Terminal assets and related payments receive favorable REIT treatment

Plain-English summary

A corporation planning to elect REIT status asked how several terminal assets, fees, and one-time payments would count under the REIT asset and income tests. The IRS ruled that permanently anchored floating docks were real property and that storage, pipeline-use, and docking fees qualified as rents from real property, based on the taxpayer's representations about exclusive capacity, fee calculations, services, and personal property. It also ruled that a positive section 481(a) depreciation adjustment and a payment for assuming remediation duties on the taxpayer's own land would be excluded from gross income solely for the REIT income tests. Income from insurance proceeds for hurricane-damaged real property would be treated as qualifying REIT income. The conclusions were limited to the submitted facts and representations, and the IRS did not rule that the taxpayer otherwise qualified as a REIT.

Ruling snapshot

• Question: How do floating docks, facility-use fees, an accounting adjustment, a remediation payment, and property-insurance proceeds count under the REIT tests?
• Outcome: Approved, all five requested treatments were granted
• Key authorities: IRC §§ 481(a), 512(b)(3), 856(c), 856(d); Treas. Reg. §§ 1.481-1, 1.512(b)-1, 1.856-4, 1.856-10

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202346008                                             Third Party Communication: None
 Release Date: 11/17/2023                                      Date of Communication: Not Applicable
 Index Number: 856.01-00
                                                               Person To Contact:
 ------------------------------------                          ----------------, ID No. -------------
 -----------------------                                       Telephone Number:
 -------------------------------------                         -------------------
 ---------------------------------                             Refer Reply To:
 Fax:                                                          CC:FIP:2
                                                               PLR-122273-22
                                                               Date:
                                                               May 30, 2023




Legend

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

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

Company          =        ---------------------------------

Agency           =        ----------------------------------------------------------------------

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

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

State C          =        -------------

Hurricane        =        ------------------

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

Date 2           =        -------------------------

Date 3           =        --------------------------

Date 4           =        --------------------------

Year 1           =        -------

Year 2           =        -------
PLR-122273-22                                  2


Year 3          =        -------

Year 4          =        -------

a               =        --

b               =        ---

c               =        ---

d               =        ---

e               =        -------------

f               =        -------------

g               =        -------------

h               =        --------------


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

      This ruling responds to a letter dated November 8, 2022, and subsequent
correspondence, requesting rulings on behalf of Taxpayer. Specifically, you have
requested the following rulings:

            1. The Floating Docks described below are real property for purposes of section
         1.856-10(b) of the Income Tax Regulations and, therefore, are real estate assets
         for purposes of sections 856(c)(4) and (c)(5) of the Internal Revenue Code.

            2. The Storage Fees, Pipeline Use Fees, and Docking Fees described below
         each qualify as rents from real property within the meaning of section 856(d) for
         purposes of sections 856(c)(2) and (c)(3).

            3. The Section 481(a) Adjustment described below will not be treated as gross
         income for purposes of sections 856(c)(2) and (c)(3).

            4. The Remediation Payment described below will not be treated as gross
         income for purposes of sections 856(c)(2) and (c)(3).

            5. Taxpayer’s income from the Insurance Payout described below will be treated
         as qualifying income for purposes of sections 856(c)(2) and (c)(3).
PLR-122273-22                                3

                                         FACTS

       Taxpayer was formed as a State A corporation on Date 2 and is currently taxed
as a corporation for U.S. federal income tax purposes. Taxpayer intends to elect to be
taxed as a real estate investment trust (“REIT”) beginning with its taxable year ending
Date 4. An existing or newly formed subsidiary of Taxpayer will elect to be treated as a
corporation for U.S. federal income tax purposes (if it is not formed as a corporation)
and will make a joint election with Taxpayer to be treated as a taxable REIT subsidiary
("TRS") of Taxpayer.

        Taxpayer owns bulk liquid storage terminal facilities (each, a "Storage Terminal
Facility") with intermodal transportation access (i.e., access to multiple forms of
transportation, such as ships, barges, rail, trucks, and pipelines). The Storage Terminal
Facilities are constructed on land owned or leased by Taxpayer. Taxpayer represents
that the Storage Terminal Facilities consist of assets that are either land, interests in
land, improvements to land, inherently permanent structures, or structural components
of an inherently permanent structure within the meaning of section 1.856-10 including
roadways, buildings, stationary docks, storage tanks, and pipelines. The Storage
Terminal Facilities also include personal property (e.g., pumps, compressors, and
meters).

Floating Docks

         Some of the Storage Terminal Facilities include floating docks (the "Floating
Docks"). The Floating Docks provide a conduit or route for tenants to access the
Storage Terminal Facilities and protect docked vessels from damage by the elements.
Taxpayer represents that the Floating Docks serve no active function within the
meaning of section 1.856-10(d)(2)(iii)(A). The Floating Docks are generally attached to
poured concrete walkways on land, to concrete, timber, or steel bulkheads that retain
contact with the land, and, as discussed below, to pilings. The configuration of each
Floating Dock was determined during the original design of the applicable Storage
Terminal Facility, and the Floating Docks are not interchangeable. Taxpayer represents
that the Floating Docks are designed, constructed, and intended to remain permanently
in place. Once attached, the Floating Docks are not portable or movable to another
location and are not intended to be moved to a different location. The Floating Docks
weigh hundreds of thousands to millions of pounds and are connected to land-based
utilities, such as water and electricity. Moving the Floating Docks would be prohibitively
costly, with the expense likely exceeding the cost of new construction. Taxpayer
represents that the floating docks have a useful life expectancy of approximately d
years.

