States shareholder for any taxable year is the
lesser of — (1) the excess (if any) of— (A) such shareholder's pro rata share of the
average of the amounts of United States property held (directly or indirectly) by the CFC
as of the close of each quarter of such taxable year, over (B) the amount of earnings
and profits described in Section 959(c)(1)(A) with respect to such shareholder, or (2)
such shareholder's pro rata share of the applicable earnings of such CFC. The amount
taken into account under subparagraph (1) with respect to any property shall be its
adjusted basis as determined for purposes of computing earnings and profits, reduced
by any liability to which the property is subject.

  Section 1.956-2(c)(1) provides that except as provided in Section 1.956-2(c)(4),

any obligation (as defined in Section 1.956-2(d)(2)) of a United States person (as
defined in Section 957) with respect to which a CFC is a pledgor or guarantor shall be
considered for purposes of Section 956(a) to be United States property held by such
CFC. Section 1.956-2(c)(2) provides that if the assets of a CFC serve at any time, even
though indirectly, as security for the performance of an obligation of a United States
person, then, the CFC will be considered a pledgor or guarantor of that obligation.

   Taxpayer has represented that assets of one of its CFCs may be pledged as

collateral for certain debt of Taxpayer that was incurred to finance Taxpayer's
acquisition of real estate assets. This pledge may cause Taxpayer to recognize a
Section 956 Inclusion. Taxpayer represents that any Section 956 Inclusions will occur
as a result of a debt of Taxpayer's that arose in connection with the acquisition of real
estate assets that have a close nexus to Taxpayer's business of investing in real
property assets. The Section 956 Inclusion recognized in connection with the
production of otherwise qualifying income is treated as qualified income for purposes of
Section 856(c)(2) to the extent that the underlying income so qualifies. Accordingly, we
rule that to the extent Taxpayer recognizes a Section 956 Inclusion on the pledge of the
assets of a CFC to secure a debt of the Taxpayer that is used to finance the acquisition
of real estate assets from which income is derived that qualifies under Section
856(c)(2), there is a sufficient nexus to treat the Section 956 Inclusion as qualifying
income for purposes of Section 856(c)(2), as provided in Section 856(c)(5)(J)(ii).

PFIC Inclusions

   Section 1297(a) of the Code defines a PFIC as a foreign corporation where either

(1) 75 percent or more of the gross income of such corporation for the taxable year is
passive income, or (2) the average percentage of assets (as determined in accordance
with Section 1297(e)) held by such corporation during the taxable year which produce
passive income or which are held for the production of passive income is at least 50
percent. Section 1297(b) defines the term “passive income” as income of a kind that
would be FPHCI under Section 954(c), subject to certain exceptions.

    Section 1291(a)(1) provides that if a United States person receives an excess

distribution (as defined in Section 1291(b)) in respect of stock in a PFIC, then — (A) the
amount of the excess distribution shall be allocated ratably to each day in the
shareholder's holding period for the stock, (B) with respect to such excess distribution,
the shareholder's gross income for the current year shall include (as ordinary income)
only the amounts allocated under Section 1291(a)(1)(A) to — (i) the current year, or (ii)
any period in the shareholder's holding period before the 1st day of the 1st taxable year
of the company which begins after December 31, 1986, and for which it was a PFIC,
and (C) the tax imposed by this chapter for the current year shall be increased by the
deferred tax amount (determined under Section 1291(c)).

   Section 1295(a) provides that a PFIC will be treated as a QEF with respect to a

shareholder if (1) an election by the shareholder under Section 1295(b) applies to such
PFIC for the taxable year; and (2) the PFIC complies with such requirements as the
Secretary may prescribe for purposes of determining the ordinary earnings and net
capital gains of such company. Section 1293(a) provides that every United States
person who owns (or is treated under Section 1298(a) as owning) stock of a QEF at any
time during the taxable year of such fund shall include in gross income— (A) as ordinary
income, such shareholder's pro rata share of the ordinary earnings of such fund for such
year, and (B) as long-term capital gain, such shareholder's pro rata share of the net
capital gain of such fund for such year.
Taxpayer has represented that it may be a shareholder of certain subsidiaries
that are PFICs and that it will make QEF elections with respect to certain of these
PFICs. As Taxpayer's PFIC's earn income that is FPHCI and such income is generally
passive income, treatment of such PFIC Inclusions as qualifying income for purposes of
Section 856(c)(2) does not interfere with or impede the policy objectives of Congress in
enacting the income test under Section 856(c)(2). Accordingly, we rule Taxpayer's
PFIC Inclusions are qualifying income for purposes of Section 856(c)(2), as provided in
Section 856(c)(5)(J)(ii).

   Accordingly, we rule that, pursuant to Section 856(c)(5)(J)(ii) of the Code,

Taxpayer's Subpart F Inclusions, Section 956 Inclusions, and PFIC Inclusions constitute
qualifying income under Section 856(c)(2).

Conclusions:

   As discussed above, and provided that Taxpayer is eligible for, and properly

elects to, treat its Qualified Outdoor Advertising Displays as real property under Section
1033(g)(3), we hereby rule as follows:

    1. The income derived by Taxpayer from customers under its contracts for the

use of advertising space on the Qualified Outdoor Advertising Displays qualifies as
“rents from real property” under Section 856(d) for purposes of Section 856(c).

   2. Any income derived from the Services attributable to Qualified Outdoor

Advertising Displays is not treated as impermissible tenant service income under
Section 856(d) and the income derived by Taxpayer from the Services does not cause
the amounts received under its contracts to be excluded from treatment as “rents from
real property” under Section 856(d).

   3. Based on Taxpayer’s representation that its portfolio location, unexpired

contracts, and GAAP goodwill intangibles are inextricably and compulsorily tied to
Taxpayer’s Qualified Outdoor Advertising Displays and have no value separate and
apart from such Displays, we rule that Taxpayer’s portfolio location, unexpired
contracts, and GAAP goodwill intangibles (as limited to the excess of the fair market
value of the Qualified Outdoor Advertising Displays acquired over their GAAP
replacement cost (less depreciation) as of the time of the acquisition), each qualify as
real property, which is a “real estate asset” for purposes of Section 856(c)(5)(B).

   4. Taxpayer's Subpart F Inclusions, Section 956 Inclusions, and PFIC Inclusions

constitute qualifying income under Section 856(c)(2).

  This ruling's application is limited to the facts, representations, Code sections,

and regulations cited herein. Except as expressly provided herein, no opinion is
expressed or implied concerning the tax consequences of any aspect of any transaction
or item discussed or referenced in this letter. In particular, no opinion is expressed with
regard to whether Taxpayer otherwise qualifies as a REIT under subchapter M of the
Code, and no opinion is expressed with regard to whether Taxpayer is eligible to make
an election under Section 1033(g)(3) with respect to any of the Outdoor Advertising
Displays.

   Further, no opinion is expressed regarding whether the value that Taxpayer

allocated to GAAP identifiable intangibles was properly determined or whether
Taxpayer’s GAAP goodwill reflects solely, and is limited to, the excess of the fair market
value of the Qualified Outdoor Advertising Displays acquired over their GAAP
replacement cost (less depreciation) as of the time of their acquisition, or rather whether
some of the value that Taxpayer has ascribed to its GAAP identifiable intangibles or
GAAP goodwill is properly attributable to workforce in place, customer lists, trademarks,
or other intangibles that would not, in the opinion of the Service, qualify as real property
for purposes of section 856.

  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.

     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,



                                   Andrea M. Hoffenson
                                   Assistant to the Branch Chief, Branch 1
                                   (Financial Institutions & Products)