In PLR 201741002, the IRS ruled that amounts received by a real estate investment trust (REIT) for providing the use of DASs (distributed antenna systems, though undefined in the ruling) to wireless telecommunications carriers constitute qualifying rents from real property for purposes of the 95% and 75% income tests of Section 856(c)(2) and (3).

Facts

Taxpayer is a corporation that intends to elect REIT status. Taxpayer owns land, cellular communications towers and interests in DAS assets that are used for the transmission of telecommunication signals through fiber optic and coaxial cables. DASs are used by wireless telecommunications carriers to supplement their cell tower antennas to improve capacity and signal strength in densely populated areas, such as stadiums, convention centers or college campuses, and in hard-to-reach areas like underground transportation systems.

Taxpayer will enter into agreements (DAS Agreements) with wireless telecommunications carriers (Users), granting Users the right to use a DAS to transport telecommunication signals. A single DAS may be leased to more than one User; typically, there are multiple users at each DAS site and multiple signals transported by a single strand of fiber optic cable. Each User will have exclusive use of a dedicated frequency within a single fiber optic pathway as specified in its DAS Agreement. The DAS Agreements will typically require the User to pay Taxpayer an initial capital contribution fee and recurring amounts that are typically paid monthly and are subject to escalation.

A DAS may be located outdoors and inside buildings or other venues. Each DAS consists of: (i) fiber optic cable, coaxial cable and related conduit piping (DAS Components); (ii) Taxpayer's easements, licenses, or other attachment rights to use land, poles and buildings owned by others to which the DAS Components are attached, as well as, in limited circumstances, indefeasible rights of use for specific strands of fiber optic cable and the right to use space in conduit piping (collectively, Property Interests); and (iii) other items, such as antennas, optical converters, amplifiers and equipment cabinets (collectively, DAS Equipment). Taxpayer represented that all DAS Equipment will be treated as personal property and will satisfy the 15% personal property test of Section 856(d)(1)(C).

Taxpayer's lease agreements with Users may obligate it to furnish certain services that Taxpayer represents are usually and customarily provided in connection with leasing telecommunications infrastructure similar to the DAS. Taxpayer services include designing the DAS, constructing the DAS, providing electrical power, providing ongoing monitoring of the functioning of systems, periodic inspections of the system components, and maintenance and minor repair work on the system components (DAS Services). Taxpayer represents that the DAS Services are usually and customarily provided in connection with the lease of a DAS.

Law and analysis

The IRS explained that, under each DAS Agreement, a User has a right to use a DAS for a term of years. In addition, Taxpayer represented that the DAS Components and Property Interests are real property for purposes of Section 856. Accordingly, the IRS ruled that amounts received under the DAS Agreements qualify as "rents from interests in real property" under Section 856(d)(1)(A). In addition, the IRS concluded, based upon the information submitted and representations made, that the DAS Services are usually and customarily provided in connection with the rental of telecommunications infrastructure similar to DAS or represent an exercise of the fiduciary duties of the Taxpayer's directors in accordance with Treas. Reg. Section 1.856-4(b)(5)(ii). Accordingly, the IRS ruled that the provision by Taxpayer of the DAS Services does not give rise to impermissible tenant service income, and will not cause any portion of the rents received by Taxpayer from Users for use of the DAS Components and the related Property Interests to fail to qualify as rents from real property under Section 856(d).

Implications

PLR 201741002 is the second private letter ruling to address a REIT's ownership and leasing of DASs to wireless telecommunications carriers (see PLR 201450017, Tax Alert 2015-43). While not actually explained as such in PLR 201741002, a DAS is a common acronym for a "distributed antenna system." In the prior ruling (PLR 20145007), the IRS ruled that: (1) the primary components of a DAS were qualifying real estate assets; and (2) amounts received for providing use of the DAS to wireless telecommunications carriers constituted qualifying rents from real property. That ruling was issued before the promulgation of Reg. Section 1.856-10, which provides a framework for determining whether an asset constitutes "real property" (as contrasted with personal property) for purposes of the REIT provisions. This may explain why the IRS ruled on the characterization of the DAS assets in PLR 20145007, but not in PLR 201741002.

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