        The Floating Docks are permanently anchored to the seabed or riverbed by
pilings. Taxpayer represents that the pilings are inherently permanent structures for
purposes of section 1.856-10(d)(2)(i). The Floating Docks are permanently affixed to
the pilings by steel pile guides or steel jackets that allow the Floating Docks to move up
PLR-122273-22                                4

or down on the pilings as necessary in response to water levels. Each Floating Dock
remains permanently anchored to the seabed or riverbed by the pilings regardless of
the elevation of the Floating Dock as water levels change. The steel pile guides contain
rollers that surround and always touch the pilings, and at no time is there space
between the rollers and the pilings. The steel pile guides are permanently connected to
the Floating Docks with steel or aluminum bolts or brackets. Similarly, where steel
jackets are used instead of pile guides, the jackets completely surround each piling and
are welded to the Floating Dock. The Floating Docks are built around, surrounded by, or
on top of the pilings and are not designed to be removed from the pilings. Because the
Floating Docks are surrounded by, attached to, or on top of the pilings, it would be
necessary to disassemble the Floating Docks to remove them from the pilings.
Moreover, the removal of the Floating Docks would result in the pilings being cut flush
with the seabed or riverbed effectively destroying the pilings.

Terminal Usage Agreements

        Taxpayer enters into agreements with one or more unrelated third-party users of
each Storage Terminal Facility (the "Terminal Users") permitting the Terminal Users to
store their products at, and move their products through, the Storage Terminal Facility.
The arrangement between Taxpayer and a Terminal User may be embodied in a single
agreement or in multiple agreements that are related to one another (such agreements,
collectively, "Terminal Usage Agreements"). Terminal Usage Agreements permit the
Terminal Users to utilize the Storage Terminal Facility for the storage and movement of
their products for a term of generally a or more years (and in no event less than c days).

         A Terminal Usage Agreement specifies the storage tank capacity reserved for
the particular Terminal User, but may or may not specify the tank in which the Terminal
User's product will be stored: under some Terminal Usage Agreements, a specified tank
or tanks is identified and dedicated to a Terminal User and, in other Terminal Usage
Agreements, the Terminal User has a right to a fixed portion of the storage capacity at
the Storage Terminal Facility but does not have a particular tank or tanks dedicated to it.
Taxpayer represents that it does not oversell storage capacity and is obligated, at all
times, to ensure that the capacity specified in a Terminal Usage Agreement is reserved
for and available to the relevant Terminal User. A Terminal Usage Agreement may
provide for the lease of a portion of the capacity of a storage tank (as opposed to a
lease of the entire storage tank) where the stored content is fungible and may be stored
on a comingled basis. Taxpayer represents that, at all times, the Terminal Users retain
title to the product stored at the Storage Terminal Facilities.

       Taxpayer represents that, with respect to each Terminal Usage Agreement, the
fair market value rent for the pumps, compressors, meters, and other personal property
which is leased under, or in connection with, the lease of the Storage Terminal Facility
does not exceed 15 percent of the total rent for the taxable year paid by the Terminal
User for both the real and personal property leased under, or in connection with, such
Terminal Usage Agreement.
PLR-122273-22                                 5


        Taxpayer represents that it will only undertake activities with respect to the
Storage Terminal Facilities that are consistent with its fiduciary duty to manage its
assets or that would not result in unrelated business taxable income under section
512(b)(3) if received by an organization described in section 511(a)(2). Taxpayer will
design, construct, inspect, maintain, and repair storage tanks and other real property
assets located at each Storage Terminal Facility. Such activities will also include
painting and repairing the storage tanks to prevent atmospheric corrosion or excessive
wear and tear. On occasion, Taxpayer may test product in the storage tanks to verify it
is the product specified in the Terminal Usage Agreement solely to ensure the safety
and integrity of the storage tanks and the safety of the environment. Taxpayer will
provide security at the Storage Terminal Facilities, including monitoring the area through
security cameras and providing security guards.

        Taxpayer will also provide Terminal Users with utility services, such as providing
electricity to light the Storage Terminal Facilities. Such utility services may also include
heating, cooling, or pressurizing the storage tanks located at a Storage Terminal
Facility. Taxpayer may also circulate product stored in a storage tank. Such heating,
cooling, pressurization, or circulation is only performed when it is necessary to avoid
damage to the storage tanks, pipes, and stored product (e.g., so the stored product
does not congeal in the storage tanks) and/or to make storing a product more efficient
(e.g., to keep a product in a liquid state). Taxpayer represents that it is customary for
storage tanks to be designed with the foregoing systems. Taxpayer further represents
that the cooling, heating, pressurization, or circulation (i) will be applied, as necessary,
at standard industry settings depending on the product stored therein, (ii) will not be
customized for an individual Terminal User, and (iii) will not be provided primarily for the
convenience of a particular Terminal User. In addition, none of the utilities provided by
Taxpayer to the Terminal Users in connection with their use of the storage tanks
separate, transform, modify, purify, or otherwise alter the nature or state of the product
stored in the storage tank. Taxpayer represents that such services are necessary for
the passive storage of the relevant products.

       Taxpayer represents that all other activities and services will be undertaken by a
TRS or an independent contractor from whom taxpayer derives no income (“IK”). In that
regard, a TRS or IK will be responsible for the following services and activities:
connecting and disconnecting loading arms or loading hoses and moving any product;
capturing and/or burning off vapors that are displaced when product is moved; adding
any agents or additives to any product in a storage tank for the benefit of a Terminal
User; taking and testing samples of product in a storage tank for the benefit of a
Terminal User; measuring or weighing product for the benefit of a Terminal User; and
the drumming of products. The TRS or IK may also move different types of product
owned by a Terminal User into a single tank to blend the Terminal User’s products.
Additionally, a TRS or IK will monitor, operate, manage, and repair pumps,
compressors, meters, and other personal property. Terminal Usage Agreements may
or may not separately state fees for the foregoing services. Taxpayer represents the
PLR-122273-22                                6

TRS or IK will receive arm's length compensation from Taxpayer for the performance of
these services.

