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Monday, April 22, 2013

NY Times: REIT Conversions Skyrocket as Tax Avoidance Vehicle

New York Times:  Restyled as Real Estate Trusts, Varied Businesses Avoid Taxes:

A small but growing number of American corporations, operating in businesses as diverse as private prisons, billboards and casinos, are making an aggressive move to reduce — or even eliminate — their federal tax bills. They are declaring that they are not ordinary corporations at all. Instead, they say, they are something else: special trusts that are typically exempt from paying federal taxes.

The trust structure has been around for years but, until recently, it was generally used only by funds holding real estate. Now, the likes of the Corrections Corporation of America, which owns and operates 44 prisons and detention centers across the nation, have quietly received permission from the IRS to put on new corporate clothes and, as a result, save many millions on taxes.

Changing from a standard corporation to a real estate investment trust, or REIT — a designation signed into law by President Dwight D. Eisenhower — has suddenly become a hot corporate trend. One Wall Street analyst has characterized the label as a “golden ticket” for corporations. “I’ve been in this business for 30 years, and I’ve never seen the interest in REIT conversions as high as it is today,” said Robert O’Brien, the head of the real estate practice at Deloitte & Touche, the big accounting firm.

At a time when deficits and taxes loom large in Washington, some question whether the new real estate investment trusts deserve their privileged position. When they were created in 1960, they were meant to be passive investment vehicles, like mutual funds, that buy up a broad portfolio of real estate — whether shopping malls, warehouses, hospitals or even timberland — and derive almost all of their income from those holdings. One of the bedrock principles — and the reason for the tax exemption — was that the trusts do not do any business other than owning real estate. But bit by bit, especially in recent years, that has changed as the IRS, in a number of low-profile decisions, has broadened the definition of real estate, and allowed companies to split off parts of their business that are unrelated to real estate.  ...

The IRS released its latest decision, allowing a data and document storage company to convert, on April 5. The letter did not include the name of the company, but several data storage companies, including Iron Mountain and Equinix, are in the process of converting. A few days later, a strategist at the Wall Street firm Jefferies wrote in a report: “It is not a far stretch to envision REITs concentrated in railroads, highways, mines, landfills, vineyards, farmland or any other ‘immovable’ structure that generates revenues.”

Today, there are more than 1,000 real estate investment trusts, about 10 percent of them traded publicly on the stock market. Investors like them because, by law, they must distribute at least 90% of their taxable income to their shareholders — a particularly alluring prospect today, given the low interest rates paid by many other basic investments.

(Hat Tip: Bill Turnier.)

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The article fails to make it clear that, while the REIT does not pay FIT, the shareholders probably do. It would be more accurate to call this a tax-shifting vehicle, not a tax avoidance vehicle.

Posted by: eli bortman | Apr 23, 2013 3:43:43 AM

No, Eli, the trust structure is a way of avoiding the dreaded bi-level taxation of corporate earnings that spurred the immense popularity of all flow the thru entities. So it does not just shift the tax from one t/p to another, but completely eliminates the corporate level tax, which is totally fine and legal, at least until Congress decides to limit the availability of this structure.

Posted by: len fuld | Apr 24, 2013 5:56:35 AM