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Nareit’s Top Priority Is Transferability of Some Energy Tax Credits

JUN. 9, 2023

Nareit’s Top Priority Is Transferability of Some Energy Tax Credits

DATED JUN. 9, 2023

June 9, 2023

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2023-36)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Recommendations for 2023-24 IRS Priority Guidance Plan/Notice 2023-36

To Whom it May Concern:

In response to Notice 2023-36, Nareit appreciates the opportunity to offer our suggestions regarding regulatory guidance to be placed on the 2023-24 Priority Guidance Plan (2023-24 PGP).

Nareit serves as the worldwide representative voice for real estate investment trusts (REITs)1 and real estate companies with an interest in U.S. real estate. Nareit's members are REITs and other real estate companies throughout the world that own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study, and service those businesses.

Executive Summary

Nareit's recommendations are listed in order of priority.

First, Nareit reiterates our recommendations in our Nov. 4, 2022 letter responding to IRS Notice 2022-50 (Notice 2022-50), on issues arising for REITs under recently enacted Section 6418,2 which permits certain tax credits to be transferred from an eligible taxpayer to an unrelated taxpayer. These are priority issues that would directly impact the ability of REITs to make investments in several clean energy projects that would be eligible for the modified or newly enacted tax credits under the Inflation Reduction Act of 20223 (IRA) (such as rooftop solar panels and electric vehicle charging stations).

Second, as suggested in our June 3, 2022 letter regarding the 2022-23 Priority Guidance Plan, Nareit recommends that the IRS and Treasury Department issue public guidance affirming the conclusions of private letter rulings (PLRs) that section 562(c) regarding preferential dividends does not apply to subsidiaries of publicly offered REITs if the financial data of such subsidiaries is required to be included in the parent entities' Securities and Exchange Commission (SEC) 1934 Act filings.

Third, Nareit reiterates its recommendations in our June 3, 2022 letter requesting that the IRS and Treasury Department finalize the revision of regulations under Treas. Reg. § 1.337(d)-7 regarding the treatment of certain foreign corporations. This request appears to fall within the scope of Item 2 under “Corporations and Their Shareholders” that most recently had been included in the 2020-2021 Priority Guidance Plan (“Revising regulations under §1.337(d)-7 regarding the treatment of certain foreign corporations”).

Fourth, as Nareit requested most recently in our Jan. 19, 2023 letter to the IRS with respect to Forms 1120-REIT and 8875, Nareit recommends that the IRS permit electronic filing of these forms.

Resolve REIT-Related Tax Credit Transferability Issues

As detailed in our Nov. 4, 2022 letter, Nareit requests that the IRS and Treasury Department resolve the following technical issues that would directly impact the ability of REITs to make investments in several clean energy projects that would be eligible for the modified or newly enacted tax credits under the IRA (such as rooftop solar panels and electric vehicle charging stations). Congress clearly expected REITs to be able to use the new energy credits to provide significant climate benefits,4 so it is vital that the Treasury Department and IRS resolve these technical questions to further Congressional intent. The failure to resolve these technical issues may inhibit REIT investments in clean energy projects.

In particular, Nareit requests that the IRS confirm that: a) the mere entitlement to a transferable tax credit (either directly or indirectly through a partnership or limited liability company) does not give rise to gross income; b) the ownership of a transferable energy tax credit is a qualifying real estate asset under section 856(c)(5)(B); c) the transfer of an energy tax credit pursuant to section 6418 and the transfer of energy pursuant to the rules of sections 45 and 45Y are not dealer sales for purposes of the prohibited transactions tax rules of section 857; and, d) as more fully described in the Oct. 28, 2022 letter by nine real estate trade associations including Nareit, a partnership can elect both the direct pay option under section 6417 for its tax-exempt partners and the transferability option under section 6418 for its taxable partners. In addition, Nareit requests that the IRS prescribe how and when to make the section 6418 election.