        Taxpayer represents that, consistent with section 1.856-4(b)(1), all services
furnished to the Terminal Users are customarily provided to tenants of similar properties
in the geographic market in which each Storage Terminal Facility is located.

        Amounts paid by a Terminal User for a Terminal Usage Agreement (the "Storage
Fee") are paid monthly and are based on the volume of storage capacity reserved by
the Terminal User. The Storage Fee can be calculated as a fixed dollar amount
multiplied by the total storage capacity of the storage tank(s) under contract in the
Terminal Usage Agreement. Under such arrangements, the Terminal User pays for the
full capacity reserved for it each month regardless of whether the Terminal User uses
such full capacity. In other cases, the Storage Fee is calculated based on the volume of
liquid product actually stored at and/or moved through the Storage Terminal Facility
each month with a minimum volume commitment. In such cases, the Storage Fee is
generally calculated as a fixed dollar amount multiplied by the amount of product stored
and handled at the Storage Terminal Facility. Under these volume based agreements,
the Terminal User pays the amount of its minimum volume commitment regardless of
whether it uses the minimum capacity reserved for it plus the fixed dollar amount
multiplied by the volume of any additional reserved capacity used that month. In all
cases, each Terminal User may only use capacity reserved for its exclusive use
pursuant to its Terminal Usage Agreement.

        The fixed dollar amount used to calculate the Storage Fee generally increases
periodically under the terms of the Terminal Usage Agreements based on an index tied
to inflation. Taxpayer represents that the Storage Fee does not depend, in whole in or
in part on the income or profits of any person.

Pipeline Use Agreements

        Taxpayer also owns pipelines outside certain Storage Terminal Facilities (the
“Pipelines”) that provide a conduit or route for product to flow to and from such Storage
Terminal Facilities and connect to pipelines and/or facilities owned by third parties.
Taxpayer represents that the Pipelines are inherently permanent structures under
section 1.856-10. The Pipelines also include a de minimis amount of personal property
(e.g., pumps, compressors, and meters).

       Taxpayer enters into agreements with respect to the use of the Pipelines,
including contractual arrangements that are subject to regulation by the U.S. Federal
Energy Regulatory Commission, (each, a "Pipeline Use Agreement") with unrelated
third-parties (each, a "Pipeline User") generally for a period of a or more years (and in
no event less than c days). Taxpayer represents that it does not oversell capacity on a
Pipeline and is obligated at all times to ensure that the capacity specified in a Pipeline
Use Agreement will be available for use by the relevant Pipeline User.
PLR-122273-22                                 7

       Taxpayer represents that, with respect to each Pipeline Use Agreement, the fair
market value rent for the pumps, compressors, meters, and other personal property
which is leased under, or in connection with, the lease of the Pipeline does not exceed
15 percent of the total rent for the taxable year paid by the Pipeline User for both the
real and personal property leased under, or in connection with, such Pipeline Use
Agreement.

       Taxpayer represents it will only undertake activities with respect to the Pipelines
that are consistent with its fiduciary duty to manage its assets or that would not result in
unrelated business taxable income under section 512(b)(3) if received by an
organization described in section 511(a)(2). Taxpayer will design, construct, inspect,
monitor, maintain, and repair the Pipelines (except as described below with respect to
associated personal property). Taxpayer will mark the location of underground
Pipelines to minimize the possibility of damage due to digging. Taxpayer may test
product as it enters a Pipeline to verify that the product in that Pipeline is, in fact, the
product specified in the Pipeline Use Agreement. Such testing is performed solely to
ensure the safety and integrity of the Pipeline and the environment.

        Similar to Taxpayer's activities with respect to the Storage Terminal Facilities,
Taxpayer may heat or provide electricity to certain Pipelines. Taxpayer represents that
it is customary for pipelines to be designed with the foregoing systems. Taxpayer
represents that the purpose of heating the Pipelines is to avoid damage to the Pipelines
and the product in the Pipelines (e.g., so the product does not congeal in the Pipelines
and remains in a liquid state). Taxpayer further represents that heat (i) will be applied,
as necessary, at standard industry settings depending on the product in the Pipeline, (ii)
will not be customized for an individual Pipeline User, and (iii) will not be provided
primarily for the convenience of a particular Pipeline User. Furthermore, Taxpayer
represents that the heat does not help propel product along the Pipeline or act as a
pumping mechanism to move product. In addition, none of the utilities provided by
Taxpayer to the Pipeline Users in connection with their use of the Pipelines separate,
transform, modify, purify, or otherwise alter the nature or state of the product in the
Pipeline. Taxpayer represents that such services are necessary in order to provide a
conduit or route for product to flow to and from Storage Terminal Facilities and connect
to pipelines and/or facilities owned by third parties.

      All other types of activities and services with respect to the Pipelines will be
undertaken by a TRS or IK, including, scheduling use of the Pipeline by the Pipeline
Users. Additionally, a TRS or IK will operate, monitor, maintain, and repair any pumps,
compressors, meters, and other personal property and will receive arm's length
compensation from Taxpayer for performing these activities.

