{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.title}}
{{item.text}}
PLR provides REIT guidance on storage terminal facilities
January 2024
In brief
What happened?
In Private Letter Ruling 202346008 (PLR), the IRS issued several rulings to a corporation (taxpayer) that intended to elect to be taxed as a real estate investment trust (REIT). The taxpayer owned bulk liquid storage terminal facilities (storage terminal facilities) constructed on land it either owned or leased. The PLR addressed several REIT income and asset testing issues, holding that:
- Permanent floating docks in the storage terminal facilities directly owned by the taxpayer are real estate assets;
- A Section 481(a) adjustment was not treated as gross income for REIT testing purposes;
- The storage fees, pipeline use fees, and docking fees received by the taxpayer from users qualified as rents from real property;
- A remediation payment received by the taxpayer was not treated as gross income for REIT testing purposes; and
- An insurance payout received by the taxpayer was treated as qualifying income.
Why is it relevant?
The PLR provided several favorable rulings analyzing whether certain income streams and other payments received by the taxpayer should be included or excluded for purposes of the REIT income tests.
Action items to consider
REITs or taxpayers considering making a REIT election may want to consider seeking guidance from the IRS and consult with their tax advisors to determine whether certain income, such as insurance payments or payments for services, and unique property holdings impact either the REIT income or asset tests.
In detail
A REIT must meet certain requirements regarding the income it receives and the assets it holds. The income requirements must be met annually, while the asset requirements must be met quarterly. A REIT also is restricted in the services it can provide, although it may provide more extensive services through an independent contractor (IK) or a taxable REIT subsidiary (TRS).
The taxpayer in the PLR owned storage terminal facilities with intermodal transportation access (i.e., access to multiple forms of transportation, such as ships, barges, rail, trucks, and pipelines). The storage terminal facilities were constructed on land owned or leased by the taxpayer and consisted of assets that were represented as either land, interests in land, improvements to land, inherently permanent structures, or structural components of inherently permanent structures (e.g., roadways, buildings, stationary docks, storage tanks, and pipelines). The storage terminal facilities also included some personal property (e.g., pumps, compressors, and meters).
Floating docks
Some of the storage terminal facilities included floating docks that protected docked vessels from damage and provided a route for tenants to access the storage terminal facilities. The floating docks generally were attached to poured concrete walkways on land, to concrete, timber, or steel bulkheads that retained contact with the land, and to pilings. The taxpayer represented that the floating docks were designed, constructed, and intended to remain permanently in place, and that removing them would require total deconstruction of the docks and the structure to which they were affixed.
The IRS ruled that the floating docks are real estate assets under Reg. 1.856-10 because they are inherently permanent structures, which are affixed to other permanent structures.
Section 481(a) adjustment
The taxpayer also planned to file Form 3115, Application for Change in Accounting Method, to change its method of depreciation for certain assets from personal property to real property. The filing would result in a positive Section 481(a) adjustment to be includible in the taxpayer's taxable income over a period of four years.
The IRS ruled that the Section 481(a) adjustment did not constitute gross income for REIT income testing purposes.
Terminal usage agreements, pipeline use agreements, and dock usage agreements
The taxpayer entered into terminal usage agreements with users of the storage terminal facilities, and received a fixed fee based on the volume of capacity reserved by a user or the volume of product stored at the storage terminal facilities. The taxpayer also owned pipelines and docks outside certain storage terminal facilities. The taxpayer entered into pipeline use agreements and dock usage agreements with users. The pipelines provided a conduit or route for product to flow to or from certain storage terminal facilities. The docks were used to run pipelines across a storage terminal facility to a dock to load and unload product from vessels at the dock. The taxpayer received (1) a fixed fee based on the amount of product moved through the pipeline from the pipeline users, and (2) a fixed fee based on the amount of product moved over the dock with a minimum volume commitment.
The taxpayer designed, constructed, inspected, maintained, and repaired the storage tanks and pipelines and maintained and repaired the docks. The taxpayer provided utilities, security, and additional services (e.g., heating, cooling, pressurizing, circulation) at the storage terminal facilities that were necessary to avoid damage to the storage tanks, pipelines, and product and to make storing product more efficient.
A TRS or an IK performed all other activities and services at the storage terminal facilities, the pipelines, and the docks (e.g., testing and measuring samples of product for the benefit of users, moving product into a single tank to blend the user’s product, scheduling use of the pipelines and docks, other services in connection with a user’s docking of vessels and loading or unloading product), and received arm’s length compensation for the services performed for the taxpayer. A TRS or IK also operated, maintained, and repaired personal property at the storage terminal facilities and the terminal usage agreements may or may not have separately stated the fees for such services.
The IRS ruled that storage fees, pipeline use fees, and docking fees received by the taxpayer qualified as rents from real property because the fees were attributable to fixed amounts based on capacity for the use of, or the right to use, the taxpayer’s real property.