Confirm Preferential Dividend Rules Do Not Apply to Subsidiaries of Publicly Offered REITs

Prior to the PATH Act of 2015,5 a distribution by any REIT was not considered as a “dividend” for purposes of computing the dividends paid deduction if it was treated as a “preferential dividend” under section 562(c). The failure of a REIT distribution to be considered as a “dividend” for purposes of computing the dividends paid deduction could cause the REIT to lose its status as such.

In 2015 as part of the PATH Act, Congress exempted from the antiquated preferential dividend rules of section 562(c)(2) distributions from “publicly offered” REITs, which are defined as REITs that are required to file annual and periodic reports with the SEC under the Securities Exchange Act of 1934 (34 Act). Notably, it is not unusual for publicly offered REITs to own one or more “subsidiary REITs,”6 and, in many cases, the financial reports of such subsidiary REITs must be consolidated with the annual and periodic reports required to be filed under the 34 Act by their publicly offered REIT parents.

The PATH Act provision for publicly offered REITs clearly recognized the transparency that filing under the 34 Act provides to publicly offered REITs and their shareholders. Given that the same transparency applies in the case of a subsidiary entity consolidated pursuant to GAAP (and therefore the same internal controls apply to both entities), it would be helpful if the preferential dividend rule similarly did not apply to a subsidiary REIT consolidated under GAAP with a parent publicly offered REIT, or, alternatively, did not apply to a subsidiary REIT if more than 50% of the voting power or value of which is owned by a parent publicly offered REIT

As further discussed below, the IRS has issued two private letter rulings7 appropriately concluding that the preferential dividend rules do not apply to REIT subsidiaries that are consolidated for financial statement purposes with publicly offered REITs. Rather than requiring REITs to seek similar PLRs (which would impose a burden both on these REITs and on the IRS), Nareit requests that the Department of the Treasury and the IRS issue public guidance confirming this interpretation.

In PLR 201924003, a publicly traded REIT owned a controlling interest in a subsidiary REIT through the REIT's operating partnership. The parent REIT represented that the subsidiary REIT was consolidated with the parent REIT under GAAP for purpose of the annual and periodic reports that the parent REIT was required to file with the SEC under the 34 Act. Accordingly, the subsidiary REIT, its immediate parent and the REIT's operating partnership were included in these consolidated financial statements. Further, for purposes of these financial statements, the subsidiary REIT was disregarded as a separate entity, The assets owned by the subsidiary REIT were listed as assets of the parent REIT, and the income, loss and other activities of the subsidiary REIT were included with those of the parent REIT and the other consolidated entities. The IRS held that the subsidiary qualified as a "publicly offered REIT" under section 562(c)(2).

Specifically, the IRS stated:

Under the Securities and Exchange Act of 1934, Taxpayer's [the subsidiary REIT's] accounting information is required to be consolidated with Parent REIT's periodic and annual reports that are submitted to the SEC. Thus, Taxpayer's assets, income, loss, and other activities are reported to the SEC as part of Parent REIT's consolidated reports. The consolidation of the reports does not alter the information reported to the SEC in the annual and periodic reporting required under the Securities and Exchange Act of 1934. Therefore, annual and periodic reporting to the SEC is required of Taxpayer, and Taxpayer meets the definitional requirements to be a publicly offered REIT pursuant to section 562(c)(2).

Accordingly, the subsidiary REIT was exempt from the preferential dividend rule of IRC Section 562(c)(1) and an apparent preferential dividend paid by the subsidiary REIT during the tax year was not a nondeductible dividend under IRC Section 562(c).

In PLR 202051005, the IRS ruled with respect to similar facts that a REIT that was an indirect subsidiary of, controlled by, and whose operations were consolidated under GAAP with, a publicly traded REIT, itself qualified as a "publicly offered REIT" under section 562(c)(2).

