Real Estate Investment Trusts (REIT for short) are the newest way some companies are seeking to avoid corporate income tax. According to a story published on June 8th in the Wall Street Journal, some companies are seeking to convert to REITs. The IRS, however, is not convinced those conversions are legal.
REITs have been around for decades. Internal Revenue Code section 856 was adopted back in 1960 when Eisenhower was president. The law was created to allow people to invest in large real estate projects. To qualify as a REIT, the trust must distribute 90% of its taxable income to investors. REITs also must also involve a real estate investment or property rental. The latter requirement is causing the controversy.
Businesses like the REIT concept because it allows the company to not pay corporate tax on its income. Since 90% or more of the income must be distributed, double taxation is avoided. According to the WSJ, some companies have been stretching the limits of the law and possibly the tolerance of the IRS.
Lamar Advertising (a major player in the outdoor advertising billboard market) and Iron Mountain Inc, a facility that rents document storage space are apparently seeking to convert to REITs. CBS is also considering spinning off its billboard business into a REIT.
We think the conversion makes sense and should pass muster. We have long represented cell phone tower operators. That industry has often used the REIT form of ownership for years and we know of no IRS challenges.
Much of our tax code was written decades ago. Not a month goes by without major technological changes in many business sectors. Cell phone towers, data storage facilities and private prisons were not even in existence when Congress enacted the REIT law. All of those uses, however, appear to comply with the law.
In a global market place, American businesses need to remain competitive. Using the REIT tax structure to avoid double taxation simply makes good business sense. We hope the IRS agrees.
The tax lawyers at Mahany & Ertl help businesses and individuals with a wide variety of tax matters. We can help in REIT conversions and other complex tax planning matters. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All inquiries protected by the attorney – client privilege.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS tax services available worldwide.
Written by Brian H. Mahany, Esq.