Observation: The IRS’s holdings that (1) the floating docks are real estate assets, (2) the Section 481(a) adjustment is excluded for REIT income testing purposes, and (3) fees received for the use of space in storage tanks, pipelines, and docks that are computed based on capacity or volume qualify as REIT income are consistent with its rulings in other PLRs.
The IRS also ruled that the storage, pipeline, and docking activities and services performed by the taxpayer and by the TRS or IK did not give rise to impermissible tenant services income (ITSI).
Observation: The IRS previously ruled that activities undertaken by a TRS similar to those described above (e.g., operating, maintaining, and repairing personal property, testing and measuring samples of product for the benefit of users, moving product into a single tank to blend the user’s product) did not give rise to ITSI. In this PLR, such activities were undertaken either by a TRS or an IK, and the charge for these other services may or may not have been separately stated. This implies that the IRS may view certain services or activities as giving rise to ITSI if performed directly by a REIT but those services or activities may be performed by a TRS or an IK without giving rise to ITSI. The taxpayer represented that all services are customary in the geographic market where the storage terminal facilities are located, so it appears that the IRS may have looked to the geographic market definition of customary to determine that the amounts can be separately stated.
Remediation payment
The taxpayer, through a wholly owned disregarded entity, acquired a parcel of property from a third-party seller. The parcel was subject to a remediation order that was entered into between the seller and, although not specified in the PLR, presumably a government agency. The order required the seller to remediate certain polluted land that it owned. The parcel (and any other property subject to the order) remained subject to the order and any instrument of conveyance was required to contain a notice to that effect.
The taxpayer specified that the purchase price for the parcel would have been lower if the seller did not agree to remain responsible for the environmental liabilities because of the costly remediation obligation that it would be required to assume. Subsequently, the taxpayer agreed to assume certain environmental remediation liabilities with respect to the parcel in exchange for a remediation payment from the seller.
The remediation payment was computed based on the net present value of the estimated remediation costs, a contingency fee in the event actual remediation costs were higher, and an amount intended to cover the risk of assuming the remediation obligation. The taxpayer represented that the parcel constituted real property for REIT purposes and substantially all income generated from the parcel constituted qualifying REIT income. The taxpayer also represented that the remediation payment did not reflect compensation for services provided by the taxpayer to any third party and it was responsible for incurring the remediation cost for the parcel that it owned.
The IRS ruled under Section 856(c)(5)(J) that the remediation payment did not constitute gross income for purposes of the REIT income tests. The IRS concluded that the remediation payment was essentially the cost of remediating its own property, and not representative of any services provided to a third party.
Observation: The IRS previously has ruled under Section 856(c)(5)(J) that incentive types of payments (e.g., grants, state tax credits) received by REITs from governmental agencies for development/remediation of brownfield sites/other real property was qualifying REIT income. In this PLR, the IRS ruled that the remediation payment should be excluded for REIT income testing purposes because the REIT was not performing services for any third party and was remediating its own property. This PLR differs from other PLRs in this area primarily because the remediation payment was originally the obligation of the seller, which the REIT later assumed. While not specifically addressed in this PLR, the IRS’s rationale for excluding the remediation payment for REIT income testing purposes may have been because it viewed the payment as an adjustment to the purchase price of the parcel because the taxpayer represented that it would have paid less for the parcel if it was required to assume the remediation obligation as part of the original purchase.
Insurance payout
The taxpayer carried property insurance to protect against damage to its storage terminal facilities and pipelines. A hurricane caused extensive damage to three of the taxpayer’s storage terminal facilities, which included damage to storage tank insulation, pipelines, and building roofs. After the taxpayer satisfied its property insurance deductible, the insurance company was required to make an insurance payout to the taxpayer for the remainder of the damage. The taxpayer expected to receive the insurance payout in multiple payments over more than one tax year.
The taxpayer recognized income to the extent the insurance payout exceeded the taxpayer’s actual expenditures to repair and replace damaged real property. Any such income compensated the taxpayer for the damaged real property that the taxpayer did not repair or replace. The taxpayer represented that any income from the insurance payout related solely to the taxpayer’s real property damaged by the hurricane.
The IRS ruled that income attributable to the insurance payout is considered qualifying REIT income. The IRS specified that (1) the payment merely restored the taxpayer to the position it would have been in absent the hurricane damage to its property, and (2) the insurance payout was for damaged real property that the taxpayer did not repair or replace, which was akin to the disposition of lost real property as a result of the hurricane. Therefore, the IRS ruled that the payment was qualifying REIT income because it did not interfere with Congressional policy objectives in enacting the REIT income tests.
The IRS noted that no opinion was expressed or implied as to whether any portion of the insurance payout constituted gross income for federal income tax purposes.
Observation: The IRS previously ruled that business interruption insurance proceeds received for lost revenue because of damages incurred to real property by natural events was qualifying REIT income under a similar analysis. However, in other PLRs, relating to insurance proceeds from directors and officers insurance (D&O Insurance PLRs) for lawsuits against a REIT, the IRS concluded that such income is excluded for REIT income testing purposes.
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Contact us
Follow us
