Permanently moored casino facilities qualify as real property

Plain-English summary

A gaming company planned a transaction in which casino real estate would be owned by a real estate investment trust and leased to an operating company. Several casino facilities were built on barges or former riverboats but had been securely moored for years, connected extensively to land-based utilities, and designed to remain in place for their useful lives. Moving them would require major demolition, disconnection, dredging, regulatory approval, and other costly work, and some structures could not practically be moved at all. The IRS concluded that the facilities were inherently permanent structures and therefore real property and real estate assets for the REIT tests under IRC § 856. The ruling excluded propulsion systems retained by some facilities for gaming-regulation compliance.

Ruling snapshot

• Question: Do permanently moored casino barges and former riverboats count as real property and real estate assets for REIT qualification tests?
• Outcome: Approved, excluding the facilities' propulsion systems
• Key authorities: IRC § 856(c); Treas. Reg. § 1.856-3; Rev. Ruls. 71-220 and 75-424

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201628009                                              Third Party Communication: None
Release Date: 7/8/2016                                         Date of Communication: Not Applicable
Index Number: 856.02-00
                                                               Person To Contact:
------------------------                                       --------------------, ID No. ----------------
-------------------------------------------------              Telephone Number:
------------------------------------                           --------------------
-----------------------------------------                      Refer Reply To:
---------------------------------                              CC:FIP:B01
                                                               PLR-132710-15
                                                               Date:
                                                               March 31, 2016




Legend:

Taxpayer                   =         ------------------------------------
----------------------------------------------------------

Company A                  =        ------------------------------------------------

Company B                  =        ------------------------------------

Subsidiary                 =        -----------------------------

State A                    =        ------------

State B                    =        -----------------

Property A                 =        -------------------

Property B                 =        -------------------------------------------------------------

Property C                 =        --------------------------------------------

Property D                 =        -----------------------------------------------

Property E                 =        ------------------------------

Property F                 =        ------------------------------------------------------

Property G                 =        ----------------------------------------------------

Property H                 =        ---------------------------------------------------
PLR-132710-15                             2

Property I      =   -------------------------------------------------

Property J      =   ------------------------------

Property K      =   --------------------------------------------------

Property L      =   ---------------------------------------------------

Property M      =   -----------------------------------------------------

City A          =   ----------------------------

Date 1          =   --------------------------

A               =   ---

B               =   ---

C               =   --

D               =   ---

E               =   ---

F               =   --

G               =   ---

H               =   --

I               =   ---

J               =   ---

K               =   --

L               =   --

M               =   ---

N               =   ---
PLR-132710-15                                        3


Dear --------------------:

       This letter responds to your letter dated September 30, 2015, requesting a ruling
on behalf of Taxpayer that the Facilities (as defined below) will constitute “real property”
for purposes of sections 856(c)(2)(C) and (3)(A) and “real estate assets” for purposes of
sections 856(c)(4)(A) and (5)(B).

Facts:

         Taxpayer is a widely held, publicly traded State A corporation. Taxpayer is an
owner, operator and developer of casinos and related hospitality and entertainment
facilities. Taxpayer owns A gaming and related hospitality and entertainment facilities.
Taxpayer’s real estate assets are comprised of B gaming facilities in C states
(collectively the “Real Estate Business Assets”).

       Company A is a widely held, publicly traded State B corporation that will elect to
be subject to tax as a real estate investment trust (“REIT”) commencing with its taxable
year ended Date 1. Company A is in the business of acquiring, financing, and owning
real estate property to be leased to gaming operators in triple net lease arrangements.
As of Date 1, Company A’s portfolio consisted of D gaming and related facilities,
including certain properties that will be held in taxable REIT subsidiaries, the real
property associated with E gaming and related facilities operated by Company B and
the real property associated with Property A in City A.

        Taxpayer has entered into an Agreement and Plan of Merger (“Merger
Agreement”) with Company A and Subsidiary, a State A limited liability company and
wholly owned subsidiary of Company A, providing for the merger of Subsidiary with and
into Taxpayer (the “Merger”) with Subsidiary surviving the Merger as a wholly owned
subsidiary of Company A. In connection with the Merger, Taxpayer will separate its
operating assets, certain real estate assets, and liabilities into a newly formed
subsidiary (“OpCo”) and, immediately prior to the closing of the Merger, Taxpayer will
distribute to its stockholders, on a pro rata basis, all of the issued and outstanding
shares of common stock of OpCo (such distribution, together with the Merger and
related transactions, the “Proposed Transaction”)1. At the time of the Proposed
Transaction, Company A and its subsidiaries will lease the real property formerly owned
by Taxpayer to OpCo and its subsidiaries pursuant to a long-term triple net lease (the
“Lease”). Each Real Estate Business Asset, other than Property B, will be leased from


1
  The Proposed Transaction is not structured as a tax-free spinoff and this ruling request was submitted to
the Internal Revenue Service prior to December 7, 2015. As a result, the Proposed Transaction is not
subject to section 311 of the Protecting Americans from Tax Hikes Act of 2015 (enacted as part of the
Consolidated Appropriations Act, 2016, Pub. L. No. 114-113 (2015)).
PLR-132710-15                                4

Company A and its subsidiaries to OpCo and its subsidiaries under the Lease (the
“Leased Properties”).

