Partnership asset transfers to a REIT were not transfers to an investment company

Plain-English summary

Several partnerships planned a coordinated restructuring that included entity conversions, two intended tax-free reorganizations, transfers of disregarded entities to a REIT for REIT stock, and an initial public offering. The partnerships' predominant assets were redacted, as were the details of their business operations. The IRS ruled only on the discrete section 351 issue presented. It concluded that the transfers of the partnerships' disregarded entities to the REIT would not be treated as transfers to an investment company under section 351(e).

Ruling snapshot

• Question: Will the partnerships' transfers of disregarded entities to the REIT for stock be treated as transfers to an investment company under section 351(e)?
• Outcome: approved, the transfers will not be treated as transfers to an investment company
• Key authorities: IRC §§ 351(e), 368(a)(1)(A), 368(a)(1)(F), 368(c); Treas. Reg. § 301.7701-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201716020                                             Third Party Communication: None
Release Date: 4/21/2017                                       Date of Communication: Not Applicable
Index Number: 351.13-00
                                                              Person To Contact:
----------------------                                        ----------------------, ID No. ----------------
------------------------                                      Telephone Number:
--------------------------------                              ------------------
-------------------------------                               Refer Reply To:
------------------------------                                CC:CORP:5
------------------------------------                          PLR-126576-16
-----------------------                                       Date:
------------------------------------                          January 04, 2017




Legend

Taxpayers                   = -------------------------------------------------------------------------------------
                              -------------------------------------------------------------------------------------
                              -------------------------------------------------------------------------------------
                              -------------------------------------------------------------------------------------
                              ------------

StateX                      = ------------

PartnershipX                = -------------------------------------------

%X                          = ----

%Y                          = ------

AssetsX                     = -------------------------------------------------------------------------------------
                              -------------------------------------------------------------------------------------
                              -------------------------------------------------------------------------------------
                              -------------------------------------------------------------------------------------
                              -------------------------------------------------------------------------------------
                              -------

Operations                  = ---------------------------------------------------------------------------------


XDRE                        = --------------------------------

XTRS                        = ----------------------------------------------
PLR-126576-16                                        2


XREIT                   = -------------------------------------------------------------

%Z                      = ------

YREIT                   = --------------------------------------------------------

PartnershipY            = ------------------------------

Date1                   = ---------------------

ZREIT                   = -------------------------------------------

StateY                  = -----------

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

        This is in response to the letter dated August 24, 2016, requesting a ruling on a
significant issue presented under section 351 of the Internal Revenue Code (the
“Code”). The information provided in that request and in subsequent correspondence is
summarized below.

       This letter is issued pursuant to section 6.03 of Rev. Proc. 2016-1, 2016-1 I.R.B.
1, regarding one or more significant issues under sections 332, 351, 355, 368, or 1036
of the Code. The ruling contained in this letter only addresses one discrete legal issue
involved in the transactions described in this letter. This Office expresses no opinion as
to the overall tax consequences of these transactions or as to any issue not specifically
addressed by the ruling below.

      The ruling contained in this letter is based upon information and representations
submitted by the taxpayers and accompanied by respective "penalties of perjury"
statements executed by an appropriate party. This office has not verified any of the
materials submitted in support of the ruling request. Verification of the facts,
representations, and other information may be required as part of the audit process.

                                                  FACTS

       Taxpayers are StateX limited partnerships (“LPs”), each of which is treated as a
partnership for U.S. federal income tax purposes (collectively, the “TPartnerships”). All
of the general partner (“GP”) interests of the TPartnerships are held by respective
StateX limited liability companies (“LLCs”) that hold no other assets.

      PartnershipX also is a StateX LP that is treated as a partnership for U.S. federal
income tax purposes (collectively, with the TPartnerships, “the Partnerships”).
PLR-126576-16                                3


      The predominant assets of the Partnerships (ranging from all but approximately
%X to %Y of their respective gross value) consist of AssetsX and a small percentage of
cash.

