The IRS ruled in PLR 202552014 that income received by a real estate investment trust (REIT) from leasing advertising space on outdoor advertising displays qualifies as "rents from real property" under IRC Section 856(d) for purposes of the REIT gross income tests under IRC Section 856(c)(2) and (c)(3).

Facts

Taxpayer is a limited liability company that has elected to be taxed as a REIT. Taxpayer owns various types of outdoor advertising displays (Displays), including dynamic displays with rotating panels or digital screens, which display multiple advertisements in a continuous cycle (Dynamic Displays). Taxpayer elected under IRC Section 1033(g) to treat the Displays as real property for purposes of Chapter 1 of the Internal Revenue Code.

Taxpayer enters into Rental Agreements with tenants for the right to place advertising copy on Displays. These agreements specify the Display(s) on which advertising copy will be displayed and the period (and, for Dynamic Displays, the intervals) during which it will be displayed, and the fixed price (Display Rents). Taxpayer primarily enters into long-term rental agreements, with Display Rents from short-term agreements comprising only a de minimis portion of gross income. According to Taxpayer, the short-term agreements are contracts for the use of advertising space and not for providing services.

Taxpayer engages businesses (Intermediaries) that match advertisers with available space for a specified term (generally short term), interval and price. Commitments with advertisers facilitated by Intermediaries are also Rental Agreements.

Taxpayer, directly or through disregarded entities or partnerships, may provide certain customary services (e.g., leasing, routine maintenance, lighting and electricity, security) (Services), which Taxpayer represents are not rendered primarily for the convenience of tenants. A taxable REIT subsidiary (TRS) of Taxpayer (Subsidiary) or an independent contractor from which Taxpayer derives no income (IK) installs and removes the advertisements and schedules and manages the display operations (Indirect Services). A portion of the Display Rents may be attributable to the Services and/or Indirect Services, but not to any other services, such as designing advertising materials and online campaigns (Other Services), provided by the Subsidiary or an IK.

Taxpayer and Subsidiary are parties to a cost-sharing arrangement for shared employees (all of whom are employed by Taxpayer) and equipment. Subsidiary bears the costs associated with providing Indirect Services and Other Services. The services covered by the cost-sharing arrangement will not include any services that Taxpayer is or will be in the business of providing to third parties. Taxpayer and Subsidiary will reimburse each other for their pro-rata shares of expenses under the cost-sharing arrangement solely for cost with no markup. The reimbursed party will not deduct or capitalize any costs reimbursed under the cost-sharing arrangement.

Law

IRC Section 856(c) requires a REIT to derive at least 95% of its gross income from specified sources, including rents from real property, and at least 75% from more narrowly defined sources, also including rents from real property.

Under IRC Section 856(d)(1), "rents from real property" includes "(A) rents from interests in real property; (B) charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated; and (C) rent attributable to personal property which is leased under, or in connection with, a lease of real property," with certain limitations.

Outdoor advertising displays for which an election has been made under IRC Section 1033(g)(3) are considered inherently permanent structures and thus real property for REIT purposes (Treas. Reg. Section 1.856-10(d)(2)(iii)(B)).

Under IRC Section 856(d)(2)(C), the term "rents from real property" does not include impermissible tenant service income (ITSI) (defined by IRC Section 856(d)(7)(A) as any amount received or accrued by the REIT for services furnished or rendered to tenants or for managing or operating the property). ITSI does not include (1) payments received for services, management or operation provided through an IK or a TRS and (2) any payment that would be excluded from unrelated business taxable income under IRC Section 512(b)(3) if received by an organization described in IRC Section 511(a)(2) (IRC Section 856(d)(7)(C)).

Reimbursements between related parties under cost-sharing arrangements, made solely for cost and without markup, are not included in the reimbursed party's gross income (including for purposes of the REIT income tests) if the reimbursed party is not in the business of receiving compensation for the type of services reimbursed.

Analysis

The IRS concluded that:

• Taxpayer's income from Display Rents is rents from real property under IRC Section 856(d) for purposes of the REIT gross income tests under IRC Section 856(c)(2) and (c)(3).
• The Services, Indirect Services and Other Services do not give rise to ITSI under IRC Section 856(d)(7) and do not cause the Display Rents to be excluded from rents from real property under IRC Section 856(d).
• Any reimbursements received under the cost-sharing arrangement will not be included in the reimbursed party's gross income, including for purposes of IRC Sections 856(c)(2) and (c)(3).

In support of these findings, the IRS stated that (1) the Displays are real property because they are outdoor advertising displays for which an election has been properly made under IRC Section 1033(g)(3); (2) Display Rents are primarily for displaying Tenants' advertisements on Displays, and therefore are for using, or the right to use, Taxpayer's real property; and (3) part of Display Rents may be attributable to Services or Indirect Services, which Taxpayer represented are customary services for purposes of IRC Section 856(d)(1)(B) and are not primarily for the convenience of Tenants. The IRS also stated that the Indirect Services and the Other Services will not be treated as provided by Taxpayer because they will be provided by an IK or a TRS.

Based on Taxpayer's representations, Display Rents are not excluded from rents from real property because (1) the portion of Display Rents attributable to personal property will be within the IRC Section 856(d)(2)(C) limit, (2) tenants are not related to Taxpayer in any relevant manner, and (3) Display Rents are not based on the income or profits of any person that would exclude them under IRC Section 856(d)(2)(A).

Implications

PLR 202552014 is the fifth private letter ruling in which the IRS ruled that income from leasing advertising space on outdoor advertising displays for which an IRC Section 1033(g) election has been made, including digital and dynamic displays, qualifies as rents from real property where a small portion of the income is attributable to short-term leases (presumably less than 30 days). See PLRs 202047003 (Tax Alert 2020-2872), 201522002, 201431020 and 201431018.

As in several prior rulings, the IRS cited to Revenue Ruling 84-138 to support its conclusion. See PLRs 202012003 (Tax Alert 2020-1035), 201537020, 201522002, 201503010, 201431020, 201423011 and 201314002.