In PLR 201907001, the IRS ruled that fees received by a real estate investment trust (REIT) under agreements to store users' product in storage tanks and provide capacity in pipelines for users' product, as well as rents received by the REIT under a master lease of an offshore oil and gas platform to an unrelated tenant constitute rents from real property under Section 856(d) and, thus, qualifying income for purposes of the 95 percent and 75 percent income tests of Sections 856(c)(2) and (3).

Facts

Taxpayer is a REIT that invests in US energy infrastructure assets.

Storage tank facilities. Taxpayer intends to purchase several storage tanks, including interests in related land, roadways, etc. (the Storage Tank Facilities) which Taxpayer represents are real property for purposes of Section 856.

Taxpayer will enter into agreements with unrelated third-party users with respect to the Storage Tank Facilities for a term that will generally be between [ ] and [ ] years, and in no event will be less than [ ]. In some cases, an agreement will specify the particular tank or tanks in which the user's product will be stored and, in other cases, an agreement will provide the user with a right to a fixed portion of the storage capacity at the respective Storage Tank Facility, but will not specify the specific tank or tanks. Taxpayer will not oversell storage capacity and will be obligated to ensure that the capacity specified in an agreement is reserved for the user. An agreement may provide for the lease of a portion of the capacity of a tank when the stored content is fungible and may be stored on a comingled basis.

Taxpayer will only undertake activities that are consistent with its fiduciary duty to manage the REIT, including, for example, inspecting, maintaining, and repairing the Storage Tank Facilities. A taxable REIT subsidiary (TRS) of Taxpayer will perform all services, including, for example, loading, unloading, and moving product and operating, maintaining, and repairing all equipment (owned by the TRS) used to heat, circulate, and blend the products.

The fee paid by a user will be calculated on a monthly basis and will be a fixed monthly amount for a prescribed amount of reserved storage capacity. The user will pay the fixed monthly amount regardless of whether it uses the capacity reserved for it. In some cases, a user will have the right to exceed the capacity reserved for it. In these cases, the fee will include an additional amount for the excess capacity computed based upon a fixed dollar amount set forth in the agreement multiplied by the volume of product stored. Fixed dollar amounts may change after a specified volume of product is stored and may increase over time to reflect changes in inflation.

Pipelines. Taxpayer intends to purchase oil and gas pipelines (the Pipelines) which Taxpayer represents are real property for purposes of Section 856.

Taxpayer will enter into agreements with one or more unrelated third-party users with respect to each Pipeline for a term that will generally be between [ ] and [ ] years, and in no event will be less than [ ]. Taxpayer will not oversell capacity in the Pipelines and will be obligated to ensure that the capacity specified in an agreement is reserved for the Pipeline user.

Taxpayer will only undertake activities that are consistent with its fiduciary duty to manage the trust itself, including, for example, inspecting and monitoring the physical condition of the Pipelines and making decisions with respect to and supervising the maintenance, repair, and construction of the Pipelines. A TRS of Taxpayer will perform all services, including, for example, scheduling the use of the Pipelines with the users pursuant to the agreements, loading product on the Pipelines, unloading product off the Pipelines, and monitoring, maintaining and operating all compressors or pumps (owned by the TRS).

The fee paid by a user will be calculated on a monthly basis. In some cases, the fee will be a fixed monthly amount for a prescribed amount of reserved pipeline capacity. The user will pay the fixed monthly amount regardless of whether it uses the capacity reserved for it. In some of these cases, a user will have the right to exceed the capacity reserved for it. In these cases, the fee will include an additional amount for the excess capacity computed based upon a fixed dollar amount set forth in the agreement multiplied by the volume of product that exits the Pipeline. In other cases, the fee will be computed solely based upon a fixed dollar amount set forth in the agreement multiplied by the volume of product that exits the Pipeline. Fixed dollar amounts may change after a specified volume of product exits the Pipeline and may increase over time to reflect changes in inflation.

Offshore oil and gas platform. Taxpayer intends to construct an offshore oil and gas platform (the Platform) that Taxpayer represents is real property for purposes of Section 856. The Platform will also include equipment affixed to the Platform that is used in the extraction and processing of crude oil and gas and constitutes personal property for federal income tax purposes.

Taxpayer will enter into a multi-year lease with an unrelated lessee, which will provide the lessee with the exclusive use of the Platform and equipment. The lessee will be solely responsible for operating, maintaining, and repairing the Platform, the equipment, and any other property associated with the Platform. Taxpayer will not perform any activities or services in connection with the lease of the Platform and equipment.