       Taxpayer represents that all services furnished to the Pipeline Users are
customarily provided to tenants of similar properties in the geographic market in which
the relevant Pipeline is located.
PLR-122273-22                                8

       The amount received by Taxpayer from a Pipeline User with respect to a Pipeline
is based on the volume of product placed on the Pipeline by the Pipeline User (the
"Pipeline Use Fee"). The Pipeline Use Fee is generally calculated as a fixed dollar
amount multiplied by the amount of product moved through the Pipeline. The Pipeline
Use Agreement provides for an agreed-upon minimum volume commitment, and the
Pipeline User is responsible for paying the minimum Pipeline Use Fee regardless of
whether it uses the minimum capacity reserved for it. A Pipeline User that exceeds its
minimum reserved capacity under its Pipeline Use Agreement is charged for such
additional reserved capacity, but the fixed dollar amount per barrel may decrease if the
product handled for a particular Pipeline User exceeds the minimum volume
commitment for the month. The fixed dollar amount increases periodically under the
terms of the Pipeline Use Agreement based on an index tied to inflation. Taxpayer
represents that the Pipeline Use Fee does not depend, in whole in or in part on the
income or profits of any person. In all cases, each Pipeline User may only use capacity
reserved for its exclusive use pursuant to its Pipeline Use Agreement.

Dock Usage Agreement

       Taxpayer enters into Dock Usage Agreements with one or more unrelated third-
parties (each, a "Dock User") generally for a period of a or more years (and in no event
less than c days). The Dock Users are not parties to Terminal Use Agreements. In
exchange for a fee (the “Docking Fee”), a Dock Usage Agreement grants the Dock User
the right to run pipeline across a Storage Terminal Facility that extends to the dock, use
space on the dock to install equipment, dock a vessel at the dock and use the dock
space to load/unload its product at any time during the term of the Dock Usage
Agreement. Docking Fees are generally calculated in a manner similar to Storage
Fees, i.e., as a fixed monthly charge or a fixed dollar amount multiplied by the amount
of product moved over the dock with a minimum volume commitment. In all cases,
each Dock User may only use space reserved for its exclusive use pursuant to its Dock
Usage Agreement.

        Taxpayer represents that it will only undertake activities with respect to Dock
Usage Agreements that are consistent with its fiduciary duty to manage its assets or
that would not result in unrelated business taxable income under section 512(b)(3) if
received by an organization described in section 511(a)(2). Taxpayer will maintain and
repair the dock and will provide electricity and security to the dock. A TRS or IK will
undertake all other activities and services that benefit the Dock User and will be
compensated at arm’s length by Taxpayer for those services. Specifically, a TRS or IK
will perform all services provided in connection with the Dock User’s docking of vessels
and loading or unloading product at the dock, including scheduling dock usage.

       In addition, Taxpayer represents that, consistent with section 1.856-4(b)(1), all
services furnished to the Dock User are customarily provided to tenants of similar
properties in the geographic market in which the dock is located. In addition, Taxpayer
represents that, with respect to each Dock Usage Agreement, the fair market value rent
PLR-122273-22                                 9

for any personal property which is leased under, or in connection with, the lease of the
dock space does not exceed 15 percent of the total rent for the taxable year paid by the
Dock User for both the real and personal property leased under, or in connection with,
such Dock Usage Agreement. Taxpayer further represents that a TRS or IK will
monitor, operate, manage, and repair such personal property. Taxpayer also
represents that the Docking Fees do not and will not depend, in whole or in part, on the
income or profits of any person.

       Taxpayer represents that it does not oversell dock space and is obligated at all
times to ensure that the space specified in a Dock Usage Agreement is reserved for and
available to the Dock User. While the Dock User does not have a specific area of the
applicable dock reserved for its sole use, it is entitled to use the dock throughout the
term of its Dock Usage Agreement.

Section 481(a) Adjustment

       Taxpayer will file a Form 3115, Application for Change in Accounting Method,
under the automatic change procedure described in Rev. Proc. 2015-13, 2015-5 I.R.B.
419, to change its method of depreciation for certain storage tanks and assets
associated therewith. Specifically, Taxpayer will treat storage tanks and associated
assets that it currently treats as personal property as real property for purposes of
depreciation. This automatic change will result in a positive adjustment under section
481(a) that will be includible in Taxpayer's taxable income over a period of four years
(the "Section 481(a) Adjustment").

Remediation Payment

        Subsidiary is a State A limited liability company that is indirectly wholly-owned by
Taxpayer and will be disregarded as an entity separate from Taxpayer as a result of
Taxpayer’s REIT election. In Year 1, Subsidiary acquired a parcel of property from
Company, an unrelated third party (“the Parcel”). The Parcel is a portion of a larger site
that is subject to a remediation order (the “Order”). The Order is an administrative
consent order entered into between Company and Agency in which Company agreed to
remediate certain polluted land in State B that was owned by Company.

          The Parcel (and any other property subject to the Order) remains subject to the
Order and any instrument of conveyance must contain a notice to that effect. Initially,
Company agreed to remain responsible for all environmental liabilities, claims, and
obligations associated with its ownership and operation of the Parcel prior to Date 1.
Taxpayer represents that if Company had not agreed to remain responsible for the
environmental liabilities at the time Subsidiary purchased the parcel, Subsidiary would
not have been willing to pay as much to acquire the Parcel because it would have been
required to assume a costly obligation with respect to the Parcel. Subsequently, on
Date 3, Subsidiary agreed to assume certain pre-Date 1 environmental remediation
liabilities with respect to Parcel in exchange for $g (the “Remediation Payment”).
PLR-122273-22                                10


        Subsidiary’s remediation obligations include excavating portions of the Parcel,
replacing contaminated soil with new soil, “capping” subsurface contamination to
prevent its upward migration, constructing water treatment infrastructure to prevent
future contamination of water and land in State B, and ongoing testing of soil samples to
ensure the remediation efforts are and remain effective. Taxpayer represents that
Subsidiary’s obligations are with respect to its own real property, the Parcel, and that it
is not responsible for the remediation of the rest of Company’s land. Taxpayer
represents that Subsidiary intends to engage independent contractors to perform most
of the remediation work. Taxpayer also represents that it will capitalize the costs of the
remediation for U.S. federal income tax purposes.

