LED sign systems qualify as outdoor advertising displays

Plain-English summary

A real estate investment trust planned to install permanent LED advertising signs on its buildings and lease them to unrelated operators. The IRS ruled that the sign structures were outdoor advertising displays eligible for an election under § 1033(g)(3) to be treated as real property. It also ruled that dedicated computers, processors, cables, and permanent housing structures were integral parts of the displays, so the same election would cover them. The ruling did not address whether lease income qualified as rent from real property or whether the taxpayer otherwise qualified as a REIT.

Ruling snapshot

• Question: Could the permanent LED signs and their dedicated support assets be treated as outdoor advertising displays and elected into real-property treatment?
• Outcome: Approved
• Key authorities: IRC § 1033(g)(3); Treas. Reg. § 1.1033(g)-1(b)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201450004 Third Party Communication: None
Release Date: 12/12/2014 Date of Communication: Not Applicable
Index Number: 1033.07-00
Person To Contact:
---------------------------- ------------------, ID No. ------------
----------------------- Telephone Number:
-------------------------------------- ---------------------
Refer Reply To:
Attention: ---------------- CC:ITA:B05
---------------------------------- PLR-108989-14
Date:
September 2, 2014

Taxpayer Identification Number ----------------

Legend

Taxpayer = ----------------------------
Operating Partnership = --------------------------
Country A = --------------------------------------
m = ----------------------
n = ----------------------
x = -------
y = ---------
z = -------------

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

In a letter dated February 28, 2014, the taxpayer named above, through its authorized
representatives, requested a private letter ruling under Rev. Proc. 2014-1, 2014-1 I.R.B.

1. On April 11, 2014, and on June 26, 2014, you submitted additional information.

Taxpayer requested rulings that certain of its assets are, or are parts of, outdoor
advertising displays and are eligible for an election under section 1033(g)(3) of the
Internal Revenue Code1 to be treated as real property for purposes of chapter 1 of the
Code.

1
Unless noted otherwise, all section references are to the Internal Revenue Code in effect on the date of
this letter ruling.
PLR-108989-14 2

                                      FACTS

Taxpayer is a publicly held company that has elected under section 856(c) to be treated
as a real estate investment trust for purposes of Federal income taxation. Through
Operating Partnership and various limited liability companies, partnerships or real estate
investment trusts, Taxpayer owns and operates real properties throughout Country A.

Sign Structure

Taxpayer plans to construct and affix electric sign structures to several of its existing
outdoor steel sign structures that are permanently affixed to some of the real properties
it owns (combined units of electric sign structure and steel sign structure referred to as
“Sign Structures”). Each Sign Structure operates using light emitting diode (LED)
technology.

A typical Sign Structure is m wide and n high. Depending on the property to which it is
affixed, the Sign Structure may be on the roof of the building or on an exterior wall of the
building.

In the case of a Sign Structure on the roof of a building, the steel sign structure is
braced back to multiple columns installed in the building structure. A horizontal steel
frame of wide flange beams connects the column extensions and supports the sign. In
the case of a Sign Structure mounted on the wall of a building, first, the building’s
structural columns and spandrel beams are exposed. Next, the exterior of the building
is removed locally to expose the structural columns, and new extensions of structural
steel are attached to the existing structure to extend sign connections beyond the
exterior face of the building. The exterior of the building is then reconstructed around
the new connection.

Whether the Sign Structure is constructed on the roof or on the wall, a series of large
sign cabinets that each are approximately x high by y wide by z deep and made of
aluminum and steel are bolted together, hoisted with a crane, and bolted to the
underlying steel sign structure. Each sign cabinet houses and supports a series of
rectangular LED panels that are bolted to the sign cabinet. Each LED panel is
composed of a series of rectangular LED modules that are bolted to the LED panel.
The LED panels contain power supplies, cables, voltage regulators, electrical wiring,
and fans that provide ventilation to prevent the LED modules from overheating.

Taxpayer represents that the Sign Structures will be inherently permanent structures.
They will be designed and constructed to remain in place permanently and will be
difficult to remove once constructed. Taxpayer further represents that it has no intention
of removing the Sign Structures once constructed.
PLR-108989-14 3

Taxpayer will lease each Sign Structure to an unrelated third party under a lease for a
fair market value rent. Each lessee will program and display advertising contents on the
Sign Structure. As a lessor, Taxpayer will not perform any services in connection with
the lease agreement, other than preventative and corrective maintenance and repair
services necessary to ensure the safety and security of the Sign Structures, the
associated buildings, its tenants and visitors, and the public, and other usual and
customary services.

Ancillary Housing Structure and Ancillary Sign Assets

In addition to the Sign Structure, Taxpayer will lease to the lessee a separate housing
structure (the “Ancillary Housing Structure”) and certain equipment, including
processors, computers, fiber optic cables and power cables dedicated for use with each
Sign Structure (the “Ancillary Sign Assets”).

Each Ancillary Housing Structure is dedicated to a particular Sign Structure, and is a
permanent structure built adjacent to the particular Sign Structure. It is built on top of
steel dunnage that is bolted and welded to the structural system of the building on which
the Sign Structure is located. The walls of the Ancillary Housing Structures are made of
steel stud framing, and clad on the exterior with metal panels and on the interior with dry
walls. An Ancillary Housing Structure has a roof. It is equipped with lighting and
electricity, and is air-conditioned.