         Of the Leased Properties, F of them are entirely land-based and are not the
subject of this ruling. The remaining G Leased Properties (the “Facilities”) are located
on water adjacent to land containing hotels and other buildings related to the Facilities.
Each of the Facilities consists of a boat or a barge (or multiple barges welded together).
Each Facility is securely and substantially moored, and is unable to be moved from its
mooring without the use of tools. In addition, each Facility is connected to land-based
utilities such as power, water, sewer, communications, and surveillance. Each Facility
has between H and A connections to the land for electricity, water, and sewage and also
has hundreds of connections for data and communications. Some of the Facilities
maintain propulsion systems solely to comply with state gaming regulations. All
references to “Facilities” in this letter exclude such propulsion systems.

        Of the Facilities, Property C, Property D, Property E, Property F, Property G, and
Property H were built on one or more barges (the “Dockside Casino Barges”) , and
Property I, Property J, Property K, Property L, and Property M are former riverboats that
are now indefinitely moored (the “Moored Riverboats”). All of the Moored Riverboats
are considered “permanently moored,” and all of the Dockside Casino Barges are
considered “substantially land structures” as defined by the U.S. Coast Guard (“USCG”)
Marine Safety Manual and, consequently, are not subject to inspection as “vessels.”
Chapter 4, Section I.3.c.of the USCG Marine Safety Manual states that a “Permanently
Moored Craft means a craft of design and mooring arrangement such that they do not
have a practical capability of being used as transportation on the water.” Chapter 4,
Section I.4.c.of the USCG Marine Safety Manual states that “a craft that cannot
demonstrate its ability to get underway to the satisfaction of the [Officer in Charge,
Marine Inspection] will be deemed a land structure and will no longer be inspected for
certification by the Coast Guard.” The Facilities have been “permanently moored” or
attached for periods of years ranging from F years to I years.

        Each Dockside Casino Barge consists of a barge or multiple barges (sometimes
welded together) upon which a building was constructed to serve as the gaming facility.
Once each barge was transported to the final facility site or built on the facility site,
concrete was typically poured across the top of the barge(s) to create a level foundation
or floor to support the gaming facility building. Since the building was constructed, each
gaming facility has resembled a land-based building from the outside and inside even
though the facility is capable of floating on water. Construction of each Dockside
Casino Barge above the barge deck was subject to local land-based building codes and
performed under the direction of a licensed contractor. Each Facility remains subject to
local building codes and is classified as real property for insurance purposes. The
Facilities were constructed onsite, and have never moved once construction of the
building commenced on the barge. Taxpayer never intends to move the Dockside
Casino Barges.
PLR-132710-15                                5


        Each of the Dockside Casino Barges is located in a cofferdam. A cofferdam
provides no access to navigable waters. Though each Dockside Casino Barge must be
capable of floating (and thus the cofferdam must generally maintain a certain water
level) to comply with gaming regulations, each Dockside Casino Barge is secured to the
cofferdam either in a “fixed-level” manner or in a manner that allows limited vertical, but
not lateral, movement. A “fixed-level” manner means that the barge is secured to the
bottom of the cofferdam with cables. The water level is then maintained at a level that
ensures the buoyancy of the barge always keeps tension on the cables and restricts
vertical movements. The systems securing the Dockside Casino Barges generally
consists of mooring dolphins with mooring cables and collars around vertical pilings to
restrict vertical movement. Property C is an exception: it is dry docked and supported
on the bottom of a basin. To secure Property C, a concrete structural slab was poured
beneath the barge and approximately 180 steel pedestals were then placed to uniformly
support the hull. The water was then removed, leaving the barge sitting on the
pedestals.

      All of the Dockside Casino Barges lack propulsion systems and crews except for
Property G and Property H, each of which maintain a propulsion system and a skeletal
crew solely to comply with state gaming regulations.

