August 3, 2018 IRS rules on several matters for a healthcare REIT In PLR 201828008, the IRS has ruled on several matters for a taxpayer (Taxpayer) that intends to make an election to be taxed as a real estate investment trust (REIT). Taxpayer's primary business is the acquisition, ownership, and leasing of independent living facilities (IL Facilities) and assisted living facilities (AL Facilities) located in the United States and foreign countries. Rulings, analysis and implications Ruling 1 The IRS ruled that certain IL Facilities, which provide an emphasis on health and wellness of its senior residents, are "congregate care facilities" within the meaning of Section 856(e)(6)(D)(ii) and, therefore, "qualified health care properties" within the meaning of Section 856(e)(6)(D). Accordingly, Taxpayer may lease the IL Facilities to a taxable REIT subsidiary (TRS) under the special rule of Section 856(d)(8)(B). Implications PLR 201828008 is the fourth private letter ruling in which the IRS has ruled that, based on the surrounding facts and circumstances, certain IL Facilities constitute "congregate care facilities". See PLRs 201147015 (Tax Alert 2011-2003), 201429017 (Tax Alert 2014-1367) and 201509019 (Tax Alert 2015-0480). Neither Section 856(e)(6) nor any regulations define the term "congregate care facility." Thus, these private letter rulings provide insight to taxpayers. Characteristics of the IL Facilities described in PLR 201828008 include: (1) each IL Facility either has a minimum age or is marketed to seniors; (2) residents receive regular linen and housekeeping services, eat meals that are planned for the dietary needs of seniors in a community dining hall, and are offered a variety of activities and events regarding health and wellness issues common to seniors; (3) the IL Facilities are equipped with features useful to an aging resident population; (4) every unit is equipped with an emergency call system and emergency pendants are available for residents; (5) residents are provided a "file of life" containing important medical documents, including "Do not Resuscitate" forms, if applicable, to post within their unit for use during emergencies; (6) 24 hour on-call staffing includes a resident manager that eats with, interacts with, and informally observes resident behavior; and (7) the exterior doors to the building are locked at night for resident security. Ruling 2 The IRS ruled that one particular IL Facility that does not provide for congregate living with a focus on the health and well-being of the resident does not constitute a health care facility within the meaning of Section 856(e)(6)(D)(ii). Accordingly, the IL Facility may not be leased to a TRS under the related party rent exception of Section 856(d)(8)(B), but may be operated or managed by a TRS of Taxpayer without causing a violation of TRS status under Section 856(l)(3). Implications PLR 201828008 is the second private letter ruling to conclude that a certain IL Facility does not constitute a health care facility. See PLR 200813005. In PLR 201828008, the IRS noted that, while the IL Facility is comprised of age-restricted multifamily residential housing buildings and provides some of the same amenities as the IL Facilities described in Ruling 1 above, it does not focus on the health and well-being of its residents and does not offer the emergency call systems, a resident manager that interacts with and observes the residents, or a meal plan with a congregate dining room that accommodates all residents. Ruling 3 The IRS ruled that rents received by Taxpayer from the leasing of assisted living facilities to partnerships formed between TRSs (of Taxpayer) and an unrelated partners qualifies for the related-party rent exception of Section 856(d)(8)(B) and thus constitute qualifying rents from real property, so long as the assisted living facilities are operated by an eligible independent contractor. Implications See Tax Alert 2018-1565 for further discussion of this ruling. Ruling 4 The IRS ruled, pursuant to its discretionary authority under Section 856(c)(5)(J)(ii), that Subpart F income inclusions (under Section 951(a)(1)(A)) of Taxpayer attributable to Taxpayer's investments in the stock of its foreign TRSs constitute qualifying income for purposes of the 95% income test of Section 856(c)(2). In addition, the IRS ruled, pursuant to Section 856(c)(5)(J)(ii), that Section 956 inclusions attributable to pledges of assets of the foreign TRSs as collateral for certain debt of Taxpayer that was incurred to finance Taxpayer's acquisition of real estate are considered as qualifying income for purposes of the 95% income tests of Section 856(c)(2). Implications PLR 201828008 is the fourteenth private letter ruling to conclude that certain Subpart F income inclusions constitute qualifying income for purposes of the 95% income test. See PLRs 201649013, 201605005, 201537020, 201503010, 201431018, 201431020, 201423011, 201314002, 201251005, 201246013, 201226004, 201129007 and 201119001. As in prior rulings, the IRS appears to have looked-through to the nature of the income and activity of the foreign TRSs in making its determination — e.g., the ruling notes that the Subpart F income was comprised of "passive" foreign personal holding company income, including rental income, interest, dividends, and gain from the sale of property that gives rise to dividends, interest or rental income. In addition, the ruling notes that the items of rental income underlying the subpart F income would constitute qualifying rents from real property (based on the surrounding facts and circumstances) if Taxpayer were in the TRSs' place and directly earned the income. The IRS's 2017–2018 Priority Guidance Plan includes an item titled "Guidance under [Section] 856(c)(5)(J) to determine whether Subpart F income and passive foreign investment company (PFIC) inclusions are treated as qualifying income for purposes of [Section] 856(c)". Taxpayers will want to be on the lookout for the release of formal guidance from the IRS regarding this guidance item. Ruling 5 The IRS ruled, under Section 856(n)(3)(C), that Section 986(c) foreign currency gains recognized by Taxpayer with respect to distributions of previously taxed earnings and profits from the foreign TRSs are excluded from gross income for purposes of the 95% income test. Implications PLR 201828008 is the seventh private letter ruling to conclude that that Section 986(c) gains recognized with respect to distributions of previously taxed income from foreign TRSs are excluded from gross income for purposes of the 95% income test. See PLRs 201649013, 201605005, 201537020, 201503010, 201301007 and 201251005. ———————————————
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