The IRS publicly released a private letter ruling* in which the IRS ruled that the independent retirement living facilities owned by a real estate investment trust (REIT) would not be considered health care facilities and that, accordingly, the REIT can engage its taxable REIT subsidiary (TRS) to provide resident services at the facilities without the risk of disqualifying the TRS status.
Furthermore, the IRS ruled that the provision of the resident services by the TRS, that in turn are subcontracted out to an independent contractor, would not give rise to impermissible tenant service income and would not cause any portion of the rents received by the REIT to fail to qualify as rents from real property.
Read the letter ruling: PLR 202020007 [PDF 92 KB] (released May 15, 2020, and dated February 7, 2020)
*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.
In the letter ruling, the REIT’s independent retirement living facilities are not licensed health care facilities and require that at least one resident be at least the age of b.
A resident enters into a lease agreement, which entitles the resident to individual living quarters within a facility in exchange for fixed monthly payments. The marketing materials and resident leases specifically state that these facilities do not provide any health care services. Also included as part of the monthly rent (and not separately stated) are certain resident services, such as three daily meals plus daily snacks; light housekeeping including linen service; and scheduled transportation to and from local destinations and group activities. Additionally, the services include an emergency call system device, which connects the resident to an emergency operator who will (1) confirm the location of the resident; (2) call emergency services, roadside assistance, locksmith, or family of the resident; and (3) stay on the line with the resident until the situation is resolved.
The letter ruling also notes that the facilities do not provide a number of health care-related services. For example, they do not conduct preventative health screening, monitor the residents’ medical needs, or provide for a streamlined resident transfer program to a facility with higher health care options. There may be pre-admission interviews to determine that the residents are ambulatory and have no apparent cognitive decline that would interfere with activities of daily living. Additionally, the facilities do not require a resident to obtain consent from the facility before the resident contracts with third-parties for in-home or other health care services. They also do not provide for supervision of a resident’s oxygen equipment or require the employees on the premises to be licensed nurses. Finally, the facilities do not keep “do not resuscitate” forms on file and do not have 24-hour onsite staff to monitor the residents.
Upon receipt of the ruling, the REIT intends to enter into a management contract with a TRS, which will be responsible for providing the resident services by subcontracting the provision of these services to an operator qualifying as an independent contractor. The REIT will collect the monthly rent from the residents and remit the payment to the TRS for the resident services under arm’s length terms based on principles described under section 482.
Before ruling that these facilities would not constitute health care facilities (i.e., not congregate care facilities), the IRS reasoned:
While they do offer amenities and services that may be found in congregate care health care facilities, the emphasis of the amenities and services provided at the Facilities is not the health and wellbeing of the Residents. Although the Residents are provided with shared meals and transportation to local destinations and group activities, these Resident Services are provided for convenience and to enhance the social lives of the Residents as opposed to providing a health benefit. The Facilities provide an emergency call device to Resident, however the device connects to the Emergency Operator, which is a third party unrelated to [the REIT and the facility operator]. The employees of the Facilities are not licensed nurses and are not available 24 hours to monitor or assist Residents. Furthermore, the Residents are screened prior to signing the Lease Agreement to ensure that they are capable of providing for their own health care needs, but the Residents are not monitored after they move in, which suggests that the Facilities are not meant to be relied on to provide for health care needs.
Because they are not health care facilities, the IRS ruled that direct or indirect operation or management of these facilities by the TRS would not prevent the TRS from being treated as a TRS. Further, the IRS ruled the provision by the operator of the resident services (through a subcontract with the TRS) that are not separately stated would not give rise to impermissible tenant service income and would not cause any portion of the rents received by the REIT to fail to qualify as rents from real property under section 856(d).
This letter ruling evidences again the IRS’s policy that to be a health care facility, which can be leased by a REIT to its related TRS, the provision of congregate living without a focus on the health and wellbeing of the residents is not sufficient. For example, in PLR 201828008, certain independent living facilities would be considered congregate care facilities and, thus, qualified health care properties because they are operated with an emphasis on health and wellness of seniors. On the other hand, “Facility A” in the same letter ruling does not provide for congregate living with a focus on the health and wellbeing of the residents and, thus, would not constitute a health care facility.
Also, in PLR 201429017, the IRS ruled that the described senior living facilities would be considered congregate care facilities because they “offer services that have a significant health care related focus, with the goal of offering a medical services intensive environment for senior citizens who are generally physically able to care for themselves.”
It is worth noting that the Treasury and IRS included a guidance item defining “congregate care facility” for purposes of the definition of a “health care facility” under the REIT rules on the 2015-2016 Priority Guidance Plan. However, in its submission, National Association of Real Estate Investment Trusts (Nareit) stated that it believes additional guidance is not needed or does not merit priority attention because “...[b]ased on the ruling practices of the IRS in several private letter rulings dealing specifically with such facilities, health care REITs have developed a good working understanding that the IRS and the Treasury Department currently interpret the definition of a ‘congregate care facility’ as an age-restricted community, where, in addition to providing communal dining and living quarters, services are provided to advance the health and physical well-being of its residents.” [Emphasis added]
The May 2020 letter ruling also reflects that the IRS continues to be comfortable with applying Rev. Rul. 2002-38 to rents received by a REIT even if (1) the TRS subcontracts all tenant services to other service providers, and (2) some services may not be considered customary so long as there are no separate charges for those services. [In Rev. Rul. 2002-38, a REIT pays its TRS to provide non-customary housekeeping services to tenants. The REIT does not separately state charges to tenants for the services. Thus, a portion of the amounts received by the REIT from tenants represents an amount received for services provided by the TRS. TRS employees perform all of the services, and TRS pays all of the costs of providing the services. The TRS also rents space from the REIT for carrying out its services to tenants. The revenue ruling concludes that the services provided to the REIT's tenants are considered to be rendered by the TRS, rather than the REIT. Accordingly, the services do not give rise to impermissible tenant service income and do not cause any portion of the rents received by the REIT to fail to qualify as rents from real property. In comparison, according to Reg. section 1.856-4(b)(5)(i), in the case of non-customary services, the cost must be borne by the independent contractor, a separate charge must be made for the services, and such charge must be received and retained by the independent contractor.]
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