Letter Ruling Addresses C Corporation’s Conversion to a REIT

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The IRS recently released the letter ruling (PLR 201503010) that was likely issued to Iron Mountain, a US multinational document storage company, on its conversion to a REIT. The taxpayer in the ruling proposed retaining its leases and ownership interests in warehouse-like buildings and racking structures therein in the corporation that would elect REIT status and moving its document storage activities into taxable REIT subsidiaries.

The letter ruling contained more than a dozen separate rulings, evincing the complexity of transitioning from a C corporation to a REIT, particularly when foreign and active businesses must be extracted from the REIT. Among other issues, the IRS determined that:

  • The taxpayer’s racking structures constituted real property for REIT purposes – not accessories to the operation of a business – emphasizing the structures’ permanence;
  • Rents for use of the taxpayer’s real property would be qualifying REIT income (including a small portion received from a taxable REIT subsidiary), given that the materials handling business was segregated from the storage business; and
  • Where a Section 481 change-of-method adjustment (due to depreciation for the racking structures) exceeded the E&P adjustment (the amount of E&P to be distributed for a successful REIT conversion), the distribution of the difference would be treated as E&P.

The taxpayer’s ruling request likely contributed to the issuance Prop Reg.  § 1.856-10 (issued two months before the ruling’s release), which provides a more detailed definition of real property for REIT qualification.

For more on PLR 201503010, see Jack Cummings‘ write-up in the February 2015 Federal Tax Advisory.