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Nareit Seeks to Tame Confusion in Proposed Cloud Transaction Regs

NOV. 12, 2019

Nareit Seeks to Tame Confusion in Proposed Cloud Transaction Regs

DATED NOV. 12, 2019
DOCUMENT ATTRIBUTES
  • Authors
    Edwards, Tony M.
  • Institutional Authors
    National Association of Real Estate Investment Trusts
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-4473
  • Tax Analysts Electronic Citation
    2020 TNTF 25-24
    2020 TNTI 25-30
    2020 TNTG 25-31

Nov. 12, 2019

CC:PA:LPD:PR (REG-130700-14)
Room 5203
Internal Revenue Service
PO Box 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Proposed Regulations: Classification of Cloud Transactions and Transactions Involving Digital Content  (REG-130700-14) (the Proposed Regulations)

Dear Sir or Madam:

Nareit appreciates the opportunity to offer comments regarding the Proposed Regulations.1

Nareit2 is the worldwide representative voice for real estate investment trusts (REITs) and publicly traded real estate companies with an interest in U.S. real estate and capital markets. Nareit advocates for REIT-based real estate investment with policymakers and the global investment community.

Executive Summary

Nareit recommends that either the preamble or the text of the Proposed Regulations be amended to clarify that their scope does not extend to Subchapter M of the Internal Revenue Code.3

Discussion

In order to qualify as a REIT, a company must satisfy numerous requirements contained in sections 856-860, Subchapter M of the Code. For example, at least 75% of the annual gross income of REITs that own and lease property must be from, among other things, “rents from real property,” as defined in section 856(d), and the regulations thereunder.

The Proposed Regulations purport to limit their scope to specific provisions of the Code, not including Subchapter M.4 However, the Proposed Regulations also reference section 7701(e), which could apply throughout the Code, including to Subchapter M. Furthermore, the Proposed Regulations provide rules for classifying certain transactions as a provision of services or a lease of property.

Broadly speaking, the extent to which the provision of services affects the definition of “rents from real property” for REIT purposes is addressed not only in Subchapter M and the regulations thereunder, but also in numerous items of IRS sub-regulatory guidance and private letter rulings specifically interpreting Subchapter M. To avoid confusion, Nareit recommends that either the preamble or, even better, the text of the final regulations, expressly state that their scope does not extend to Subchapter M. Nareit also supports the other recommendations and analysis regarding these regulations in the Oct. 24, 2019 comment letter submitted by Ameek Ashok Ponda of Sullivan & Worcester.

We would be pleased to discuss these comments if you believe it would be helpful. Please feel free to contact me at (202) 739-9408, or tedwards@nareit.com; Cathy Barré, Nareit's Executive Vice President General Counsel, at (202) 739-9422, or cbarre@nareit.com; or Dara Bernstein, Nareit's Senior Vice President and Tax Counsel, at (202) 739-9446 or dbernstein@nareit.com.

Respectfully submitted,

Tony M. Edwards
Senior Executive Vice President
Nareit
Washington, DC

Cc:
Michael S. Novey, Esq.
Douglas Poms, Esq.
Gary Scanlon, Esq.
Krishna Vallabheneni, Esq.
Brett York, Esq.
Peter Blessing, Esq.
Michael Y. Chin, Esq.
Grace Cho, Esq.
Andrea Hoffenson, Esq.
Helen Hubbard, Esq.
Robert Z. Kelley, Esq.
William M. Paul, Esq.
Holly Porter, Esq.
David B. Silber, Esq.
Robert H. Wellen, Esq.

FOOTNOTES

1 Classification of Cloud Transactions and Transactions Involving Digital Content, 84 Fed. Reg. 40317 (Aug. 14, 2019), corrected, 84 Fed. Reg. 52410 (Oct. 2, 2019).

2 REITs are real estate working for you. Through the properties they own, finance and operate, REITs help provide the essential real estate we need to live, work and play. All U.S. REITs own approximately $3 trillion in gross assets, public U.S. REITs account for $2 trillion in gross assets, and stock-exchange listed REITs have an equity market capitalization of over $1 trillion. In addition, more than 80 million Americans invest in REIT stocks through their 401(k) and other investment funds.

3 Internal Revenue Code of 1986, as amended (the Code, and, unless otherwise provided, any section reference in this letter is to a section of the Code).

4 Prop. Reg. § 1.861-19 limits its scope to sections 59A, 245A, 250, 267A, 367, 404A, 482, 679, and 1059A, subchapter N of chapter 1, chapters 3 and 4; and sections 842 and 845 (to the extent involving a foreign person) and transfers to foreign trusts not covered by section 679. Prop. Reg. § 1.861-18(a) would amend the scope of existing Treas. Reg. § 1.861-18 to have a similar scope.

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Authors
    Edwards, Tony M.
  • Institutional Authors
    National Association of Real Estate Investment Trusts
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-4473
  • Tax Analysts Electronic Citation
    2020 TNTF 25-24
    2020 TNTI 25-30
    2020 TNTG 25-31
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