The rent due under the lease will be computed based upon a fixed dollar amount per volumetric measure of product flowing through the Platform, which may change after a specified volume of product flows through the Platform and may also change periodically pursuant to a formula set forth in the lease to reflect changes in crude oil or gas prices. The lease will provide for a specified minimum amount of rent intended to provide for a return of Taxpayer's invested capital associated with the construction of the Platform plus a market-based return thereon. The lessee will also be required to pay a percentage of rent equal to a stated percentage of the gross revenue the lessee receives from subleasing the platform to one or more third parties.

Law and analysis

Section 856(c)(2) requires a REIT to derive at least 95 percent of its gross income (excluding gross income from prohibited transactions) from dividends, interest, rents from real property, certain gains from the sale of stock, securities and real property, and abatements and refunds of taxes on real property, as well as certain other income sources.

Section 856(c)(3) requires a REIT to derive at least 75 percent of its gross income (excluding gross income from prohibited transactions) from rents from real property, interest on obligations secured by real property, gain from the sale or other disposition of real property, dividends from REIT stock, gain from the sale of REIT stock, and abatements and refunds of taxes on real property, as well as certain other sources of income.

Reg. Section 1.856-4(a) defines "rents from real property" generally as the gross amounts received for the use of, or the right to use, real property of the REIT.

In the analysis section of PLR 201907001, the IRS noted that Taxpayer represents that (i) the Storage Tank Facilities, the Pipelines and the Platform are real property for purposes of Section 856, (ii) the fair market value of any personal property provided in connection with the Storage Tank Facilities, the Pipelines and the Platform is less than 15 percent of the total fair market value of the real and personal property leased (or otherwise provided) under the aforementioned agreements; and (iii) amounts due under the Storage Tank Facilities use agreements, the Pipelines use agreements, and the Platform lease will not depend, in whole or in part, on the income or profits of any person.

The IRS explained that the Storage Tank Facilities use agreements and the Pipelines use agreements will provide the user with the exclusive right to use a fixed portion of the capacity of the Storage Tank Facilities or the Pipelines throughout the terms of the agreements, and the Platform lease will be a multi-year lease that provides the lessee with the exclusive right to use the Platform. The IRS also elaborated that the Pipeline use fees that are based upon the volume of product that exits the Pipelines are comparable to amounts received that are based upon a percentage of gross receipts. Accordingly, that IRS concluded that the Storage Tank Facilities use fees, the Pipeline use fees and the Platform rent are amounts received for the use of, or the right to use, real property of Taxpayer, and thus, qualify as rents from interests in real property under Section 856(d)(1)(A).

The IRS also noted that, with respect to the Storage Tank Facilities and the Pipelines, Taxpayer will only undertake activities that are consistent with its fiduciary duty to manage the trust itself, and a TRS will perform all services, and that Taxpayer will not furnish any services in connection with the Platform lease. Accordingly, the IRS concluded that the activities and services do not give rise to impermissible tenant service income. Thus, the IRS ruled that the Storage Tank Facilities use fees, the Pipeline use fees and the Platform rent qualify as rents from real property under Section 856(d).

Implications

PLR 201907001 is the first private letter ruling to conclude that amounts received by a REIT under an agreement to store a user's product (presumably crude oil and gas) in storage tanks owned by the REIT, and amounts received under an agreement to provide a user with capacity in pipelines owned by the REIT (for use to transport the user's product) constitute "amounts received for the use of, or the right to use, real property", and thus, qualifying rents from interests in real property under Section 856(d). These types of agreements should be contrasted with a master lease of storage tanks or pipelines to a single tenant who is responsible for operating, maintaining, and repairing the storage tanks or pipelines.

While the ruling was based on Taxpayer's representation that the Storage Tank Facilities, the Pipelines and the Platform constitute "real property" for purposes of Section 856, and that certain other assets constitute personal property, it should be noted that Reg. Section 1.856-10(d)(2)(iii)(B) provides that "real property" includes "oil and gas storage tanks," "pipelines" and "offshore drilling platforms" if such property is permanently affixed to land or other inherently permanent structures. On the other hand, the determination of whether certain fixtures relating to the Storage Tank Facilities, the Pipelines and Platform constitutes structural components (and thus, real property) or personal property is determined under Reg. Section 1.856-10(d)(3), which requires a determination of whether the fixture serves a "passive function" or "active function," as well as consideration of certain facts and circumstances relating to the permanence of the fixture.

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