In PLR 201628009, the IRS ruled that permanently moored casino barges and riverboats constitute qualifying real property for purposes of the real estate investment trust (REIT) income and asset tests.

Facts

Taxpayer is a publicly traded corporation that is an owner, operator and developer of casinos and related hospitality and entertainment facilities.

Company A is a publicly traded corporation that will elect to be treated as a REIT. Company A is in the business of acquiring, financing, and owning real estate property to be leased to gaming operators in triple net lease arrangements.

In accordance with an agreement and plan of merger, Taxpayer will take the following steps: (i) separate its operating assets into a newly formed subsidiary (OpCo) and distribute to its stockholders all of the issued and outstanding shares of common stock of OpCo; (ii) a limited liability company (Subsidiary) that is wholly owned by Company A will merge with and into Taxpayer with Subsidiary surviving the merger as a wholly owned subsidiary of Company A; and (iii) Company A and its subsidiaries will lease the real property formerly owned by Taxpayer to OpCo and its subsidiaries under a long-term triple net lease.

Certain of the properties (the Facilities) leased from Company A and its subsidiaries to OpCo are located on water adjacent to land containing hotels and other buildings related to the Facilities. Each Facility consists of a boat (Moored Riverboat) or a barge or multiple barges welded together (Dockside Casino Barge) and is securely and substantially moored, and cannot be moved from its mooring without the use of tools. In addition, each Facility is connected to land-based utilities such as power, water, sewer, communications and surveillance. Some of the Facilities maintain propulsion systems solely to comply with state gaming regulations. All references to "Facilities" exclude such propulsion systems.

The Dockside Casino Barges were transported to their current locations and secured; buildings were then constructed on them to serve as gaming facilities. The barges do not have propulsion equipment. Each of the Dockside Casino Barges is located in a cofferdam that provides no access to navigable waters. Although the Barges must be capable of floating under gaming regulations, each Barge is secured to the cofferdam in either a fixed level manner (secured to the bottom of the cofferdam with cables) or in a manner that allows limited vertical but not lateral movement. The barges have never and are never intended to be moved. Moving any Dockside Casino Barge would require extensive work due to the manner in which each is affixed to the land and may not be seaworthy after removal. The barges are classified as real property for insurance purposes.

Each Moored Riverboat is a previously active riverboat that was required to travel on navigable waters to operate the casino. Gaming was only permitted on excursions. Changes to state laws allowed the riverboats to be moored to the shoreline. The riverboats are attached to the riverbed via high strength ropes, steel and concrete. The riverboats are not used for transportation or cruises and are not intended to ever move again. Moving the Moored Riverboats would require detaching the sewer, electric, water, and communications lines, the hiring a tugboat or obtaining a Coast Guard certificate to move. The riverboats do have propulsion systems, but they may not be functioning. The riverboats also have back-up utilities, and a skeletal crew to comply with local gaming requirements.

Law and analysis

Reg. Section 1.856-3(d) defines the term "real property" to include land or improvements thereon, such as buildings or other inherently permanent structures, including items that are structural components of such buildings or structures. The term does not include assets accessory to the operation of a building (such as machinery; printing press; transportation equipment that is not a structural component; office equipment; refrigerators; individual air conditioning units; grocery counters; motel, hotel or office building furnishings), even though such items may be fixtures under local law.

In Revenue Ruling 71-220, 1971-1 C.B. 210, the IRS considered whether certain mobile home units are real property within the meaning of Section 856 and Reg. Section 1.856-3(d). The mobile home units were delivered to the site, set on a foundation of pre-engineered blocks with the wheels and axles removed. The units were then attached to the ground using steel straps. A carport or screened porch was attached to the unit, and the unit was connected to utilities. The revenue ruling concludes that these mobile home units are real property.

In Revenue Ruling 75-424, the IRS considered whether certain equipment used in connection with the transmission and reception of microwave signals is treated as real property, or assets accessory to a building, for purposes of Section 856. The IRS ruled that the building, heating and air conditioning system, transmitting and receiving towers, and chain link fencing are real property, whereas the antennae, waveguides, transmitting, receiving, and multiplex equipment, and pre-wired modular racks constitute "assets accessory to the operation of a trade or business" and not real estate assets.

In PLR 201628009, the IRS explained that, similar to the property or structural components described in Revenue Ruling 71-220 and Revenue Ruling 75-424 that qualify as real property for purposes of Section 856, the Facilities likewise are inherently permanent structures. The IRS noted that: the Facilities have been moored or attached for years; the Facilities are connected to land-based utilities, such as electrical, water and sewer systems; each Dockside Casino Barge was designed and constructed to remain permanently in place for the entirety of its economic useful life and each Moored Riverboat was moored with a design to remain in place for the entirety of its economic useful life; Taxpayer has no plans to ever move any of the Facilities prior to the end of its economic useful life; moving any of the Facilities would be costly, burdensome, and would require significant time and expense; and each Facility is constructed and affixed in such a manner that movement ranges from impracticable to impossible without complete destruction of the Facility.

Accordingly, the IRS ruled that the Facilities qualify as real property for purposes of the income tests of Sections 856(c)(2)(C) and 856(c)(3)(A), and as real estate assets for purposes of the asset tests of Sections 856(c)(4)(A) and 856(c)(5)(B).

Implications

PLR 201628009 is the first private letter ruling, or authority of any type, specifically addressing the treatment of permanently moored casino barges and riverboats for purposes of the REIT income and asset tests, and is a favorable development.

While the ruling does not discuss the comprehensive definition of "real property" found in Prop. Reg. Section 1.856-10 (which is not effective until finalized), it appears that the IRS likely considered the proposed regulations in arriving at its conclusion. See Prop. Reg. Section 1.856-10(d)(2) (iv), which provides that the determination of whether a distinct asset (that does not serve an active function) is an "inherently permanent structure" and thus real property is based on all the facts and circumstances, including: (i) the manner in which the distinct asset is affixed to real property; (ii) whether the distinct asset is designed to be removed or to remain in place indefinitely; (iii) the damage that removal of the distinct asset would cause to the item itself or to the real property to which it is affixed; (iv) any circumstances that suggest the expected period of affixation is not indefinite; and (v) the time and expense required to move the distinct asset.

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