October 30, 2017 Incentive payment received in connection with installation of solar power system is qualifying REIT income In PLR 201742008, the IRS ruled that an incentive payment (Base Solar Incentive Amount) received by a real estate investment trust (REIT) from a utility company in connection with the installation of a solar PV system on the roof of the REIT's retail property will be considered qualifying income for purposes of the 95% and 75% income tests under Section 856(c) (2) and (c) (3). PLR 201742008 was issued in connection with a series of substantially similar rulings, including PLRs 201742009, 201742010, 201742011, 201742012, and 201742013. Facts Taxpayer is a REIT that owns, through a partnership (Partnership), land improved with a mixed-use shopping center (the Retail Center) in which space is leased to various retailers. The state in which the Retail Center is located mandates that all electric utilities implement a solar incentive program. City Utility offers a solar incentive to customers that install solar PV systems on buildings they own or lease. Participants receive a one-time, lump-sum, upfront payment based on the lesser of: (I) an incentive formula estimating the expected performance of the customer's solar PV system; or (ii) the net installed cost of the system. The incentive rate used in the incentive formula differs depending upon whether a participant retains ownership of renewable energy credits, or RECs (REC Incentive Rate), or the participant transfers the RECs to City Utility (Base Rate). Partnership plans to purchase or lease and permanently install a solar PV system on the roof of the Retail Center. Taxpayer represents that: — The solar PV system will be designed and intended to produce electricity only to serve the Retail Center and that Partnership will not sell any electricity generated by the solar PV system to third parties Partnership intends to transfer any RECs that it receives in connection with the solar PV system to City Utility and would therefore qualify for the REC Incentive Rate. Taxpayer is not seeking a ruling on its receipt of any portion of the Solar Incentive that is attributable to the transfer of RECs to City Utility, and Taxpayer intends to treat such an amount as non-qualifying income for purposes of the 95% and 75% REIT income tests. Taxpayer requested a ruling regarding the Base Solar Incentive Amount, which is the portion of the solar incentive that is not attributable to the transfer of RECs to City Utility. Law and Analysis Under Section 856(c), a REIT must: (i) derive at least 95% of its gross income (excluding gross income from prohibited transactions) from sources listed in Section 856(c)(2), which includes dividends, interest, rent from real property, and certain other items; and (ii) derive at least 75% of its gross income (excluding gross income from prohibited transactions) from sources listed in Section 856(c)(3), which include rents from real property and certain other items. Section 856(c)(5)(J) authorizes the Treasury Secretary to determine, solely for purposes of the REIT provisions of the Code, whether any item of income or gain that does not qualify for the 95% income test under Section 856(c)(2) and/or the 75% income test under Section 856(c)(3) may nevertheless be considered as: (i) not constituting gross income for purposes of the 95% or 75% income tests; or (ii) qualifying income for purposes of the 95% or 75% income tests. The IRS determined, based upon the facts and representations, that treating income from the Base Solar Incentive Amount as qualifying income does not interfere with or impede the objectives of Congress in enacting the REIT income tests. Accordingly, the IRS ruled that, pursuant to its authority under Section 856(c)(5)(J)(ii), income from the Base Solar Incentive Amount is treated as qualifying income for purposes of the 95% and 75% income test of Sections 856(c)(2) and (3). Implications PLR 201742008 has similarities to certain prior letter rulings in which the IRS ruled, pursuant to its authority under Section 856(c)(5)(J), that certain incentive-type payments received by a REIT from a state (or jurisdiction thereof) in connection with developing real property that will be held as rental investment property constitutes qualifying income for purposes of the 95% and 75% income tests. See PLRs 201716043 (Tax Alert 2017-717), 201518010 (Tax Alert 2015-984) and 201428002 (Tax Alert 2014-1304). Also of interest is the statement that Taxpayer intends to treat any portion of the incentive payment that is attributable to the transfer of RECs to the utility as non-qualifying income for purposes of the 95% and 75% income tests. Taxpayer presumably made this statement because the consideration received would appear to represent amounts received from the sale of personal property to the utility (note: the preamble to Final Treas. Reg. Section 1.856-10 indicates that RECs are not real property, but rather personal property). PLR 201742008 does not address the treatment under the REIT income tests of the income presumably recognized by Taxpayer upon the receipt of RECs (which are generally received/awarded from the state). Compare with PLR 201720008 (Tax Alert 2017-1177), in which the IRS ruled that, pursuant to its authority under Section 856(c)(5)(J), income recognized by a REIT in connection with the receipt of carbon sequestration credits will be considered qualifying income under the 95% and 75% income tests. ———————————————
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