The Ancillary Sign Assets consist of equipment dedicated for use with each Sign
Structure that is contained within the Ancillary Housing Structure and cables that
connect such equipment in the Ancillary Housing Structure to the Sign Structure. The
lessee of the Sign Structure, or its agent, will initiate programming of the Sign Structure
from a remote location, which is then transmitted to the server and computers in the
associated Ancillary Housing Structure. The advertising content is in turn transmitted
via fiber optic cables that connect the server and computers to the base of the Sign
Structure. Taxpayer represents that none of the programming equipment or other
assets at the remote location is owned or operated by Taxpayer. Accordingly, this
remote equipment is not part of the Ancillary Sign Assets and is not the subject of this
ruling.

Taxpayer represents that the Ancillary Housing Structure and Ancillary Sign Assets are
integral parts of the Sign Structure and, therefore, constitute parts of the “outdoor
advertising displays” within the meaning of section 1033(g)(3)(C).

Taxpayer represents that it has not made and will not make any section 179(a) election
for any Sign Structure, Ancillary Housing Structure or Ancillary Sign Assets. Taxpayer
further represents that it will make a section 1033(g)(3) election to treat all its Sign
PLR-108989-14 4

Structures, Ancillary Housing Structures and Ancillary Sign Assets as real property for
all purposes of chapter 1 of the Code, including for purposes of cost recovery.

                             REQUESTED RULINGS

Taxpayer has requested the following rulings:

1. Each Sign Structure constitutes an “outdoor advertising display” that is eligible for
   an election under section 1033(g)(3) to be treated as real property for purposes
   of chapter 1 of the Code.

2. Because the Ancillary Sign Assets and Ancillary Housing Structures are integral
   parts of these “outdoor advertising displays,” any election under section
   1033(g)(3) to treat the Sign Structures as real property also applies to the
   Ancillary Sign Assets and the Ancillary Housing Structures.

                             LAW AND ANALYSIS
   

Section 1033(g)(3)(A) provides that a taxpayer may elect, in accordance with the rules
prescribed by the Secretary, to treat property that constitutes an outdoor advertising
display as real property for purposes of Federal income taxation. No section 1033(g)(3)
election may be made, however, for property for which the taxpayer has made a section
179(a) election.

Section 1033(g)(3)(C) defines an “outdoor advertising display” as a “rigidly assembled
sign, display, or device permanently affixed to the ground or permanently attached to a
building or other inherently permanent structure constituting, or used for the display of, a
commercial or other advertisement to the public.” Section 1.1033(g)-1(b)(3) of the
Income Tax regulations defines an “outdoor advertising display” as “a rigidly assembled
sign, display, or device that constitutes, or is used to display, a commercial or other
advertisement to the public and is permanently affixed to the ground or permanently
attached to a building or other inherently permanent structure.” These regulations
further provide that “[t]he term includes highway billboards affixed to the ground with
wooden or metal poles, pipes, or beams, with or without concrete footings.”

According to Taxpayer, the Sign Structures are rigidly assembled signs, displays or
devices permanently attached to buildings or other inherently permanent structures. In
addition, they will be used to display commercial or other advertisements to the public.
Accordingly, the Sign Structures constitute outdoor advertising displays within the
meaning of section 1033(g)(3)(C).
PLR-108989-14 5

According to Taxpayer, the Ancillary Sign Assets are used to make each Sign Structure
function as an outdoor advertising display. Taxpayer further represents that the
servers, computers, processors, fiber optic cables and power lines that constitute the
Ancillary Sign Assets are dedicated to the Sign Structure and thus are an integral part
thereof. Accordingly, the Ancillary Sign Assets are part of an outdoor advertising
display, and Taxpayer’s election under section 1033(g)(3)(C) to treat the Sign
Structures as real property also applies to the Ancillary Sign Assets.

According to Taxpayer, each Ancillary Housing Structure is dedicated to a particular
Sign Structure and is located adjacent to the particular Sign Structure. An Ancillary
Housing Structure is used to secure Ancillary Sign Assets serving an associated Sign
Structure and ensure that advertising contents are properly displayed on the Sign
Structure. Taxpayer further represents that each Ancillary Housing Structure is an
integral part of a particular Sign Structure. Accordingly, the Ancillary Housing
Structures are part of an outdoor advertising display, and Taxpayer’s election under
section 1033(g)(3)(C) to treat the Sign Structures as real property also applies to the
Ancillary Housing Structures.

                                    RULINGS

Based on the facts presented, we hold as follows:

1. Each Sign Structure constitutes an “outdoor advertising display” that is eligible for
   an election under section 1033(g)(3) to be treated as real property for purposes
   of chapter 1 of the Code.

2. Because the Ancillary Sign Assets and Ancillary Housing Structures are integral
   parts of these “outdoor advertising displays,” any election under section
   1033(g)(3) to treat the Sign Structures as real property also applies to the
   Ancillary Sign Assets and the Ancillary Housing Structures.

Except as expressly provided herein, no opinion is expressed or implied on the tax
consequences of any aspect of any transaction or item discussed or referred to in this
letter. Further, we express no opinion about whether any income that Taxpayer
receives from leasing the Sign Structures qualifies as “rents from real property” for
purposes of section 856(d) or whether Taxpayer qualifies as a real estate investment
trust under subchapter M of the Code.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.
PLR-108989-14 6

In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to Taxpayer’s authorized representatives.

A copy of this letter must be attached to any income tax return to which it is relevant.

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,



                                   William A. Jackson
                                   Chief, Branch 5
                                   Office of Associate Chief Counsel
                                   (Income Tax & Accounting)

Enclosure
Copy for § 6110 purposes

cc: