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Letter Ruling Addresses C Corporation’s Conversion to a REIT

February 3, 2015 By Jasper L. (Jack) Cummings, Jr.

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.

Filed Under: Corporate - Federal, Federal Tax Advisory, RICs, REITs and other Special Entities Tagged With: change of accounting method, conversion to REIT, E&P, IRS letter ruling, proposed regulations, real property, REIT, REIT subsidiary, section 481, section 856

Jasper L. (Jack) Cummings, Jr.

About Jasper L. (Jack) Cummings, Jr.

Jack Cummings is counsel in the Federal Tax Group of Alston & Bird in Raleigh and Washington, D.C. He served as IRS associate chief counsel (corporate) and chair of the Corporate Tax Committee of the ABA Section of Taxation.

[Read Bio]

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