       The amount of the Remediation Payment includes the following: the net present
value of the estimated remediation costs, up to a b percent contingency fee in the event
actual remediation costs are higher, and an amount intended to cover the risk of
assuming the remediation liabilities. Taxpayer expects to include in its gross income all
or a portion of the Remediation Payment in Year 4.

        Taxpayer represents that the Parcel constitutes real property for purposes of
section 856 and substantially all of the income generated from the Parcel will constitute
qualifying income for purposes of section 856(c)(2) and (c)(3). Taxpayer further
represents that it is responsible for the remediation and must incur the costs associated
with remediating the Parcel and the Remediation Payment does not reflect
compensation for services provided by Taxpayer to any third-party.

Insurance Payout

        In Year 2, Hurricane caused extensive damage to three Storage Terminal
Facilities located in State C. The hurricane-force winds caused most of the property
damage, including damage to storage tank insulation, pipelines, and building roofs.
Taxpayer estimates that the total cost to repair the damage from Hurricane will be
between $f and $h (or more). Taxpayer carries property insurance to protect against
damage to its storage terminal facilities and pipelines. After Taxpayer satisfies its
property insurance deductible in the amount of approximately $e, the third-party
insurance company that issued Taxpayer's policy will make an insurance payment to
Taxpayer for the remainder of the damage (the "Insurance Payout"). Taxpayer expects
to receive the Insurance Payout in multiple payments over more than one taxable year,
beginning in Year 3 or Year 4.

       Taxpayer represents that it will recognize income due to the receipt of the
Insurance Payout to the extent it exceeds Taxpayer’s actual expenditures to repair and
replace damaged real property. Any such income compensates Taxpayer for the
damaged real property that Taxpayer does not repair or replace. Taxpayer represents
that any income from the Insurance Payout relates solely to Taxpayer’s real property
damaged by Hurricane.
PLR-122273-22                                 11


                                  LAW AND ANALYSIS

Ruling 1: Floating Docks

       Section 856(c)(4)(A) of the Code provides that, at the close of each quarter of its
taxable 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) defines the term “real estate assets”, in part, to mean real
property (including interests in real property). Section 1.856-3(b)(1) of the Regulations
provides that the term “real estate assets” means real property, interests in mortgages
on real property (including interests in mortgages on leaseholds of land or other
improvements thereon), and shares in other qualified REITs.

        Section 1.856-10(b) provides that the term “real property” means land and
improvements to land. Local law definitions are not controlling for purposes of
determining the meaning of the term real property. Section 1.856-10(d)(1) provides that
the term “improvements to land” means inherently permanent structures and their
structural components. Section 1.856-10(d)(2)(i) provides that the term “inherently
permanent structure” means any permanently affixed building or other permanently
affixed structure. Affixation may be to land or to another inherently permanent structure
and may be by weight alone. If the affixation is reasonably expected to last indefinitely
based on all the facts and circumstances, the affixation is considered permanent. A
distinct asset that serves an active function, such as an item of machinery or equipment,
is not a building or other inherently permanent structure.

        Section 1.856-10(d)(2)(iii)(A) provides that, in general, other inherently
permanent structures serve a passive function, such as to contain, support, shelter,
cover, protect, or provide a conduit or a route, and do not serve an active function, such
as to manufacture, create, produce, convert, or transport. Section 1.856-10(d)(2)(iii)(B)
provides a list of distinct assets that may qualify as other inherently permanent
structures if they are permanently affixed. Stationary wharves and docks are included
in the list of inherently permanent structures found in section 1.856-10(d)(2)(iii)(B).

       Section 1.856-10(d)(2)(iv) provides facts and circumstances that must be
considered in determining if a distinct asset that serves a passive function and is not
otherwise listed in section 1.856-10(d)(2)(ii)(B) or (iii)(B) is an inherently permanent
structure. The factors that must be taken into account include:

       (A) The manner in which the distinct asset is affixed to real property;

       (B) Whether the distinct asset is designed to be removed or to remain in place
           indefinitely;
PLR-122273-22                                12


       (C) The damage that removal of the distinct asset would cause to the item itself
           or to the real property to which it is affixed;

       (D) Any circumstances that suggest the expected period of affixation is not
           indefinite (for example, a lease that requires or permits removal of the
           distinct asset upon the expiration of the lease); and

       (E) The time and expense required to move the distinct asset.

       Because only stationary wharves and docks are included in the list of inherently
permanent structures under section 1.856-10(d)(2)(iii)(B), floating docks that do not
serve an active function must be analyzed based on all the facts and circumstances
pursuant to section 1.856-10(d)(2)(iv) to determine if they are inherently permanent
structures.

        Taxpayer represents that the pilings are inherently permanent structures for
purposes of section 1.856-10(d)(2)(i). Taxpayer further represents that: (A) the Floating
Docks are affixed to the pilings by steel pile guides containing rollers that always touch
the pilings and are permanently connected to the Floating Docks with steel or aluminum
bolts or brackets or are affixed to the pilings by steel jackets that completely surround
the pilings and are welded to the Floating Docks; (B) the Floating Docks are designed,
constructed, and intended to remain permanently in place; (C) removal of the Floating
Docks from the pilings would require total deconstruction of the Floating Docks and
would also result in destruction of the pilings; (D) no circumstances suggest that the
expected period of affixation is not indefinite; and (E) moving the Floating Docks would
be prohibitively costly, with the expense likely exceeding the cost of new construction.
Taxpayer represents that the Floating Docks provide a conduit or route for tenants to
access the Storage Terminal Facilities and protect docked vessels from damage by the
elements. Taxpayer further represents that the floating docks serve no active function
within the meaning of section 1.856-10(d)(2)(iii)(A).