        Moving a Dockside Casino Barge would require a determination that movement
is at all feasible, and the preparation for movement could take several weeks. Such
movement would be costly and time consuming due to the required labor, insurance,
demolition of the cofferdams, demolition of portions of the Dockside Casino Barge, and
possibly construction of a channel to the river. In addition, the amount of lost revenue
from foregone gaming activity resulting from separation from customers’ access point
and associated land-based businesses would be several times the cost of physically
moving the Facility. None of the Dockside Casino Barges have current USCG
certificates of inspection, and a special certificate of transport from the USCG and
approval from the appropriate state gaming commission would be required to move
each of them. Moving any Dockside Casino Barge would require extensive work due to
the manner in which each Dockside Casino Barge is affixed to the land. Such work
would include dismantling the moorings, cutting the welds where barges are joined
together, clearing silt (and digging and flooding channels in the case of the cofferdams),
disconnecting all utilities, and, in most cases, arranging for multiple tugboats to provide
propulsion. Even after this work took place, it is unclear whether any of the Dockside
Casino Barges would in fact be seaworthy for purposes of moving them any substantial
distance.

       Each Moored Riverboat is affixed to multiple moorings called “dolphins” using
wire rope and/or ultrahigh-strength synthetic rope. The dolphins are constructed using
steel and concrete, and are permanently affixed to the river bed under the water. The
Moored Riverboats are moored in a way that permits no horizontal movement and only
PLR-132710-15                                 6

limited vertical movement depending on river conditions. Previously, under applicable
gaming regulations, the Moored Riverboats were required to travel on navigable waters
to operate their business. Gaming was only permitted on excursions, and the Facilities
had to be out on the water a certain amount of time each year. Over 10 years ago,
gaming regulations were changed to no longer require such travel. As a result, the
Moored Riverboats were indefinitely moored and have not moved for periods ranging
from J to I years.

       The Moored Riverboats are not used for transportation or cruises and are not
intended to ever move again. The Moored Riverboats have withstood severe weather
events, including hurricanes, tornados, extreme floods, and micro bursts. Moving the
Moored Riverboats would require detaching the sewer, electric, water, and
communications lines and hiring a tugboat or obtaining a certificate from the USCG to
allow the Moored Riverboat to move. Movement of a Moored Riverboat could also
require destroying the current moorings. Engines, safety equipment, navigation
systems, propulsion, lights, generators, and other components would need to be
inspected and potentially upgraded or repaired. Some of the propulsion system
components on the Moored Riverboats would likely require replacement. For most of
the Moored Riverboats, some dredging would be required to channel to navigable
water, and, in some instances, sheet pile walls would need to be removed.

        Of the Moored Riverboats, K of them can conduct gaming only while the Facility
is docked. Under local gaming regulations, the Facilities generally are subject to safety
inspection by the American Bureau of Shipping or another inspection very similar to
standard land-based building inspections that test compliance with local building codes,
fire codes and/or other safety requirements. However, the American Bureau of
Shipping and other inspectors generally do not inspect the Facilities for standards that
would be relevant to moving any of the Facilities. Repairs, maintenance, upgrades and
installation of independent utility resources could be required for each of the Facilities to
pass inspection and obtain the approvals necessary for moving the Facility.

        Solely to comply with gaming regulations, L of the Moored Riverboats maintain a
propulsion system, back-up utilities, and a skeletal crew. Generators for the
independent utilities are generally only used in emergencies and could not support a
Facility operating at full capacity. Thus, if a Facility were moved, a new source of power
might need to be installed. The crew maintains the land-based utilities for the Facility
and monitors the Facility’s moorings to ensure the Facility remains securely and
permanently attached.

      Taxpayer represents that unless required by law or loss of other rights, neither
Taxpayer presently, nor Company A following the Proposed Transaction, has or will
have the intent to move a Facility from its current location prior to the end of its
economic useful life. Taxpayer also represents that each Dockside Casino Barge was
designed and constructed to remain in place for the entirety of its economic useful life
PLR-132710-15                                 7

and that each Moored Riverboat was permanently moored with a design to remain in
place for the entirety of its economic useful life. Taxpayer has represented that the
economic useful life of the Facilities, assuming normalized ongoing capital
expenditures, ranges from M to N years.

Law and Analysis:

       Section 856(c)(4)(A) of the Code provides that at the close of each quarter of its
tax year, at least 75 percent of the value of a REIT’s total assets must be represented
by real estate assets, cash and cash items (including receivables), and Government
securities.

       Section 856(c)(5)(B) of the Code and section 1.856-3(b)(1) of the Income Tax
Regulations define the term “real estate assets,” in part, to mean real property (including
interests in real property and interests in mortgages on real property) and shares (or
transferable certificates of beneficial interest) in other qualified REITs.