The repeal of the preferential dividend rule was a very helpful step in avoiding failure of REIT status by “publicly offered” REITs due to what, in many cases, could be inadvertent foot faults.8 This repeal reduced the burden on the IRS by avoiding many requests for closing agreements after the discovery of these foot faults. As noted above, if a subsidiary REIT of a publicly offered REIT were to distribute a dividend that inadvertently might be viewed as preferential, the subsidiary REIT's REIT status could be jeopardized. As a result, the parent REIT's status would be similarly jeopardized (as the parent REIT could be viewed as owning more than 10% of a non-REIT subsidiary). Rather than requiring publicly traded and other public REITs to seek similar PLRs with their expense and burden on IRS resources, Nareit requests that the Department of the Treasury and the IRS issue public guidance confirming this interpretation.

Nareit believes that this revision would resolve a significant issue relevant to a many major REITs. The current uncertainty is inappropriate, unnecessarily burdensome, and contrary to sound tax administration. The revision would not be difficult to draft. The revision is not controversial.

Exempt Transfers by a Foreign Corporation of Appreciated Assets to RICs and REITs from Treas. Reg. § 1.337(d)-7 if Such Foreign Corporation is Not Otherwise Subject to U.S. Tax

As Nareit discussed in our June 3, 2022, May 28, 2021, July 20, 2020; June 7, 2019, and June 14, 2018 letters to the Treasury Department and IRS, Nareit encourages the Treasury Department and the IRS to finalize its work on the revision of Treas. Reg. § 1.337(d)-7 regarding the built-in gain treatment of certain foreign corporations. This revision was most recently included in the IRS' 2020-21 Priority Guidance Plan, but was not included on the 2021-22 Priority Guidance Plan.

Following comments by the American Bar Association, and joint comments by Nareit and The Real Estate Roundtable, the Treasury and IRS adopted final regulations under section 337(d) in 2013 that render the regulation inapplicable to transfers of appreciated property to a RIC or REIT in a conversion transaction if the C corporation transferring the property is either a tax-exempt entity or the property is transferred to a RIC or REIT in a section 1031 transaction in which gain is not recognized.

Section 337(d)(1) directs the Treasury Department and IRS to issue regulations that may be necessary to carry out the purposes of the repeal of the General Utilities doctrine (generally speaking, to ensure two levels of tax on income and gains of C corporations and their shareholders), including rules to "ensure that such purposes may not be circumvented . . . through the use of a regulated investment company, a real estate investment trust, or tax-exempt entity . . .”

Treas. Reg. § 1.337(d)-7 was promulgated so that a C corporation could not avoid corporate level taxation through transferring appreciated property to a REIT. Recognizing that transfers of appreciated property to a REIT by a tax-exempt C corporation or by means of a tax-deferred section 1031 like-kind exchange transaction are not circumventions of the General Utilities doctrine, the Treasury Department and IRS issued final regulations in 2013 exempting such transactions from the “deemed sale” rule under these regulations.

The same principle should apply when a REIT acquires non-U.S. property from a foreign corporation — for example, by acquiring the stock of the foreign corporation and then liquidating it, a common transaction for REITs that are building foreign portfolios. Typically, the foreign corporation would not have been subject to U.S. corporate tax upon a disposition of the property. If, and to the extent that this is the case, Treas. Reg. § 1.337(d)-7 should not apply to the property in the hands of the REIT.

Allow for E-filing of Forms 1120-REIT and 8875

Nareit reiterates the recommendations from our Jan. 19, 2023 letter, requesting that the IRS allow both electronic filing and electronic signatures for both the Form 1120-REIT and the Form 8875 (Taxable REIT Subsidiary Election).9 For many REITs, the Form 1120-REIT is the only tax return required to be filed in paper form. Further, while certain states permit e-filing of a REIT tax income tax return, the relevant software will not permit doing if the corresponding federal form is not e-filed. The benefits of e-filing that the IRS promotes for other taxpayers (such as accuracy, completeness, security, and ease)10 should also be available to REITs.

* * *

The above recommendations would fulfill the goals and objectives set forth in Notice 2023-36.

