The IRS has ruled in PLR 202440007 that a real estate investment trust (REIT) satisfied the REIT gross income and asset qualification tests despite having no assets or gross income.
A REIT is required to meet a “gross income test” defined in Section 856(c)(2)-(3) and an “asset test” defined in 856(c)(4)(A), The income test requires at least 95% of a REIT’s gross income must be derived from certain enumerated sources and at least 75% of a REIT’s gross income derived from certain other enumerated sources. The asset test requires that “at the close of each quarter of its taxable year at least 75% of the value of the REIT’s total assets must be represented by specifically enumerated items.”
The taxpayer addressed by the PLR was a corporation that indirectly owned multi-family properties through partnerships. The parent of the taxpayer was a foreign special limited partnership classified as a partnership for U.S. federal income tax purposes.
In Year 1, the parent planned to issue equity for cash and contribute the proceeds to the taxpayer to acquire multi-family properties from a seller. The parent completed the equity offering in Year 1 but did not transfer the proceeds by the end of Year 1. As a result, in Year 1, the taxpayer had zero gross income and zero assets. The cash proceeds were contributed to the taxpayer on a date in Year 2. Upon receipt of the proceeds, taxpayer acquired the multi-family properties.
The taxpayer filed a Form 1120-REIT for its tax return for Year 1 despite having no gross income or assets. Its audit firm later questioned whether a REIT could meet the tests required for REIT qualification if the REIT did not have gross income or assets.
The taxpayer filed a ruling request stating it intended to file a non-REIT amended return for Year 1 and remove the REIT election. While in the process of getting the ruling, taxpayer filed a second Form 1120-REIT return for Year 2.
The IRS in the ruling held that legislative history demonstrates the tests were concerned with the source of the REIT’s income and that 95% of zero and 75% of zero are both zero. Similarly, the IRS held the legislative history demonstrated Congress’s primary concern was the nature of the REIT’s assets and not whether the REIT had assets. Even so, the IRS concluded that 95% of zero, and 75% of zero, are both zero, respectively.
The IRS nonetheless ruled that the taxpayer can still meet the gross income and asset test with zero gross income and zero assets. Thus, taxpayer met both REIT tests in Year 1 and no amended return was required to be filed because taxpayer was a REIT in Year 1.
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