       Section 1.856-3(d) provides that “real property” includes land or improvements
thereon, such as buildings or other inherently permanent structures thereon (including
items which are structural components of such buildings or structures). In addition, the
term “real property” includes interests in real property. Local law definitions will not be
controlling for purposes of determining the meaning of “real property” for purposes of
section 856 and the regulations thereunder. “Real property” includes, for example, the
wiring in a building, plumbing systems, central heating or central air-conditioning
machinery, pipes or ducts, elevators or escalators installed in the building, or other
items which are structural components of a building or other permanent structure. The
term does not include assets accessory to the operation of a business, such as
machinery, printing press, transportation equipment which is not a structural component
of the building, office equipment, refrigerators, individual air-conditioning units, grocery
counters, furnishings of a motel, hotel, or office building, etc. even though such items
may be termed fixtures under local law.

       Rev. Rul. 71-220, 1971-1 C.B. 210, considers whether certain mobile home units
are real property within the meaning of section 856 and section 1.856-3(d). The mobile
home units were delivered to the site, set on a foundation of pre-engineered blocks with
the wheels and axles removed. The units were then attached to the ground using steel
straps. A carport or screened porch was attached to the unit, and the unit was
connected to utilities. The revenue ruling holds that these mobile home units are real
estate assets under section 856 and section 1.856-3(d).

      Rev. Rul. 75-424, 1975-2 C.B. 269, concerns whether various components of a
microwave transmission system are real estate assets for purposes of section 856. The
system consists of transmitting and receiving towers built upon pilings or foundations,
transmitting and receiving antennae affixed to the towers, a building, equipment within
PLR-132710-15                                8

the building, and waveguides. The waveguides are transmission lines from the
receivers or transmitters to the antennae, and they are metal pipes permanently bolted
or welded to the tower and never removed or replaced unless blown off by weather.
The transmitting, multiplex, and receiving equipment is housed in the building. Prewired
modular racks are installed in the building to support the equipment that is installed
upon them. The racks are completely wired in the factory and then bolted to the floor
and ceiling. They are self-supporting and do not depend upon the exterior walls for
support. A permanent heating and air conditioning system is also installed in the
building. The transmission site is surrounded by chain link fencing. The revenue ruling
holds that the building, the heating and air conditioning system, the transmitting and
receiving towers, and the fence are real estate assets. The ruling further holds that the
antennae, waveguides, transmitting, receiving, and multiplex equipment, and the
prewired modular racks are assets accessory to the operation of a business, and they
are, therefore, not real estate assets.

        Similar to the property or structural components described in Rev. Rul. 71-220
and Rev. Rul. 75-424 that qualify as real property for purposes of section 856, the
Facilities are inherently permanent structures. The Facilities have been moored or
attached for periods of years ranging from F years to I years. The Facilities are
connected to land-based utilities, such as electrical, water, and sewer systems.
Taxpayer represents that each Dockside Casino Barge was designed and constructed
to remain permanently in place for the entirety of its economic useful life and that each
Moored Riverboat was moored with a design to remain in place for the entirety of its
economic useful life. Taxpayer represents that it has no plans to ever move any of the
Facilities prior to the end of its economic useful life; moving any of the Facilities would
be costly, burdensome, and would require significant time and expenditure. Each
Facility is constructed and affixed in such a manner that movement ranges from
impracticable to impossible without complete destruction of the Facility. Based on an
analysis of the foregoing, we conclude that the Facilities are inherently permanent
structures. Inherently permanent structures are real property, and the term “real estate
assets” includes real property. Accordingly, based on the information submitted and the
representations made, we conclude that the Facilities qualify as real property for
purposes of sections 856(c)(2)(C) and 856(c)(3)(A). Furthermore, because the
Facilities are real property, they constitute real estate assets for purposes of sections
856(c)(4)(A) and 856(c)(5)(B). As explained supra in the Facts section of this letter, the
Facilities described in this ruling do not include the propulsion systems present in some
of the Dockside Casino Barges and Moored Riverboats.

Conclusion:

       We hereby rule that the Facilities qualify as real property for purposes of sections
856(c)(2)(C) and 856(c)(3)(A) and real estate assets for purposes of sections
856(c)(4)(A) and 856(c)(5)(B).
PLR-132710-15                                  9

       This ruling’s application is limited to the facts, representations, Code sections,
and regulations cited herein. Except as expressly provided herein, no opinion is
expressed or implied concerning the tax consequences of any aspect of any transaction
or item discussed or referenced in this letter. In particular, no opinion is expressed with
regard to whether Taxpayer or Company A otherwise qualifies as a REIT under
subchapter M of the Code. Additionally, we express no opinion regarding whether
amounts received under any leases with respect to the Facilities constitute qualifying
income under Section 856(c)(2) or (c)(3).

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

         In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representatives.



                                       Sincerely,



                                       Robert A. Martin
                                       Senior Technician Reviewer, Branch 1
                                       (Financial Institutions & Products)




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