WSJ: IRS Puts Brakes on REIT Conversions

Following up on my previous post, New York Times: REIT Conversions Skyrocket as Tax Avoidance Vehicle:  Wall Street Journal:  IRS Puts Brakes on Corporate Push to Capture Real-Estate Tax Break:

The IRS is stepping up its scrutiny of companies that are looking to avoid some corporate taxes by converting their operations into real-estate investment trusts.

On Friday, outdoor-billboard company Lamar Advertising and data-center operator Equinix disclosed that their plans to become a REIT could be delayed as the IRS launches a review to define what type of companies can qualify as real-estate firms to become a REIT.

The tax regulator has formed an "internal working group" to study its current standards, according to regulatory filings by the companies. Document storage operator Iron Mountain, which since last July has been awaiting IRS approval to convert to a REIT, made a similar disclosure late Thursday. The move by the IRS comes as an increasing number of companies, including many that aren't traditionally viewed as real-estate firms, have converted to REITs or are lining up to become a REIT. ...

The IRS decades ago defined as real estate sectors including cell towers, prisons and billboards. But now, "they are being more deliberative," John Rayis, a REIT tax attorney with Skadden, Arps, Slate, Meagher & Flom LLP said of the IRS. He believes the IRS has been and will remain consistent on what constitutes real property. "The IRS has not expanded the definition of real estate. The only thing that's occurred is that companies with real property who were always eligible to become REITs have now decided to become REITs," Mr. Rayis said.