Private Letter Ruling   
Number: 202005017   
Internal Revenue Service   
October 16, 2019   
     
     
     
Internal Revenue Service   
Department of the Treasury   
Washington, DC 20224   
     
Number: 202005017   
Release Date: 1/31/2020   
Index Number: 856.01-00     
Third Party Communication: None   
Date of Communication: Not Applicable   
Person To Contact:   
ID No.   
Telephone Number:   
Refer Reply To:   
CC:FIP:B02   
PLR-115801-15   
Date:  October 16, 2019   
     
Dear *********:     
     
This is in in response to your letter dated April 29, 2015, and subsequent correspondence, requesting a ruling that the Tax Credits (described below) will be treated as qualifying income for purposes of section 856(c)(2) and (c)(3) of the Internal Revenue Code ("Code") pursuant to section 856(c)(5)(J)(ii).   
     
Taxpayer is a State A limited liability company that has elected to be taxed as a real estate investment trust ("REIT") under sections 856 through 859. Taxpayer uses the calendar year and an accrual method as its overall method of accounting. Taxpayer holds indirect interests, through one or more tiers of partnership subsidiaries, in Company, which holds property located in Area (the "Property").   
     
State B has a tax credit program that allows taxpayers to claim a credit against their state tax liability for a percentage of the eligible costs incurred to rehabilitate a hazardous waste site on property located within an economically distressed area (the "Tax Credits"). The Tax Credits are available to eligible taxpayers who commence and diligently pursue an environmental response on or before Date, and who achieve and maintain a permanent solution or remedy operation status with respect to the property. The tax credit program allows for the transfer, sale or assignment of the Tax Credits to a corporation or nonprofit organization.   
     
To qualify, the property must be owned or leased by the taxpayer for business purposes and located in an economically distressed area and reported to the department of environmental protection. In addition, the eligible costs must relate to the net response and removal costs paid by the taxpayer for the purpose of achieving a permanent solution or to remedy operation status of the property. The Property is located in an area designated by State B as an economically distressed area, and the site has been reported to the State B Department of Environmental Protection. Taxpayer, through the activities undertaken by Company, will be involved in the construction, development, ownership, and operation of a mixed-use real estate development project on the Property (the "Project"). The Project will consist of substantial remediation and redevelopment activities on the Property.   
     
Taxpayer expects that the Project will generate an estimated $x worth of Tax Credits. Taxpayer represents that it will include its proportionate share of the income from the Tax Credits when required under section 451. As a REIT, Taxpayer does not expect to incur a material amount of State B tax liability and, thus, Company will sell the Tax Credits to other eligible persons. Taxpayer further represents that the Tax Credits will be sold or disposed of by the unextended due date of the federal income tax return for the taxable year in which the Tax Credits are included in income in accordance with section 451.   
     
Taxpayer further represents that the proceeds from the sale of the Tax Credits will be used to offset the actual costs previously expended to accomplish the remediation work related to Property and the Project. In addition, Taxpayer represents that substantially all of the income from the Project will be qualifying income for purposes of sections 856(c)(2) and (c)(3). Taxpayer further represents that upon completion, the Project will be a qualified real estate asset under section 856(c)(5)(B).   
     
 LAW      
     
Section 856(c)(2) provides that at least 95 percent of a REIT's gross income must be derived from dividends, interest, rents from real property, gain from the sale or other disposition of stock, securities, and real property (other than property in which the corporation is a dealer), abatement and refunds of taxes on real property, income and gain derived from foreclosure property, certain commitment fees, and gain from certain sales or other dispositions of real estate assets.   
     
Section 856(c)(3) provides that at least 75 percent of a REIT's gross income must be derived from rents from real property, interest on obligations secured by real property, gain from the sale or other disposition of real property (other than property in which the corporation is a dealer), dividends from REIT stock and gain from the sale of REIT stock, abatements and refunds of taxes on real property, income and gain derived from foreclosure property, certain commitment fees, gain from certain sales or other disposition of real estate assets, and qualified temporary investment income.   
     
