The IRS has issued a private letter ruling (PLR 201810005
) concerning the application of the Section 351 investment company rules to a contribution to a partnership holding primarily interests in a real estate investment trust (REIT).
Section 721 generally provides that no gain or loss is recognized when partners contribute property to a partnership, but turns off that non-recognition treatment when the partnership is an “investment company” within the meaning of Section 351(e). According to the regulations under Section 351, a transferee is an investment company if more than 80% of the value of its assets are “stock and securities,” a class of assets that is defined by 351(e)(1)(B) to include, among other things, any interest in a REIT.
Treas. Reg. Sec 1.351-1(c)(4) contains a look-through rule that provides that if a transferee owns at least 50% of a corporation, its stock in that corporation is disregarded and it is instead deemed to own a ratable share of that corporation’s assets. On its surface, that look-through rule only applies to stock in corporations and not to a transferee’s interest in other kinds of entities.
In the letter ruling, a partnership planned to form a new REIT and contribute substantially all of its operating assets to the REIT. Subsequently, the partners of the partnership planned to contribute property to the partnership. The IRS ruled that in determining whether the partnership was an investment company, its equity interest in the REIT will be disregarded, and instead the partnership will be deemed to own its ratable share of the assets of the REIT. This ruling suggests that despite its narrow language, the look-through rule in Treas. Reg. Sec. 1.351-1(c)(4) may be applicable to equity interests other than stock in a corporation.
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