Brownfield-credit receivable and income qualified for REIT tests

Plain-English summary

A REIT indirectly owned an interest in a redeveloped brownfield site through
partnership and disregarded-entity tiers. Its share of refundable state
brownfield credits arose from remediation and development costs connected with
the site's real-property leasing business and had not been purchased. The IRS
ruled that, to the extent the right to receive the credits was an asset under
GAAP, it was an ordinary-course receivable for the Section 856(c)(4) asset test.
It also exercised its Section 856(c)(5)(J) authority to treat income from receipt
or accrual of the credits as qualifying income for the 95-percent and 75-percent
REIT income tests. The ruling did not determine the credit income amount, GAAP
asset treatment, or whether the taxpayer otherwise qualified as a REIT.

Ruling snapshot

• Question: How are refundable brownfield credits treated under the REIT asset and income tests?
• Outcome: Approved; the right is a qualifying receivable to the stated extent, and the related income is qualifying income
• Key authorities: IRC § 856(c)(2), (3), (4), and (5)(J); Treas. Reg. § 1.856-2(d)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202409002 Third Party Communication: None
Release Date: 3/1/2024 Date of Communication: Not Applicable
Index Number: 856.01-00
Person To Contact:
------------------------- -------------------, ID No. -----------------
------------------------------------------------------------ Telephone Number:
---------------- --------------------
---------------------------- Refer Reply To:
----------------------- CC:FIP:B02
---------------------------------------------- PLR-111473-23
------------------------- Date:
December 01, 2023

Legend:

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

Operating Partnership = ---------------------------

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

JV = -------------------------------------------

Fee Owner = ---------------------------------------------

Address = -----------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------------------

Tax = ----------------------------------------------------

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

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

Date = --------------------------

Year 1 = -------

Year 2 = -------
PLR-111473-23 2

Year 3 = -------

Year 4 = -------

Law 1 = ------------------------------------------------------------------------

Law 2 = -----------------------------------------------------

a = ---

b = ---

c = ---

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

   This is in reply to a letter dated May 23, 2023. Taxpayer has requested the

following rulings:

     (1) Taxpayer’s right to receive the Brownfield Credits (defined below), to the
         extent that right is an asset under generally accepted accounting principles
         (“GAAP”), is a receivable for purposes of section 856(c)(4) of the Internal
         Revenue Code (the “Code”); and

     (2) Pursuant to section 856(c)(5)(J)(ii), the gross income of Taxpayer arising from
         the receipt or accrual of the Brownfield Credits is considered qualifying
         income for purposes of section 856(c)(2) and (c)(3).

                                                   Facts

   Taxpayer is the sole general partner of Operating Partnership, which is treated

as a partnership for Federal income tax purposes. Taxpayer elected to be treated as a
Real Estate Investment Trust (“REIT”) beginning with the tax year ended Date.

   Taxpayer owns approximately a% of Operating Partnership. Through Operating

Partnership and its subsidiaries, Taxpayer owns interests in real property throughout the
United States. Operating Partnership is the sole member of Subsidiary. Subsidiary is a
State A limited liability company disregarded for Federal income tax purposes. 1

1
Taxpayer represents that because Subsidiary is a disregarded entity, the income, assets, and activities
of Subsidiary are treated as those of Operating Partnership for all relevant purposes of this letter. See
section 301.7701-3(b)(1)(ii) of the procedure and administration regulations.
PLR-111473-23 3

    Subsidiary owns b% of the interests in JV, a State A limited liability company that

is treated as a partnership for Federal income tax purposes. The remaining c% of the
interests in JV is owned by a person unrelated to Taxpayer, Operating Partnership, or
Subsidiary.

   JV is the sole member of Fee Owner, a State A limited liability company that is

treated as a disregarded entity for Federal income tax purposes. 2 Fee Owner is the
owner of real property located at Address (the “Site”).

     JV incurred significant expenditures in connection with the remediation of

adverse environmental conditions at the Site and with the rehabilitation and
development of the Site. Taxpayer represents that these expenditures were for the
remediation, rehabilitation, or development of real property within the meaning of
section 1.856-10 of the income tax regulations. In connection with JV’s remediation,
rehabilitation, and development of the Site, Taxpayer has claimed on its Year 1, Year 2,
and Year 3 State B income tax returns brownfield redevelopment tax credits under Law
13 (the “Brownfield Credits”). The amount of the Brownfield Credits is a percentage of
the costs of (1) site preparation, (2) certain tangible property (including buildings and
structural components placed in service at the Site), and (3) on-site groundwater
remediation. For each of Year 1, Year 2, and Year 3, the amount of the Brownfield
Credits claimed exceeds Taxpayer’s liability for Tax, i.e., Taxpayer’s State B income tax
liability. Taxpayer represents that, under State B law, the excess is treated under Law 2
as an overpayment of Tax and that Taxpayer has elected to receive a refund of the
overpayment.

   The allowable amount of Brownfield Credits has been under audit by State B. In

Year 4, Taxpayer consented to State B’s proposed allowable amount of Brownfield
Credits for Taxpayer’s Year 1 State B income tax return. Taxpayer’s Year 2 and Year 3
State B returns are still under audit, but for such years, Taxpayer anticipates receiving
notice that the refund claims or portions thereof have been approved.

   JV constructed an office building on the Site and leased the building or portions

thereof on terms that cause the income from any such lease to be qualifying rents from
real property for purposes of section 856(c)(2) and (3). Taxpayer represents that
substantially all of the income derived from the Site (other than income arising from the
receipt or accrual of the Brownfield Credits) is qualifying income for purposes of
section 856(c)(2) and (3).