Section 856(c)(5)(J) provides that to the extent necessary to carry out the purposes of part II of subchapter M of the Code, the Secretary is authorized to determine, solely for purposes of such part, whether any item of income or gain which - (i) does not otherwise qualify under section 856(c)(2) or (c)(3) may be considered as not constituting gross income for purposes of section 856(c)(2) or (c)(3), or (ii) otherwise constitutes gross income not qualifying under section 856(c)(2) or (c)(3) may be considered as gross income which qualifies under section 856(c)(2) or (c)(3).   
     
Section 1.856-3(g) of the Income Tax Regulations provides that a REIT that is a partner in a partnership is deemed to own its proportionate share of each of the assets of the partnership and is deemed to be entitled to the income of the partnership attributable to such share. For purposes of section 856, the interest of a partner in the partnership's assets is determined in accordance with the partner's capital interest in the partnership. The character of the various assets in the hands of the partnership and items of gross income of the partnership shall retain the same character in the hands of the partners as in the hands of the partnership for all purposes of section 856.   
     
Section 61(a) provides that, except as otherwise provided, gross income includes all income from whatever source derived.   
     
Section 451(a) provides that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.   
     
Under an accrual method of accounting, unless section 451(b)(1)(A) requires earlier inclusion, an item of gross income is includible when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. See  section 451(b) and section 1.451-1(a). All the events that fix the right to receive income generally occur upon the earliest of the following: (1) the required performance takes place, (2) payment is due, or (3) payment is made. See  Schlude v. Commissioner, 372 U.S. 128 (1963); Rev. Rul. 2003-10, 2003-1 C.B. 288.   
     
The legislative history underlying the tax treatment of REITs indicates that a central concern behind the gross income restrictions is that a REIT's gross income should largely be composed of passive income. For example, H.R. Rep. No. 2020, 86th Cong., 2d Sess. 4 (1960) at 6, 1960-2 C.B. 819, at 822-823 states, "[o]ne of the principal purposes of your committee in imposing restrictions on types of income of a qualifying real estate investment trust is to be sure the bulk of its income is from passive income sources and not from the active conduct of a trade or business."   
     
 ANALYSIS      
     
Income attributable to the receipt of the Tax Credits constitutes gross income that is not listed as qualifying income under section 856(c)(2) or (c)(3). Taxpayer represents that the Project will be a qualified real estate asset for purposes of section 856 and that substantially all of the income from the Project will be qualifying income for purposes of sections 856(c)(2) and (c)(3). Furthermore, Taxpayer represents that it will include its proportionate share of the Tax Credits in income when required under section 451. The State B tax credit program provides the Tax Credits as a government incentive to redevelop property that may not otherwise be a profitable venture for the REIT and, therefore, the Tax Credits are received in connection with the development of real property, an activity that is permissible for REITs. Treating income from the receipt of the Tax Credits as qualifying income does not interfere with or impede the objectives of Congress in enacting sections 856(c)(2) and (c)(3). Accordingly, pursuant to section 856(c)(5)(J)(ii), it is appropriate for the Secretary to determine that amounts included in income with respect to the Tax Credits in accordance with section 451 shall be treated as qualifying income for purposes of section 856(c)(2) and (c)(3).   
     
 CONCLUSION    
     
Based on the facts and representations submitted by Taxpayer, we conclude that amounts included in Taxpayer's income with respect to the Tax Credits in accordance with section 451 will be qualifying income for purposes of section 856(c)(2) and (c)(3) pursuant to section 856(c)(5)(J)(ii).   
     
Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed whether taxpayer otherwise qualifies as a REIT under part II of subchapter M of Chapter 1 of the Code. Nor is any opinion expressed with respect to the tax consequences of any dispositions of the Tax Credits, including whether a sale of the Tax Credits constitutes a prohibited transaction as described in section 857(b)(6)(B)(iii).   
     
This ruling is directed only to the taxpayer 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 representatives.   
     
Sincerely,   
     
 Andrea M. Hoffenson    
Andrea M. Hoffenson   
Branch Chief, Branch 2   
Office of Associate Chief Counsel   
(Financial Institutions & Products)