How did SC PLR 92-7 treat a wholly owned qualified REIT subsidiary for corporate income tax, annual-report, and license-fee purposes?

Plain-English summary

South Carolina PLR 92-7 reached two different results for a proposed wholly owned qualified real estate investment trust subsidiary:

1. Corporate income tax: the subsidiary was not treated as a separate corporation. Its assets, liabilities, income, deductions, and credits were treated as those of the REIT parent.
2. Annual report and corporate license fee: the subsidiary still had to file the historical annual report and pay the license fee because it was the general partner of a partnership renting South Carolina real estate.

Why the subsidiary was disregarded for income tax

ABC was a REIT and planned to own 100% of a Delaware corporate subsidiary. The subsidiary would qualify under Internal Revenue Code Section 856(i).

That federal provision did not treat a qualified REIT subsidiary as a separate corporation and attributed its tax items to the REIT. Because South Carolina had adopted the federal REIT provisions cited in the ruling, the PLR followed the same treatment for South Carolina corporate income tax.

The ruling therefore assigned the subsidiary's assets, liabilities, income, deductions, and credits to ABC rather than taxing the subsidiary separately.

Why the annual report and license fee still applied

The subsidiary would be the general partner of a partnership owning and renting South Carolina real property. The ruling distinguished merely owning property from renting it: the rental activity meant the partnership was transacting business in the state.

The Secretary of State required a foreign corporation serving as general partner of a partnership transacting business in South Carolina to obtain a certificate of authority. Once qualified to do business, the subsidiary had to file the annual report under Section 12-19-20 and pay the license fee under Section 12-19-70.

Because neither the partnership nor subsidiary did business outside South Carolina, the ruling based the historical license fee on the subsidiary's entire capital stock and paid-in surplus.

Historical filing instruction

The PLR said the annual report and corporate income-tax return were then combined on Form SC 1120. It instructed the subsidiary to file that form, pay the license fee, report zero taxable income on the income-tax portion, identify the REIT parent and its federal employer identification number, and attach the ruling or cite it in a statement.

Those form instructions are part of the historical ruling, not current filing guidance.

What this means for you

REITs and qualified REIT subsidiaries

Disregarded income-tax treatment did not eliminate every state corporate obligation. The ruling separately analyzed entity qualification, annual reporting, and the license fee.

Foreign corporate general partners

Serving as general partner of a South Carolina rental partnership triggered a different result from merely owning property.

Real-estate partnerships

Renting South Carolina property was treated as transacting business, not passive ownership alone.

Tax professionals

PLR 92-7 is a useful example of separating income-tax entity classification from corporate-law qualification and license-fee requirements.

Common questions

Q: Did the qualified REIT subsidiary owe separate South Carolina income tax?

A: No. The ruling attributed its tax items to the REIT parent.

Q: Did that eliminate the annual report and license fee?

A: No. The subsidiary had to file and pay because it qualified to do business as general partner of the rental partnership.

Q: Why was the partnership transacting business?

A: It rented South Carolina real property, which the ruling treated as more than merely owning property.

Q: What did the PLR say to report on the historical SC 1120?

A: Zero taxable income for the subsidiary, along with a statement identifying its qualified-REIT-subsidiary status and parent, while paying the license fee.

Q: Can another REIT rely on PLR 92-7?

A: No. The ruling was temporary, fact-specific, and nonprecedential.

Citations and references

• S.C. Code Ann. § 12-7-230 — historical corporate income tax and return requirement
• S.C. Code Ann. § 12-7-415 — historical adoption of federal corporate taxable income
• S.C. Code Ann. §§ 12-19-20 and 12-19-70 — historical annual report and corporate license fee
• S.C. Code Ann. § 12-19-100 — historical special license fee provision
• S.C. Code Ann. § 33-15-101 — foreign-corporation qualification and excluded activities
• Internal Revenue Code §§ 856-859, including § 856(i) — REIT and qualified REIT subsidiary treatment

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR92-7.pdf

Original ruling text

SC PRIVATE LETTER RULING #92-7

TO:

ABC

SUBJECT:

Qualified Real Estate Investment Trust Subsidiary
(Income Tax and Corporate License Fee)

TAX ANALYST:

Sally Major

REFERENCES:

S.C. Code Ann. Section 12-7-230 (Supp. 1991)
S.C. Code Ann. Section 12-19-20 (Supp. 1991)
S.C. Code Ann. Section 12-19-70 (Supp. 1991)
S.C. Code Ann. Section 33-15-101 (1976)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1991)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request.
Private Letter Rulings have no precedential value and are not intended for
distribution.

Questions:
1.

Is a qualified real estate investment trust subsidiary of ABC, which is a real estate
investment trust, taxed as a separate corporation or as part of the ABC for South Carolina
income tax purposes?

2.

Is a qualified real estate investment trust subsidiary of ABC required to file an annual
report and pay the annual license fee?