2
Taxpayer represents that because Fee Owner is a disregarded entity, the income, assets, and activities
of Fee Owner are treated as those of JV for all relevant purposes of this letter. See section 301.7701-
3(b)(1)(ii).
3
Taxpayer represents that if a partnership completes the requirements for such credit, the credit is
claimed, and any refund is collected, by the partners.
PLR-111473-23 4

    Taxpayer represents that the right to receive the Brownfield Credits is properly

treated as a receivable under GAAP. The Brownfield Credits are allowable and
refundable only with respect to Taxpayer’s State B income tax liability and are not
abatements or refunds of taxes on real property under State B law. Taxpayer also
represents that neither it nor any other person purchased the Brownfield Credits from
another person. Rather, the right to receive the Brownfield Credits arose from the
development of real property on land in connection with the leasing business of JV.

                                Law and Analysis

Asset Test

    Section 856(c)(4)(A) provides that, in order for a corporation to qualify as a REIT

for a taxable year, at the close of each quarter of the taxable year, at least 75 percent of
the value of the corporation's total assets must be represented by real estate assets,
cash and cash items (including receivables), and Government securities.

   Section 1.856-2(d)(1) defines the term “receivables” for purposes of section

856(c)(4)(A) to mean only those receivables that arise in the ordinary course of a REIT's
operation, excluding receivables purchased from another person.

   Section 1.856-2(d)(3) provides that in determining the investment status of a

REIT, the term “total assets” means the gross assets of the REIT determined in
accordance with GAAP.

   Neither Taxpayer nor any other person purchased the Brownfield Credits from

another person. The right of Taxpayer to receive the Brownfield Credits arose from the
development of real property on land in connection with the leasing business of JV.
Taxpayer also represents that the right to receive the Brownfield Credits is properly
treated as a receivable under GAAP. Therefore, Taxpayer’s right to receive the
Brownfield Credits is a receivable that arose in the ordinary course of Taxpayer’s
operations within the meaning of section 1.856-2(d)(1).

Income Tests

   Section 856(c)(2) provides that at least 95% of a REIT’s gross income must be

derived from certain enumerated sources, which include dividends, interest, rents from
real property, gain from the sale or other disposition of stock, securities, and real
property (other than property in which the corporation is a dealer), abatements and
refunds of taxes on real property, income and gain derived from foreclosure property,
and certain commitment fees.

   Section 856(c)(3) provides that in order for a corporation to qualify as a REIT for

a taxable year, at least 75 percent of the corporation's gross income (excluding gross
income from prohibited transactions) must be derived from certain enumerated sources,
PLR-111473-23 5

which include rents from real property, interest on obligations secured by real property,
gain from the sale or other disposition of real property (other than property in which the
corporation is a dealer), distributions on and gain from the sale of REIT stock,
abatements and refunds of taxes on real property, income and gain derived from
foreclosure property, certain commitment fees, and qualified temporary investment
income.

   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, (i) whether any item of income or gain
that 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) whether any
item of income or gain that otherwise constitutes gross income not qualifying under
section 856(c)(2) or (3) may be considered as gross income that qualifies under
section 856(c)(2) or (3).

   Legislative history indicates that Congress intended part II of subchapter M to

apply to certain “organizations specializing in investments in real estate and real estate
mortgages.” H.R. Rep. No. 2020, 86th Cong., 2d Sess. 4 (1960), 1960-2 C.B. 819, 820.
Congress intended to restrict the beneficial tax treatment of part II of subchapter M to
“what is clearly passive income from real estate investments, as contrasted to income
from the active operation of businesses involving real estate.” Id.

   Income attributable to the receipt or accrual of the Brownfield Credits is not

derived from any source listed in section 856(c)(2) or (3). Pursuant to section
856(c)(5)(J), the Secretary has the authority to determine that the income attributable to
the receipt or accrual of the Brownfield Credits be considered as qualifying gross
income under those provisions. On the basis of all of the facts and circumstances,
including Taxpayer’s representations that JV leases the office building constructed on
the Site to generate rents from real property and that substantially all of the income
generated by the Site (exclusive of income arising from the receipt or accrual of the
Brownfield Credits) is qualifying income for purposes of section 856(c)(2) and (3),
treating Taxpayer’s income attributable to the receipt or accrual of the Brownfield
Credits as qualifying income is consistent with the purposes of part II of subchapter M of
the Code.

                                   Conclusions

   We hereby rule as follows:

   (1) Taxpayer’s right to receive the Brownfield Credits, to the extent the right is an
   asset under GAAP, is a receivable for purposes of section 856(c)(4); and

PLR-111473-23 6

     (2) Pursuant to section 856(c)(5)(J)(ii), the gross income of Taxpayer attributable
     to the receipt or accrual of the Brownfield Credits is considered qualifying income
     for purposes of section 856(c)(2) and (3).

    This ruling's application is limited to the facts, representations, Code sections,

and regulations cited herein. Except as specifically ruled upon above, no opinion is
expressed concerning any Federal income tax consequences related to the facts herein
under any other provisions of the Code. Specifically, we express no opinion as to the
proper amount of Taxpayer’s gross income from the Brownfield Credits, whether the
right to receive the Brownfield Credits is an asset under GAAP, or whether Taxpayer
qualifies as a REIT under part II of subchapter M of chapter 1 of the Code.

   This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent. In accordance with the
provisions of a Power of Attorney on file, we are sending a copy of this letter ruling to
your authorized representatives.

                                             Sincerely,


                                             ___________________________
                                             Bernard Audet
                                             Chief, Branch 2
                                             Office of Associate Chief Counsel
                                             (Financial Institutions & Products)

----------------------------------

----------------

----------------------------------------------------------------

-------------------

----------------------------------------------------------------