In PLR 201837004, the IRS ruled that, for purposes of determining whether a real estate investment trust (REIT) is a "pension-held REIT" under Section 856(h)(3)(D), the stock of the REIT owned by a group trust (as described in Revenue Ruling 81-100) will not be treated as owned by the group trust, but instead will be treated as owned by the participating trusts that are part of the group trust.

Facts

Taxpayer is a pension trust fund that invests in US real estate and holds some of the real estate through REITs. Taxpayer is a group trust described in Revenue Ruling 81-100, as modified by Revenue Ruling 2011-1, which was modified by Notice 2012-6 (an 81-100 group trust).

There are [ ] participating trusts in Taxpayer, none of which owns more than 5% of the units in Taxpayer, and each of which has thousands of beneficiaries.

Analysis

Under Section 856(h)(3)(C), if a qualified trust holds more than 10% of the interests in a pension-held REIT at any time during a tax year, a portion of the dividends received by the qualified trust from the pension-held REIT will be treated as unrelated trade or business income if the REIT derives gross income from an unrelated trade or business (determined as if the REIT were a qualified trust).

Section 856(h)(3)(D) defines the term "pension-held REIT" as a REIT that would not have qualified as a REIT but for the look-through rule of Section 856(h)(3)(A) (which treats stock held by a qualified trust as held by its beneficiaries for purposes of complying with the requirement that a REIT not be "closely held") and: (i) has at least one qualified trust holding more than 25% of the REIT's interests, or (ii) has one or more qualified trusts (each of which own more than 10% of the interests in the REIT) holding in the aggregate more than 50% of the interests in the REIT. Section 856(h)(3)(E) defines the term "qualified trust" as any trust described in Section 401(a) and exempt from tax under Section 501(a).

Examining Sections 401(a), 403(b)(7)(B), 403(b)(9), 408(e), 457(g), and 501(a), the IRS determined that, for purposes of determining the concentration of ownership under the pension-held REIT rules, the tax classification and the concentration of ownership in a REIT held by the group trust should be determined by evaluating the interests equitably held for each beneficiary separately.

Accordingly, the IRS ruled that, "[s]olely for purposes of determining whether a REIT held by Taxpayer is a pension-held REIT … under Section 856(h)(3)(D), pursuant to the principles in Revenue Ruling 2011-1, to the extent the stock of a REIT is treated as owned by Taxpayer, such stock will not be treated as owned by a single qualified trust … solely due to the Taxpayer's ownership." Additionally, the concentration of ownership in a REIT held by Taxpayer will be determined by examining the interests equitably held for each beneficiary separately because Taxpayer is an 81-100 group trust.

Implications

PLR 201837004 supports that a REIT can look through a shareholder that is a "group trust" (as described in Revenue Ruling 81-100) to the individual trusts that are part of a group trust for purposes of determining whether the REIT qualifies as a pension held-REIT. This is a favorable conclusion that may help a REIT avoid pension-held REIT status, and thus, prevent UBTI recognition to the REIT's 10%-or-greater qualified trust shareholders. Also, see PLRs 201650002 and 201650003, addressed in Tax Alert 2016-2185, which contain similar conclusions.

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