Senior Care Facilities Seek Adjustment to Business Interest Regs
Senior Care Facilities Seek Adjustment to Business Interest Regs
- AuthorsCollins, Emily
- Institutional AuthorsRuhling & Associates
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- Tax Analysts Document Number2019-6477
- Tax Analysts Electronic Citation2019 TNT 35-30
Additional public comments related to nursing homes are available in the PDF version of the document.
]February 8, 2019
Internal Revenue Service
CC:PA:LPD:PR (REG-106089-18)
Room 5203
P.O. Box 7604
Ben Franklin Station Washington, DC 20044
RE: IRS REG-106089-1, Comments on Proposed Regulations Regarding the Limitation on Deduction for Business Interest Expense
Dear Sir or Madam,
After careful reading of the proposed regulations under §163(j), our firm would like to take this opportunity to submit our comments on these proposed regulations. We are concerned regarding the significant impact the interest limitations will have on our clients in the Senior Care industry. We are requesting for clarity in the final regulations. We provide services for small to mid-sized facilities in Senior Care and without additional guidance and revision, our clients will suffer significant economic hardship as a result of the inequitable application of §163(j) to this industry.
Specifically, we urge you to revise the final regulations so that:
1. Guidance will explicitly state that Senior Care facilities will qualify as a real property trade or business — specifically including Assisted Living Facilities ("ALF"), Independent Living Facilities ("ILF), Memory Care ("MC"), Skilled Nursing Facilities ("SNF"), and Continuing Care Retirement Communities ("CCRC").
2. An exception to the anti-abuse rule contained in Prop. Reg. §1.163(j)-9(h)(1) will allow an entity leasing property to a commonly controlled leasee to qualify as a real property trade or business when the leasee qualifies as a real property trade or business and is also making the election to be treated as a qualifying real property trade or business.
1. Senior Care Facilities qualification as a real property trade or business
Senior Care facilities rely heavily on the capital provided through the same lending sources that fund other types of real estate. Senior Care facilities of all types (ILF, ALF, SNF, MC, CCRC, etc) follow the same capital structure of other real property trades or businesses. The capital investment of these facilities is substantial and the resulting interest expense is significant in this industry.
Lawmakers' intent can be seen in the Congressional Record of December 19, 20171 which specifically states the intent that operation or management of elderly housing (including CCRCs, MC, and ALFs) should qualify for the definition of a real property trade or business. This Congressional Record acknowledges the importance of lending within these businesses and acknowledges that the lending for these facilities comes from the same sources as other types of real estate (HUD, Fannie Mae, Freddie Mac, Commercial Banks, etc). The record also acknowledges that Senior Care competes with other Real Property Businesses for equity and debt.
Additionally, Chief Counsel Memorandum 201147025 acknowledges that at least some portion of the income received by the various types of Senior Care facilities (including SNFs and CCRCs) is rental income. Since the loans on these facilities are generally for the building, the interest expense on Senior Care facilities also relates primarily to its rental business — regardless of the amount of ancillary or nursing services provided to its residents.
Although the interest limitation under §163(j) and the related definition of a real property trade or business is separate and distinct law from the rules and regulations concerning a Specified Service Trade or Business under §199A, we have concern that if a particular facility is an SSTB under §199A that this facility may be viewed as ineligible for the election as a real property trade or business under §163(j). Therefore, we request guidance and clarity that the determination of a business as an SSTB will be a separate and unrelated determination as to whether the business is a real property trade or business. The Senior Care industry is unique in that a facility such as a Skilled Nursing Facility or an Assisted Living Facility may be determined to have SSTB income but should also qualify as a real property trade or business due to the factors already discussed.
For all of these reasons, it would be inequitable for Senior Care facilities of all types to not qualify as a real property trade or business. Since the law's intent is that these facilities will qualify, we respectfully request that this qualification be specifically addressed by the IRS so that there is no question regarding the treatment of these businesses.
2. An exception to the §1.163(j)-9(h)(1) anti-abuse rule for commonly controlled real property trades or businesses
We agree with the intent behind the anti-abuse rule contained in Proposed Regulation §1.163(j)-9(h). But without additional exceptions, this rule will inevitably be applied to non-abusive situations and situations well beyond the intent of the rule.
We request an exception when the commonly controlled leasee is a real property trade or business. In this scenario, the entity structure is in place for legal and lending purposes and is not motivated by tax avoidance. The structure occurs very frequently in the Senior Care industry. The operation and management of the facility is contained in one entity ("OpCo") and the property ownership, mortgage and resulting interest expense is contained in a separate, commonly controlled entity ("PropCo"). Without an additional exception to the anti-abuse rule in Prop. Reg. §1.163(j)-9(h), the rule will prevent the PropCo from qualifying as a real property trade or business due to common ownership even when one hundred percent of its lease income is derived from a real property trade or business.
As previously discussed, the lawmakers' intent is that Senior Care facilities will qualify as real property trades or businesses. However without this exception many of Senior Care facilities will unintentionally be caught by the anti-abuse rule. This structure is clearly not abusive and if the entities were collapsed, the collapsed business would qualify as a real property trade or business.
The anti-abuse rule under Prop. Reg. §1.163(j)-9(h) already provides for an exception in a similar situation when PropCo is a REIT leasing to qualified lodging or health care property. Many privately owned health care properties are structured similarly but with the use of a commonly controlled entity other than a REIT and these businesses should also be eligible for the exception provided to REITs.
Therefore, we urge you to insert an additional exception to the §1.163(j)-9(h) anti-abuse rule that allows a lessor leasing to a commonly controlled trade or business to qualify as a real property trade or business when the commonly controlled leasee is an electing real property trade or business. This exception will maintain the purpose of the anti-abuse rule to disallow non-real property businesses from artificially qualifying for the election. And this exception will prevent the anti-abuse rule from being applied in non-abusive situations.
I thank you on behalf of our firm and our clients for your consideration of our comments regarding the Proposed Regulations. We look forward to the changes implemented in the final regulations as a result of taxpayer comments. If any additional information can be provided related to these comments, please do not hesitate to contact our firm at 423-592-8380.
Sincerely,
Emily Collins, CPA, MST
Ruhling Associates
Chattanooga, TN
- AuthorsCollins, Emily
- Institutional AuthorsRuhling & Associates
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- Tax Analysts Document Number2019-6477
- Tax Analysts Electronic Citation2019 TNT 35-30