Facts:
ABC was organized as a Massachusetts business trust in 19XX and from its inception has elected
to be treated as a real estate investment trust (REIT) under Internal Revenue Code Section 856.
ABC is planning to form a Delaware corporate subsidiary (subsidiary). One hundred percent of
the subsidiary's stock will be owned by ABC. The subsidiary will be a general partner in a

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partnership that owns and rents real property located in South Carolina. This partnership interest
is currently owned by ABC. Neither the partnership nor the subsidiary does business in any other
state. The subsidiary will be a qualified real estate investment trust subsidiary within the
meaning of Internal Revenue Code Section 856(i).
Discussion:
CORPORATE INCOME TAX:
Code Section 12-7-230(A) provides, in part:
... every foreign corporation transacting, conducting, doing business, or having an
income within the jurisdiction of this State, whether or not the corporation is engaged
in or the income derived from intrastate, interstate, or foreign commerce, shall make a
return and shall pay annually an income tax equivalent to five percent of a proportion
of its entire net income, to be determined as provided in this chapter. The term
"transacting", "conducting", or "doing business", as used in this section, includes the
engaging in or the transacting of any activity in this State for purpose of financial profit
or gain.
Code Section 12-7-415 provides that "[t]he South Carolina gross income and taxable income of a
corporation,..., is the corporation's gross income and taxable income as determined under the
Internal Revenue Code with the modifications specified in Section 12-7-430."
Internal Revenue Code Sections 856 through 859 deal with the taxation of Real Estate
Investment Trusts for federal income tax purposes. These sections have been adopted by South
Carolina for purposes of determining South Carolina taxable income under Code Section 12-7415.
Internal Revenue Code Section 856(i) provides, in part:
(1) For purposes of this title (A) a corporation which is a qualified REIT subsidiary shall not be treated as a
separate corporation, and
(B) all assets, liabilities, and items of income, deduction, and credit of a
qualified REIT subsidiary shall be treated as assets, liabilities, and such items (as
the case may be) of the real estate investment trust.
(2) For purposes of this subsection, the term "qualified REIT subsidiary" means any
corporation if 100 percent of the stock of such corporation is held by the real estate
investment trust at all times during the period such corporation was in existence.
The taxpayer has indicated that the subsidiary will be a "qualified REIT subsidiary" for federal
income tax purposes and as a result, for federal income tax purposes, it will not be treated as a

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separate corporation. In addition, its assets, liabilities, and items of income, deduction, and credit
will be treated as though they are assets, liabilities, and items of income, deduction and credit of
ABC.
Since South Carolina has adopted the Internal Revenue Code Sections 856 through 859, South
Carolina will treat these items as they are treated for federal purposes. In other words, for South
Carolina income tax purposes, the subsidiary would not be taxed as a separate corporate entity.
CORPORATE LICENSE FEE AND ANNUAL REPORT:
Code Section 12-19-20(a) provides, in part:
Every corporation organized under the laws of this State and every corporation
organized to do business under the laws of any other state, territory, or country and
qualified to do business in South Carolina and any other corporation required by
Section 12-7-230 to file income tax returns, in addition to any other requirements of
law, must make a report annually to the Tax Commission on or before the fifteenth day
of the third month next after the preceding income year in a form prescribed by the Tax
Commission or the Secretary of State containing all information and facts either the
Tax Commission or the Secretary of State may require for the administration of the
provisions of this chapter and the provisions of Title 33.... (Emphasis added.)
Code Section 12-19-70 provides, in part:
In addition to all other license taxes or fees or taxes of whatever kind, every
corporation required to file the report by Section 12-19-20, except the corporations
enumerated in Section 12-19-100, shall pay to the Commission at the time of filing the
report as required by Section 12-19-20 an annual license fee of fifteen dollars plus one
mill on each dollar paid to the capital stock and paid in as surplus of the corporation as
shown by the records of the corporation on the first day of the income year next
preceding the date of filing the report. In no case may the license fee provided by this
section be less than twenty-five dollars. The license fee provided for by this section
must be paid at the time of filing the report pursuant to the provisions of Section 12-1920.
Code Section 12-19-100 imposes a special license fee on certain types of corporations. The
subsidiary does not qualify as a corporation subject to the license fee under Code Section 12-19100.
Code Section 33-15-101 provides, in part:
(a) A foreign corporation may not transact business in this State until it obtains a
certificate of authority from the Secretary of State.
(b) The following activities, among others, do not constitute transacting business
within the meaning of subsection (a):

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...(9) owning, without more, real property or personal property.... (Emphasis
added.)
The Secretary of State's office requires that foreign corporations which are general partners in
either a general partnership or a limited partnership which is transacting business in the State
must obtain a certificate of authority to do business in South Carolina. By obtaining this
certificate of authority to do business, a foreign corporation is qualified to do business in South
Carolina and must file an annual report as required by Code Section 12-19-20 and pay the annual
license fee required by Code Section 12-19-70.
Because the partnership is renting real property, and is therefore doing more than merely owning
real or personal property, it is considered to be transacting business in South Carolina. Therefore,
as the general partner in the partnership, the subsidiary must obtain a certificate of authority to
do business in the State from the Secretary of State and file an annual report and pay an annual
license fee to the State. Since neither the partnership nor the subsidiary does business in any state
except South Carolina, the subsidiary must pay the license fee based on the entire capital stock
and paid in as surplus of the corporation as shown by the records of the corporation.
Conclusions:
1.

The qualified real estate investment trust subsidiary of ABC is not taxed as a separate
corporation for South Carolina income tax purposes. The assets, liabilities, and items of
income, deduction, and credit of the subsidiary are treated as assets, liabilities, and items of
income, deduction and credits of ABC.

2.

The qualified real estate investment trust subsidiary of ABC, as a general partner in a
partnership transacting business in South Carolina, must file an annual report and pay the
annual license fee required by Code Sections 12-19-20 and 12-19-70.

Note: Since the annual report required by Code Section 12-19-20 and the South Carolina income
tax return are on the same form (SC 1120), the subsidiary should file Form SC 1120 and pay the
license fee. On the income tax portion of the return, the subsidiary should report zero taxable
income and file a statement with the return indicating it is a subsidiary of a qualified real estate
investment trust and has no income for South Carolina corporate income tax purposes. The
subsidiary should include the name and federal employer identification number of the parent
entity. Additionally, the subsidiary should attach a copy of this ruling or a statement citing this
ruling to the return.

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