To maintain momentum ›› StayCurrent. - Paul Hastings the circumstances described in scenarios...
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New IRS Revenue Ruling Raises Concerns for Pension Funds From the ERISA Institutional Investment Group and Tax Department In an effort to identify circumstances in which a REIT’s income from the provision of parking services at its rental real properties qualifies as rents from real property, the IRS recently issued Revenue Ruling 2004- 24. The Ruling indicates that the provision of parking services by a REIT generally does not generate impermissible tenant service income. However, the Ruling also indicates that the provision of these parking services will generate unrelated business taxable income (“UBTI”) for tax-exempt entities. The Ruling describes the following three hypothetical fact patterns: (1) A REIT owns commercial real properties, including office buildings, shopping centers, and residential apartment complexes. The REIT’s properties also include parking facilities, located in or adjacent to the tenant-occupied buildings, which are for the use of the buildings’ tenants and their guests, customers, and subtenants. There are no parking attendants and the REIT’s responsibilities are limited to maintaining, repairing and lighting the parking facilities. (2) Same as (1), except that some parking spaces are reserved for particular tenants and the REIT hires an independent contractor to enforce the parking arrangements. (3) Same as (1) and (2), except that the REIT hires an independent contractor to manage and operate the parking lot. The independent contractor provides valet parking under limited circumstances, and the parking lot is generally open to the public. The Ruling concludes that the amounts received by the REIT for furnishing unattended parking facilities, under the circumstances described in scenarios (1) and (2), and for furnishing attended parking facilities, under the circumstances described in scenario (3), qualify as permissible rents from real property under the REIT tax rules. In reaching its conclusions, the IRS noted that (i) the furnishing of unattended parking facilities, as depicted by the scenarios, is a service customarily furnished or rendered in connection with the rental of real property because the services provided are customary for parking facilities located at rental real properties in all geographic markets and are furnished to the REIT’s tenants or their guests, customers or subtenants; and (ii) any additional services provided beyond the basic activities are performed by an independent contractor. The analysis in the Ruling also indicates that, for all three fact patterns, payments for the use of parking space are not excludable from UBTI. This portion of the analysis raises a significant concern for pension funds that own property which includes a parking facility, whether directly or through an investment partnership or limited liability company. Should you have any questions regarding this Ruling please do not hesitate to contact Lawrence Hass or Richard O’Toole or any other member of the Paul Hastings ERISA Institutional Investment Group and Tax Department listed below: Lawrence J. Hass (212) 318-6401 [email protected] Richard O’Toole (212) 318-6830 [email protected] Andrew M. Short (212) 318-6018 [email protected] Thomas S. Wisialowski (213) 683-6246 [email protected] Joshua Sternoff (212) 318-6011 [email protected] Anthony Dreyspool (212) 318-6601 [email protected] Bethany Cheever (212) 318-6854 [email protected] Nicole Watson (212) 318-6309 [email protected] Lawrence Browning (212) 318-6738 [email protected] StayCurrent is published solely for the interests of friends and clients of Paul, Hastings, Janofsky & Walker LLP and should in no way be relied upon or construed as legal advice. For specific information on recent developments or particular factual situations, the opinion of legal counsel should be sought. Paul Hastings is a limited liability partnership. Stay Current. March 2004 To maintain momentum ›› San Francisco Shanghai Orange County San Diego Los Angeles New York City Hong Kong London Atlanta Beijing Stamford Tokyo Washington, D.C. www.paulhastings.com
Transcript of To maintain momentum ›› StayCurrent. - Paul Hastings the circumstances described in scenarios...
New IRS Revenue Ruling Raises Concerns for Pension FundsFrom the ERISA Institutional Investment Group and Tax Department
In an effort to identify circumstances in which a REIT’s income from the provision of parking services at its rental real properties qualifies as rents from real property, the IRS recently issued Revenue Ruling 2004-24.
The Ruling indicates that the provision of parking services by a REIT generally does not generate impermissible tenant service income. However, the Ruling also indicates that the provision of these parking services will generate unrelated business taxable income (“UBTI”) for tax-exempt entities.
The Ruling describes the following three hypothetical fact patterns:
(1) A REIT owns commercial real properties, including office buildings, shopping centers, and residential apartment complexes. The REIT’s properties also include parking facilities, located in or adjacent to the tenant-occupied buildings, which are for the use of the buildings’ tenants and their guests, customers, and subtenants. There are no parking attendants and the REIT’s responsibilities are limited to maintaining, repairing and lighting the parking facilities.
(2) Same as (1), except that some parking spaces are reserved for particular tenants and the REIT hires an independent contractor to enforce the parking arrangements.
(3) Same as (1) and (2), except that the REIT hires an independent contractor to manage and operate the parking lot. The independent contractor provides valet parking under limited circumstances, and the parking lot is generally open to the public.
The Ruling concludes that the amounts received by the REIT for furnishing unattended parking facilities, under the circumstances described in scenarios (1) and (2), and for furnishing attended parking facilities, under the circumstances described in scenario (3), qualify as permissible rents from real property under the REIT tax rules.
In reaching its conclusions, the IRS noted that (i) the furnishing of unattended parking facilities, as depicted by the scenarios, is a service customarily furnished or rendered in connection with the rental of real property because the services provided are customary for
parking facilities located at rental real properties in all geographic markets and are furnished to the REIT’s tenants or their guests, customers or subtenants; and (ii) any additional services provided beyond the basic activities are performed by an independent contractor.
The analysis in the Ruling also indicates that, for all three fact patterns, payments for the use of parking space are not excludable from UBTI. This portion of the analysis raises a significant concern for pension funds that own property which includes a parking facility, whether directly or through an investment partnership or limited liability company.
Should you have any questions regarding this Ruling
please do not hesitate to contact Lawrence Hass or
Richard O’Toole or any other member of the Paul
Hastings ERISA Institutional Investment Group and Tax
Department listed below:
Lawrence J. Hass (212) [email protected]
Richard O’Toole (212) [email protected]
Andrew M. Short (212) [email protected]
Thomas S. Wisialowski (213) [email protected]
Joshua Sternoff (212) [email protected]
Anthony Dreyspool (212) [email protected]
Bethany Cheever (212) [email protected]
Nicole Watson (212) [email protected]
Lawrence Browning (212) [email protected]
StayCurrent is published solely for the interests of friends and clients of Paul, Hastings, Janofsky & Walker LLP and should in no way be relied upon or construed as legal advice. For specific information on recent developments or particular factual situations, the opinion of legal counsel should be sought. Paul Hastings is a limited liability partnership.
StayCurrent.March 2004
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