PLR: Payments for use of storage terminal facilities and pipelines qualify under REIT income tests

The IRS concluded that payments made for the use of the storage terminal facilities and the pipelines, qualify as rents from real property.

Qualify under REIT income tests

The IRS today publicly released a private letter ruling* in which it addressed an electing real estate investment trust (REIT) that invested in storage terminal facilities and pipelines that were used by unrelated third parties based on capacity arrangements. The IRS concluded that payments made under these arrangements—for the use of the storage terminal facilities and pipelines—qualify as rents from real property for purposes of the REIT income tests.

Read PLR 202150014 [PDF 105 KB] (release date December 17, 2021, and dated May 14, 2021)

* 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.

KPMG observation

This is the latest letter ruling relying on the “limited capacity” argument as the basis upon which to treat payments for the use non-traditional real property (such as pipelines, transmission lines, and fiber optic cables), and that can be concurrently used by multiple users, as rents from real property for REIT purposes. This letter ruling follows prior IRS rulings in PLRs 202133003, 202132002, 202035008, 201907001, 201901001, 201741002, and 201450017. Read TaxNewsFlash

PLR 202150014

In the letter ruling released today, a taxpayer that invested in U.S. energy infrastructure assets—including storage terminal facilities and pipelines—intends to elect to be taxed as a REIT.
 

Storage terminal facilities

  • The taxpayer owns storage terminal facilities that include various interests in or rights to occupy real property, such as land, roadways, docks, rail spurs, and storage tanks. The facilities also include other types of real property, such as pipes, pipelines, and other inherently permanent steel structures (e.g., racks or docks) and structural components of inherently permanent structures (e.g., vents or fire suppression systems).
  • The taxpayer entered into agreements with unrelated third-party users of the storage terminal facility, permitting them to store their products at and move their products through the facility for a term that is generally between a and b years.
  • The taxpayer represented that with respect to each agreement, rent attributable to personal property, such as pumps, compressors, meters, etc., does not exceed 15% for purposes of the personal property limit.
  • A terminal usage agreement may or may not specify the tank in which the user’s product will be stored. In some situations, a specified tank or tanks is identified and dedicated to a user. In other situations, the user has a right to a fixed portion of the storage capacity at the facility but does not have a particular tank or tanks dedicated to it.
  • The taxpayer does not oversell storage capacity and is obligated at all times to determine that the capacity specified in a terminal usage agreement is reserved for and available to the user.
  • A terminal usage agreement may provide for the lease of a portion of the capacity of a storage tank, as opposed to a lease of the entire storage tank, when the stored content is fungible and may be stored on a comingled basis.  At all times, the users retain title to the product stored at the facility.

With respect to activities and services at a terminal storage facility, the taxpayer will undertake activities that are consistent with a REIT’s fiduciary duty to manage itself and distinguished from rendering or furnishing services to the tenants of its property or managing or operating the property. The taxpayer will also perform activities that are permitted for a tax-exempt organization for purposes of unrelated business taxable income (UBTI) such as the provision of security guards at the facilities. Additionally, the taxpayer may heat, cool or pressurize the storage tanks located at a storage terminal facility and may circulate product stored in a storage tank to avoid damage to the storage tanks, pipes, and stored product at standard industry settings (i.e., not customized for an individual user).

The letter ruling also describes customary activities and services to be performed or furnished by the taxpayer’s taxable REIT subsidiary (TRS).

Finally, the letter ruling describes the fee arrangements with storage terminal users, including one in which a user pays for the minimum volume of product each month regardless of whether it uses the capacity reserved for it. Users also reimburse the taxpayer for their share of wharfage fees that the taxpayer is obligated to pay to a port authority under an easement that allows the taxpayer to construct, maintain, repair, and operate a wharf, dock, or similar structure on submerged land. 
 

Pipelines

  • In addition to the storage terminal facilities, the taxpayer also owns equity interests in two pipelines that are used by unrelated third parties pursuant to agreements with terms ranging from a to b years.
  • Similar to the storage terminal facilities (described above), the taxpayer does not oversell capacity on the pipeline and is obligated at all times to determine that the capacity specified in a pipeline use agreement will be available for use by the user.
  • The letter ruling similarly describes the activities of the taxpayer and its TRS with respect to the pipelines for purposes of determining impermissible tenant service income and qualifying rents. 
  • The fee paid by a pipeline user is based on the volume of product placed on the pipeline and is generally calculated as a fixed dollar amount multiplied by the amount of product placed on the pipeline. Furthermore, the pipeline user pays for the minimum volume of product each month that is specified in its agreement regardless of whether it uses the capacity reserved for it. 

The capacity of one of the pipelines had been substantially committed to a particular user under a b year agreement, and the remaining capacity of the same pipeline had been reserved by only one other user under an agreement with a duration of f months. Upon the expiration of the current b year agreement, the taxpayer intends to enter into another long-term agreement or agreements.

The taxpayer represented that it would treat as rents from real property only those pipeline-use fees earned under agreements with a term of at least c.
 

IRS conclusion

The IRS concluded that payments made under these arrangements, for the use of the storage terminal facilities and the pipelines, qualify as rents from real property for purposes of the REIT income tests. To support its conclusion, the IRS reasoned in part:

No Terminal Usage Agreement or Pipeline Use Agreement will have a term of less than c.  Each of the Terminal Usage Agreements and the Pipeline Use Agreements will provide the user with the exclusive right to use a fixed portion of the capacity of the Storage Terminal Facilities or the Pipelines throughout the term of the lease.

Accordingly, after considering the respective activities of the taxpayer and its TRS, the IRS ruled that the storage fee, wharfage fee, and pipeline-use fee received by the taxpayer qualify as rents from real property under section 856(d) for purposes of sections 856(c)(2) and (3).


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

Stephen Giordano | +1 (202) 533-3535 | stephengiordano@kpmg.com

David W. Lee | +1 (202) 533-4071 | dwlee@kpmg.com

 

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.