      The business operations of the Partnerships consist of Operations.

       The TPartnerships hold their respective AssetsX through LPs and LLCs that are
disregarded as separate from their sole regarded owner under Treas. Reg. § 301.7701-
3 for U.S. federal income tax purposes (each such entity, a "DRE").

       PartnershipX indirectly holds its AssetsX through XDRE, a DRE for U.S. federal
income tax purposes, and XTRS, a taxable REIT subsidiary. Specifically, PartnershipX
owns all of the common stock of XREIT, a corporation that is taxed as a real estate
investment trust (REIT). The assets of XREIT consist of approximately %Z of the
outstanding common stock of YREIT, a corporation that also is taxed as a REIT. The
remaining common stock of YREIT is owned by PartnershipY, a StateX LP that is
treated as a partnership for U.S. federal income tax purposes. The assets of YREIT
consist of all of the interests in XDRE and XTRS.

        On Date1, PartnershipX formed a new StateX corporation, ZREIT. Prior to the
completion of step (v), below, ZREIT's jurisdiction of incorporation will be changed to
StateY.

       Taxpayers intend to engage in a series of transactions that will include the
following steps:

      (i) in a series of transactions, each of the TPartnerships and their GPs will
      become a DRE for U.S. federal income tax purposes that is wholly-owned by
      respective, successor partnerships of the TPartnerships (the “New
      TPartnerships”).

      (ii) XREIT will merge into ZREIT in a reorganization intended to qualify under
      section 368(a)(1)(F). The common shareholder of XREIT, PartnershipX, will
      exchange its stock in XREIT for all of the stock of ZREIT. ZREIT will succeed to
      XREIT’s REIT election upon the merger.

      (iii) the New TPartnerships will transfer all of the interests in all of their DREs
      (and thus the respective assets of the DREs) to ZREIT in exchange for stock of
      ZREIT;

      (iv) YREIT will merge into ZREIT (with ZREIT surviving) in a reorganization
      intended to qualify under section 368(a)(1)(A). PartnershipY will exchange all of
PLR-126576-16                                  4

       the stock it owns in YREIT for stock in ZREIT, and the stock of YREIT owned by
       ZREIT will be cancelled in the merger.

       (v) ZREIT will issue stock to the public market in an initial public offering for cash
       (“IPO”).

       The cash transferred to ZREIT may be applied to pay transaction costs, reduce
existing debt, establish reserves for working capital, acquire additional AssetsX (having
a similar risk profile as those of the Partnerships), or some combination thereof.

        Steps (i) – (v) will all take place pursuant to an agreed upon plan and should
occur on approximately the same date, and in those steps, the New TPartnerships,
PartnershipY and the members of the public transferring cash to ZREIT in the IPO
collectively will receive stock in ZREIT that will constitute "control" of ZREIT as defined
under section 368(c).

                                          RULING

       The transfers of the New TPartnerships’ DREs to ZREIT in exchange for stock of
ZREIT will not be treated as a transfer to an investment company within the meaning of
section 351(e).

                                         CAVEATS

        Except as expressly provided herein, no opinion is expressed or implied
concerning the tax treatment of any transaction or item discussed or referenced in this
letter under any provision of the Code and regulations, or the tax treatment of any
condition existing at the time of, or effects resulting from, any transaction that is not
specifically covered by the above ruling. Additionally, no opinion is expressed
concerning whether XREIT, YREIT, or ZREIT otherwise qualify as a REIT under
subchapter M, part II of Chapter 1 of the Code. Furthermore, this letter does not
provide any rulings under sections 856 or 857.

                              PROCEDURAL STATEMENTS

      This ruling is directed only to the taxpayers 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 representative.
PLR-126576-16                               5


       A copy of this letter must be attached to any income tax return to which it is
relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.


                                     Sincerely,


                                      T. Ian Russell
                                     T. Ian Russell
                                     Branch Chief, Branch 6
                                     Office of Associate Chief Counsel (Corporate)