IRS Officials Discuss New Proposed Regulations Defining REIT Real Property

At a June 18, 2014 D.C. Bar conference titled "IRS Update: Recent REIT Regulations and Priority Guidance Plan," officials in the Financial Institutions and Products Branch of the IRS discussed recently proposed regulations that clarify which assets qualify as good real estate assets for a REIT and the potential application of those assets to various renewable energy properties.The regulations project resulted from a review of IRS's private rulings, which some commentators felt expanded the historical scope of real property for REITs. The IRS suspended issuing such private rulings and conducted an extensive review, in which it concluded that the vast majority of private rulings were consistent with existing law as well as each other. However, the IRS felt that the public guidance available to taxpayers was outdated, since the most recent revenue ruling defining real property for purposes of the REIT rules was issued in the 1970s, and since REITs wanted current guidance as to whether they could invest in cellphone towers and data centers - property that didn't exist back then. The proposed regulations are designed to update guidance to address new technology and possibly reduce the need for private rulings.

Although the regulations remain in proposed form, the IRS is now considering requests for private rulings; however, they will not rule on property that is treated as real property under various safe harbors in the proposed regulations. IRS officials warned that the private ruling process is time-consuming and requires an exhaustive understanding of all of the underlying facts. Drawings and pictures are essential, said Julianne Allen, assistant to the Branch 3 chief.

Examples 8 and 9 of the proposed regulations were discussed at length by panel members. In Example 8, the photovoltaic modules of a solar energy facility generating electricity that was transmitted to an electric power grid and sold to third parties was not treated as real property, although the land, mounts and exit wires were treated as real property. In Example 9, the photovoltaic modules were treated as real property where they were mounted on land adjacent to an office building owned by the REIT, and the electricity generated from the panels was used primarily to power that building. According to the IRS officials, the entire solar facility in Example 9 qualified as real property because it was considered a "structural component" of the building (like an air conditioning system), but in Example 8, the solar energy plant was used to produce power for resale, and was not a structural component of a building, thus, an asset-by-asset facts and circumstances analysis was required. IRS officials agreed that Example 9 also could apply to wind turbines if they were dedicated to producing power to an adjacent building or shopping center owned by the REIT.