There was a time where structuring a company as REIT was reserved for companies whose sole purpose was to raise capital to acquire and manage properties. However, American corporations operating prison, billboards and casinos are declaring tha g that they are not ordinary corporations but Special Trusts that are typically exempt from Federal taxes.
For instance Corrections Corporation of America which owns and operates for more 44 prions across the country just recently got approval from Internal Revenue Service to switch to a Trust which is projected to save them more than $70 million dollars in taxes. Same goes for Penn National Gaming a Vegas Casino operate which won approval to change it’s tax designation to a Trust!
The IRS classification as a TRUST was designed for REITs only since their sole purpose was nothing but Real Estate ownership. Designation of REIT was signed into law in 1960 by President Dwight D. Eisenhower, but no one was imaging that after 30 years this designation would be utilized to help Gambling companies avoid paying Federal Income Taxes.
What has helped is that IRS has gradually broadened their definition of what constitutes as a Real Estate business and allowed companies to treated as Real Estate companies. In the case of the Corrections Corporation of America they have successfully argued that their business is basically collecting rent from Federal, State and Local Governments for providing house to inmates!
IRS’s recent ruling has even promoted some data Storage companies to file as Real Estate holding companies since after all, they only are offering rental facilities to companies to store their data for them. Some of the Data Storage companies such as Iron Mountain and Equinix have filed to change their tax filing status from a corporation to a REIT.
Wall Street firm Jefferies has published 33 page report that anticipates that it’s possible to see REIT provisions applied to companies who use landfills, highways, rods, railroads, highways, mines, vineyards. Basically the rule could be applied to any company which has immovable objects used in generating income.
Needless to say this trend is alarming the traditional REIT firms which area alarmed that this abusive practice will jeopardize the tax status of older trust that do nothing but manage real estate. Also, some advocates of taxing corporations have started wondering about why corporation who deal with real estate should not be taxed in the 1st place.
If this trend is allowed to continue, corporation like MacDonalds and Wendy’s could also register as REITs since after all they offer is a location to rent a Big Mac for a few hours!!
What do you think about this trend?