       Based on the information submitted and representations made, we conclude that
the Floating Docks are inherently permanent structures that are permanently affixed to
other inherently permanent structures for purposes of section 1.856-2(d)(2)(i).
Accordingly, the Floating Docks are real property within the meaning of section 1.856-
10(b) and, therefore, are real estate assets for purposes of section 856(c)(4) and (5).


Ruling 2: Storage Fees, Pipeline Use Fees, and Docking Fees

       Section 856(c)(2) provides that in order for a corporation to qualify as a REIT, at
least 95 percent of the corporation's gross income (excluding gross income from
prohibited transactions) must be derived from dividends; interest; rents from real
property; gain from the sale or other disposition of stock, securities, and real property
PLR-122273-22                                13

(other than property described in section 1221(a)); abatements and refunds of taxes on
real property; income and gain derived from foreclosure property; commitment fees to
make loans secured by mortgages on real property or on interests in real property or to
purchase or lease real property; gain from certain sales or other dispositions of real
estate assets; and certain mineral royalty income.

       Section 856(c)(3) provides that in order for a corporation to qualify as a REIT, at
least 75 percent of the corporation's gross income (excluding gross income from
prohibited transactions) must be derived from rents from real property; interest on
obligations secured by mortgages on real property or on interests in real property; gain
from the sale or other disposition of real property (other than property described in
section 1221(a)); dividends or other distributions on, and gain from the sale or
disposition of, transferable shares in other REITs; abatements and refunds of taxes on
real property; income and gain derived from foreclosure property; commitment fees to
make loans secured by mortgages on real property or on interests in real property or to
purchase or lease real property; gain from certain sales or other dispositions of real
estate assets; and qualified temporary investment income.

        Section 856(d)(1) provides that “rents from real property” includes (subject to
exclusions provided in section 856(d)(2)): (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, but only if the rent attributable to such personal property for the taxable
year does not exceed 15 percent of the total rent for the taxable year attributable to both
the real and personal property leased under, or in connection with, such lease.

       Section 856(d)(2)(A) provides that, subject to certain exceptions, rents from real
property does not include any amount received or accrued, directly or indirectly, with
respect to any real or personal property, if the determination of such amount depends in
whole or in part on the income or profits derived by any person from such property
(except that any amount so received or accrued shall not be excluded from rents from
real property solely by reason of being based on a fixed percentage or percentages of
receipts or sales).

       Section 856(d)(2)(C) provides that any impermissible tenant service income is
excluded from rents from real property. Section 856(d)(7)(A) defines "impermissible
tenant service income" to mean, with respect to any real or personal property, any
amount received or accrued directly or indirectly by the REIT for services furnished or
rendered by the REIT to the tenants of the property, or for managing or operating such
property.

       Section 856(d)(7)(C) provides certain exceptions from impermissible tenant
service income. Section 856(d)(7)(C)(i) provides that for purposes of section
856(d)(7)(A), services furnished or rendered, or management or operation provided,
PLR-122273-22                                14

through an independent contractor from whom the REIT does not derive or receive any
income or through a TRS of such REIT shall not be treated as furnished, rendered, or
provided by the REIT. Section 856(d)(7)(C)(ii) provides that impermissible tenant
service income does not include any amount which would be excluded from unrelated
business taxable income under section 512(b)(3) if received by an organization
described in section 511(a)(2).

        Section 512(b)(3) provides, in part, that there shall be excluded from the
computation of unrelated business taxable income all rents from real property and all
rents from personal property leased with such real property, if the rents attributable to
such personal property are an incidental amount of the total rents received or accrued
under the lease, determined at the time the personal property is placed in service.

     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.

        Section 1.856-4(b)(1) provides that, for purposes of sections 856(c)(2) and (3),
rents from real property includes charges for services customarily furnished or rendered
in connection with the rental of real property, whether or not the charges are separately
stated. Services furnished to the tenants of a particular building will be considered as
customary if, in the geographic market in which the building is located, tenants in
buildings of a similar class (such as luxury apartment buildings) are customarily
provided with the service. To qualify as a service customarily furnished, the service
must be furnished or rendered to the tenants of the REIT or, primarily for the
convenience or benefit of the tenants, to the guests, customers, or subtenants of the
tenants.

        Section 1.856-4(b)(5)(ii) provides that the trustees or directors of the REIT are
not required to delegate or contract out their fiduciary duty to manage the REIT itself, as
distinguished from rendering or furnishing services to the tenants of its property or
managing or operating the property. Thus, the trustees or directors may do all those
things necessary, in their fiduciary capacities, to manage and conduct the affairs of the
REIT itself, including establishing rental terms, choosing tenants, entering into renewal
of leases, and dealing with taxes, interest, and insurance relating to the REIT’s property.
The trustees may also make capital expenditures with respect to the REIT’s property
(as defined in section 263) and may make decisions as to repairs of the REIT’s property
(of the type that would be deductible under section 162), the cost of which may be
borne by the REIT. See also Rev. Rul. 67-353, 1967-2 C.B. 252.