First, resolution of these issues would resolve significant issues relevant to the more than 1,000 entities that have elected REIT status and the millions of taxpayers who invest in REITs.

Second, the recommended guidance would reduce controversy and lessen the burden on taxpayers or the IRS.

Third, the recommended guidance regarding energy tax credits relates to the recently-enacted Inflation Reduction Act of 2022.

Fourth, the recommended guidance involves regulations or other guidance that is outdated, unnecessary, ineffective, insufficient, or unnecessarily burdensome and that should be modified, streamlined, expanded, replaced, or withdrawn.

Fifth, the recommended guidance promotes sound tax administration.

Sixth, the IRS can administer the recommended guidance on a uniform basis.

Seventh, the recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance.

We would be pleased to discuss these comments if you believe it would be helpful. Please feel free to contact Tony Edwards, Nareit Senior Executive Vice President, at (202) 739-9408, or; Cathy Barré, Nareit Executive Vice President, Policy & Public Affairs & General Counsel, at (202) 739-9422, or; or Dara Bernstein, Nareit Senior Vice President and Tax Counsel, at (202) 739-9446 or

Respectfully submitted,

Tony M. Edwards
Senior Executive Vice President

Dara F. Bernstein
Senior Vice President & Tax Counsel

Washington, DC

The Honorable Lily Batchelder
The Honorable William M. Paul
Bernard Audet, Jr., Esq.
Peter H. Blessing, Esq.
Colin Campbell, Esq.
Michael Y. Chin, Esq.
Grace E. Cho, Esq.
Lisa A. Fuller, Esq.
Andrea M. Hoffenson, Esq.
Helen M. Hubbard, Esq.
Lindsay M. Kitzinger, Esq.
Michael S. Novey, Esq.
Krishna P, Vallabhaneni, Esq.
Tom West, Esq.
Brett York, Esq.


1REITs invest in America's future. Through the diverse array of properties they own, finance, and operate, REITs help provide the essential real estate that revitalize neighborhoods, enable the digital economy, power community essential services, and build the infrastructure of tomorrow, while creating American jobs and economic activity along the way. REITs of all types collectively own more than $4.5 trillion in gross assets across the U.S., with public REITs owning $3 trillion in assets. U.S. listed REITs have an equity market capitalization of more than $1.3 trillion. REITs provide everyday Americans the opportunity to invest in real estate, and 150 million Americans live in households that benefit from ownership of REITs through stocks, 401(k) plans, pension plans, and other investment funds.

2Unless otherwise provided, any reference to a “section” herein shall be to the Internal Revenue Code of 1986, as amended (the Code).

4See section 6418(c), added by the IRA (modifying the prior law limits in section 50(d) applicable to REITs); see also (at p. S4166).

5Protecting Americans from Tax Hikes Act of 2015 (Division Q of P.L. 114-113).

6Over the years, the IRS has issued several private letter rulings involving subsidiary REITs. See, e.g., PLRs 201614009; 201518010; 200813009 and 200625019. Further, the presumption of ownership made by the PATH Act in section 897(h)(4)(E)(i) and (ii) recognizes the use of subsidiary REITs by listed REITs.

7PLRs 202051005 and 201924003.

8See, e.g., Nareit's May 2017 letter to the IRS regarding the 2017-28 Priority Guidance Plan, attaching a draft revenue procedure that lists examples of such inadvertent errors. At the time, Nareit had requested that the IRS issue such a revenue procedure pursuant to statutory authority enacted as part of the PATH Act with respect to inadvertently preferential dividends issued by non-publicly offered REITs. While Nareit continues to believe that such a revenue procedure would be very useful, Nareit's priority is the issuance of precedential guidance confirming that subsidiary REITs of publicly offered REITs, if consolidated with their parent REIT in required 34 Act filings, are themselves considered “publicly offered” and are not subject to the preferential dividend rule.

9We note that The Investment Company Institute (ICI) has made similar requests with respect to the e-filing of Form 1120-RIC, including most recently on June 2, 2022.


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