In brief

What happened?   

In Private Letter Ruling 202506007 (PLR), the IRS ruled that certain intercompany payments between a REIT and its subsidiaries and the associated underlying agreements should be disregarded for purposes of the REIT income and asset tests.

Why is it relevant?   

This ruling provides renewed insight into how certain intercompany transactions within a REIT structure may be treated for purposes of the REIT income and asset tests when the REIT receives a payment from a partnership in which the REIT has a capital interest.

Action items to consider   

Given the IRS ruled on this issue using its discretionary authority, REITs that have or may engage in similar intercompany transactions may want to consider the analysis in the ruling with respect to their own income and asset tests and consider whether they should obtain their own ruling addressing those transactions.

IRS analysis   

Partnership payment agreement 

The IRS noted that the payments made by the partnership to the taxpayer pursuant to the partnership payment agreement would come from income that is already included in the taxpayer’s gross income as a result of its capital interest in the partnership, and therefore including the portion of the payments attributable to the taxpayer’s capital interest would cause such amounts to be counted twice for purposes of the REIT income tests. The IRS further noted that the taxpayer’s gross income attributable to the payments represented an amount that the taxpayer was effectively charging itself to perform functions the taxpayer could have performed directly without negative implications. Accordingly, the IRS used its discretion to rule that the portion of the payments attributable to the taxpayer’s capital interest in the partnership will not be treated as gross income for purposes of the REIT income tests.

DRE payment agreement 

The IRS noted that wholly owned disregarded entities are not treated as separate entities from their owners. For that reason, the income earned by the DREs would be included in the taxpayer’s gross income upon receipt, and therefore the portion of the payments made by the DREs to the partnership that is attributable to the taxpayer’s capital interest in the partnership would be included in the taxpayer’s gross income twice as discussed above. Accordingly, the IRS used its discretion to rule that the portion of the payments made by the DREs to the partnership that were attributable to the taxpayer’s capital interest in the partnership would not be treated as gross income for purposes of the REIT income tests.

Observation: The IRS’s holding in this PLR that the payments received by the REIT from a partnership that the REIT owned an interest in could be excluded for purposes of the REIT gross income tests is consistent with the IRS’s holdings in prior PLRs which were issued after the enactment of Section 856(c)(5)(J). In addition, the IRS’s conclusion in the PLR to disregard the payments received from the partnership also is consistent with its earlier PLRs, predating the enactment of Section 856(c)(5)(J), where the IRS relied on the partnership look-through rule under the Treasury Regulations to exclude from a REIT’s gross income fees received from a partnership that were attributable to the REIT's capital interest in that partnership.

Observation: The IRS also has ruled in a number of “self-charged rent” PLRs that a REIT may ignore its allocable share of rental income from a “lessor partnership” to avoid “double counting” of income attributable to the extent of the REIT’s allocable share of rental deductions of the “lessee partnership.”

Observation: We note that the IRS used its discretionary authority to disregard the payments discussed above rather than ruling under the Treasury Regulations addressing a REIT’s ownership of a partnership. The PLR may therefore be of less utility to other similarly situated taxpayers, and REITs with similar fact patterns are strongly encouraged to obtain their own rulings.

Asset tests 

The taxpayer represented that the partnership payment agreement and the DRE payment agreement were not treated as assets under GAAP and did not appear on the taxpayer’s or the partnership’s financial statements.

The IRS noted that the partnership payment agreement and the DRE payment agreement were not assets under GAAP and were not on the taxpayer’s or the partnership’s financial statements. Accordingly, the IRS ruled that the intercompany payment agreements should be excluded from gross assets for purposes of the REIT asset tests.