       Section 1.512(b)-1(c)(5) provides that payments for the use or occupancy of
rooms and other space where services are also rendered to the occupant, such as for
the use or occupancy of rooms or other quarters in hotels, boarding houses, or
apartment houses furnishing hotel services, or in tourist camps or tourist homes, motor
courts or motels, or for the use or occupancy of space in parking lots, warehouses, or
storage garages, do not constitute rents from real property. Generally, services are
PLR-122273-22                                 15

considered rendered to the occupant if they are primarily for his convenience and are
other than those usually or customarily rendered in connection with the rental of rooms
or other space for occupancy only. The supplying of maid service, for example,
constitutes such service; whereas the furnishing of heat and light, the cleaning of public
entrances, exits, stairways, and lobbies, and the collection of trash are not considered
as services rendered to the occupant.

        Taxpayer represents that the Storage Terminal Facilities and the Pipelines are
real property for purposes of section 856. Furthermore, this letter ruling concludes that
the Floating Docks are real property for purposes of section 856. The Terminal Usage
Agreements, Pipeline Use Agreements, and Dock Usage Agreements will generally
have a term of a or more years, and in no event less than c days. Each of the Terminal
Usage Agreements, Pipeline Use Agreements, and Dock Usage Agreements will
provide the user with the exclusive right to use a fixed portion of the capacity of the
Storage Terminal Facilities, the Pipelines, or docks and land at the Storage Terminal
Facilities throughout the term of the agreement. Taxpayer represents that the Storage
Fee, Pipeline Use Fee, and Docking Fee do not depend, in whole or in part, on the
income or profits of any person. Accordingly, each of the Storage Fee, Docking Fee,
and Pipeline Use Fee is an amount received for the use of, or the right to use, real
property of Taxpayer and qualifies as rents from interests in real property under section
856(d)(1)(A).

        With respect to the Storage Terminal Facilities, Pipelines, and docks, Taxpayer
represents that it will only undertake activities that are consistent with its fiduciary duty
to manage itself or that would produce amounts which would be excluded from
unrelated business taxable income under section 512(b)(3) if received by an
organization described in section 511(a)(2). Taxpayer represents that a TRS or an IK
will perform all other activities and services. In connection with the Storage Terminal
Facilities, Taxpayer represents that the heating, cooling, or pressurization of the storage
tanks and the circulation of product stored in a storage tank is performed only when it is
necessary to avoid damage to the storage tanks and pipes, to make storing a product
more efficient; and is necessary for the passive storage of the relevant products. Such
heating, cooling, pressurization, or circulation is applied at standard industry settings
depending on the product stored and is not tailored to the needs of individual Storage
Terminal Users. Such heating, cooling, pressurization, or circulation is not provided
primarily for the convenience of a particular Storage Terminal User. Additionally, such
heating, cooling, pressurization, or circulation does not separate, transform, modify,
purify, or otherwise alter the nature or state of the product stored in the storage tank.
Similarly, in connection with the Pipelines, Taxpayer represents that the heat is applied
as necessary to avoid damage to the Pipelines and is applied at standard industry
settings depending on the product in the Pipeline and is not customized for any
individual Pipeline User. Neither the heat nor the electricity provided by Taxpayer
separate, transform, modify, purify or otherwise alter the nature or state of the product in
the Pipeline. Furthermore, the heat does not help propel product along the Pipeline or
act as a pumping mechanism to move product. Therefore, the activities and services
PLR-122273-22                                 16

performed by Taxpayer and by a TRS or IK detailed in the Facts section of this letter do
not give rise to impermissible tenant service income. Taxpayer represents that all
services furnished to the Storage Terminal Users are customarily provided to tenants of
similar properties in the geographic market in which the Storage Terminal Facility is
located, and that all services furnished to the Pipeline Users are customarily provided to
tenants of similar properties in the geographic market in which the Pipeline is located.
Likewise, Taxpayer represents that the services furnished to a Dock User are
customarily provided to tenants of similar properties in the geographic market in which
the dock is located.

       Taxpayer represents that, with respect to each Terminal Usage Agreement,
each Pipeline Use Agreement, and each Dock Usage Agreement, rent attributable to
personal property that is leased under, or in connection with, the lease of the Storage
Terminal Facility, Pipeline, or dock does not exceed 15 percent of the total rent for the
taxable year attributable to both the real and personal property leased under, or in
connection with, such agreement. Accordingly, the Storage Fees, Pipeline Use Fees,
and Docking Fees received by Taxpayer qualify as rents from real property within the
meaning of section 856(d) for purposes of sections 856(c)(2) and (c)(3).

Ruling 3: Section 481(a) Adjustment

        Section 856(c)(5)(J) provides that to the extent necessary to carry out the
purposes of Part II of subchapter M of chapter 1 of the Code, the Secretary is
authorized to determine, solely for purposes of such part, whether any item of income or
gain which (i) does not otherwise qualify under section 856(c)(2) or (3) may be
considered as not constituting gross income for purposes of section 856(c)(2) or (3), or
(ii) otherwise constitutes gross income not qualifying under section 856(c)(2) or (3) may
be considered as gross income which qualifies under section 856(c)(2) or (3).

        The legislative history underlying the tax treatment of REITs indicates that the
central concern behind the gross income restrictions is that a REIT's gross income
should largely be composed of passive income. For example, H.R. Rep. No. 2020, 86th
Cong., 2d Sess. 4 (1960) at 6, 1960-2 C.B. 819, at 822-823 states, "[o]ne of the
principal purposes of your committee in imposing restrictions on types of income of a
qualifying real estate investment trust is to be sure the bulk of its income is from passive
income sources and not from the active conduct of a trade or business."

       Section 481(a) provides that a taxpayer that changes its method of accounting
takes into account necessary adjustments in computing its taxable income.

