PLR: Reimbursement payments, qualifying income for REIT’s 95% income test only

PLR: Reimbursement payments

The IRS today publicly released a private letter ruling* concerning a real estate investment trust (REIT) in which the IRS exercised its authority under section 856(c)(5)(J)(ii) to treat income attributable to certain reimbursement payments as qualifying income for the taxpayer REIT’s 95% income test only.


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The IRS has issued many letter rulings under section 856(c)(5)(J) when REITs received subsidy or incentive payments toward the construction costs of their real estate projects.  However, in this letter ruling, the payments are to reimburse the taxpayer for the construction of certain public improvements conveyed to and maintained by the city, which could possibly be considered for construction services. Furthermore, similar to the treatment of foreign income inclusions in earlier letter rulings, such as subpart F or PFIC inclusions, as well as Rev. Proc. 2018-48, the IRS treated the income in this letter ruling as qualifying only for the 95% income test. In comparison, in other letter rulings, payments that are intended to subsidize the construction of a REIT’s real estate project were ruled pursuant to section 856(c)(5)(J)(ii) as qualifying for both the 75% and 95% income tests.

Read PLR 202006001 [PDF 64 KB] released February 7, 2020, and dated November 12, 2019

*Private letter rulings are taxpayer-specific rulings furnished by the IRS Office of Chief Counsel in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. Pursuant to section 6110(k)(3), written determinations such as private letter rulings are not intended to be relied upon by third parties and may not be cited as precedent. These written determinations may, however, offer an indication of the IRS’s position on the issues addressed.


The project in the letter ruling is a mixed-use residential, retail, and office development in City.

On Date 2, LP (a limited partnership) entered into an economic development agreement (EDA) with City as an incentive for LP to make certain improvements to the project—i.e., water, stormwater, wastewater and drainage improvements; road improvements; and a public park. Under the EDA, these public improvements must be (1) actually constructed, (2) conveyed to and accepted by City (with the exception of the public park), and (3) open to the public and available for public use.  The EDA obligated LP to maintain the public park, and City to maintain the other public improvements.  LP was also required to grant an easement to City to allow for public use of the park.

The EDA requires City to reimburse LP for amounts expended for the public improvements (the "Reimbursement Payments") plus a simple interest factor after certain public improvement construction milestones are met (the “Reimbursement Date”). However, the Reimbursement Payments are (1) subject to the requirement that the development of the project leads to the creation of a specified number of jobs, and (2) paid only out of the incremental sales tax revenue generated by the project. Further, City's obligation to make Reimbursement Payments may terminate e years from the Reimbursement Date.

A REIT, through a joint venture (JV), acquired an interest in the project from LP. As part of such acquisition, JV also acquired rights and obligations under the EDA. Aside from the maintenance of the park and job creation certifications, which are ongoing obligations, the construction and conveyance of the public improvements by LP were completed prior to the date that JV acquired the EDA. 

The REIT represented:

  • Excluding any right or obligation under the EDA, substantially all assets constituting the project are qualifying real estate assets.
  • Excluding the Reimbursement Payments, substantially all income yielded by the project is expected to qualify for the 75% and 95% income tests.
  • Other than ongoing park maintenance and job creation certification obligations, payments under the EDA are otherwise unconditional.  
  • It intends to use a method of accounting for income attributable to the Reimbursement Payments that clearly reflects income, and does not intend to use a method that improperly frontloads or backloads its recovery of basis in its interest in the EDA.
  • It will treat the amount included in income from the EDA as non-qualifying income for purposes of the 75% income test.

Without much analysis, the IRS ruled that pursuant to section 856(c)(5)(J)(ii), income attributable to the Reimbursement Payments would be treated as qualifying income for purposes of the 95% income test only.  


For more information, contact a tax professional with KPMG’s Washington National Tax:

Stephen Giordano | +1 (202) 533-3535 |

David W. Lee | +1 (202) 533-4071 | 

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