       Section 1.481-1(d) provides that a section 481(a) adjustment must be properly
taken into account for purposes of computing gross income, adjusted gross income, or
taxable income in determining the amount of any item of gain, loss, deduction, or credit
that depends on gross income, adjusted gross income, or taxable income.
PLR-122273-22                                 17

        As noted above, Taxpayer will file a Form 3115 to change its method of
accounting for depreciating certain storage tanks. The method change will result in a
positive Section 481(a) Adjustment that will be includible in taxable income. Sections
856(c)(2) and (3) list the sources of permissible income for a REIT. Income from a
section 481(a) adjustment is not specifically enumerated in section 856(c)(2) or (3).
Based on all the facts and circumstances, however, excluding the Section 481(a)
Adjustment from Taxpayer’s gross income for purposes of section 856(c)(2) and (c)(3)
does not interfere with Congressional policy objectives in enacting the income tests
under those provisions. Accordingly, pursuant to section 856(c)(5)(J)(i), the Section
481(a) Adjustment will not constitute gross income for purposes of section 856(c)(2) and
(c)(3).

Ruling 4: Remediation Payment

       The Remediation Payment constitutes gross income that does not qualify under
sections 856(c)(2) or (c)(3). The Remediation Payment is essentially an amount
intended to compensate Taxpayer for the cost of remediating its own property.
Taxpayer represents that had it been obligated to perform the remediation when it
purchased the Parcel, the purchase price of the Parcel would have been lower to reflect
the cost of remediation. In addition, Taxpayer represents that the Remediation
Payment is not compensation for any services provided to a third party or for
remediating property that is not owned by Taxpayer. As such, excluding the
Remediation Payment from gross income for purposes of sections 856(c)(2) and (c)(3)
does not impede or interfere with Congress’ policy objective in enacting the income
tests under those provisions. Accordingly, pursuant to section 856(c)(5)(J)(i), the
Remediation Payment will not constitute gross income for purposes of sections
856(c)(2) and (c)(3).

Ruling 5: Insurance Payout

        Any gross income attributable to the Insurance Payout is not gross income that
qualifies under sections 856(c)(2) or (c)(3). Taxpayer represents that receipt of the
Insurance Payout merely restores Taxpayer to the position in which it would have been
absent the hurricane damage to its property and the income attributable to the
Insurance Payout is a payment for the damaged real property that Taxpayer does not
repair or replace, which is akin to the disposition of lost real property as a result of
Hurricane. Taxpayer represents that the property damaged is real property for
purposes of section 856. Based on the facts and circumstances of the instant case,
treating the income attributable to the Insurance Payout as qualifying income for
purposes of sections 856(c)(2) and (c)(3) does not interfere with Congressional policy
objectives in enacting the income tests under those provisions. Accordingly, pursuant
to section 856(c)(5)(J)(ii), income attributable to the Insurance Payout will be treated as
qualifying income for purposes of sections 856(c)(2) and (c)(3).
PLR-122273-22                                 18

                                     CONCLUSIONS

       Based on the information submitted and representations made by Taxpayer, we
rule that:

    1. The Floating Docks are real property for purposes of section 1.856-10(b) and,
      therefore, are real estate assets for purposes of sections 856(c)(4) and (c)(5).

    2. The Storage Fees, Pipeline Use Fees, and Docking Fees received by Taxpayer
      qualify as rents from real property within the meaning of section 856(d) for
      purposes of sections 856(c)(2) and (c)(3).

    3. Pursuant to section 856(c)(5)(J)(i), the Section 481(a) Adjustment will not be
      treated as gross income for purposes of sections 856(c)(2) and (c)(3).

    4. Pursuant to section 856(c)(5)(J)(i), the Remediation Payment will not be treated
      as gross income for purposes of sections 856(c)(2) and (c)(3).

    5. Pursuant to section 856(c)(5)(J)(ii), Taxpayer’s income from the Insurance
      Payout will be treated as qualifying income for purposes of sections 856(c)(2)
      and (c)(3).

        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
concerning whether any asset described herein, other than the floating docks,
constitutes real property for purposes of section 856. Additionally, no opinion is
expressed regarding whether any amount received by Taxpayer depends on the income
or profits of any person, any activities are fiduciary duties to manage the REIT itself, any
activities would not result in unrelated business taxable income under section 512(b)(3)
if received by an organization described in section 511(a)(2), any services are
customarily provided to tenants of similar properties in the same geographic market, or
any income attributable to personal property leased in connection with real and personal
property does not exceed 15 percent of the total rent under section 856(d)(1)(C).
Furthermore, no opinion is expressed regarding the propriety of Taxpayer’s method
change or the amount of the Section 481(a) Adjustment. Additionally, no opinion is
expressed or implied as to whether any portion of the Insurance Payout constitutes
gross income for federal income tax purposes. Finally, no opinion is expressed
regarding whether Taxpayer otherwise qualifies as a REIT under subsection M, part II of
chapter 1 of the Code.

      Furthermore, the ruling herein relates to whether income from certain services
performed by Taxpayer is impermissible tenant service income and is specifically limited
to whether the income is qualifying income for REIT qualification purposes. The
PLR-122273-22                                          19

definition of rents from real property under section 856(d) differs in scope and structure
from the definition of rents from real property under section 512(b)(3), which applies to
exempt organizations described in section 511(a)(2). Therefore, an exempt organization
providing the same services may have unrelated business taxable income because the
income may not be excluded under section 512(b)(3) as rents from real property.

       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 cite 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,

                                                 ____________________
                                                 Andrea M. Hoffenson
                                                 Senior Technical Reviewer, Branch 3
                                                 Office of Associate Chief Counsel
                                                 (Financial Institutions & Products)



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