Many individual and corporate taxpayers are becoming annoyed with rising tax rates. For many wealthy Americans, income is taxed federally and by many states at the corporate level and then taxed again when the income is distributed to the shareholders of the corporation. Without even taking into account state and local taxes, most corporations are taxed a 35% rate and, with the recent tax increases, individuals are taxed at a rate over 40%. This has led to some creative tax planning in the recent years.
One recent development, as explained in more detail at CNBC.com, is a move by a number of corporations, namely private prisons, casinos, and billboards, to convert to a Real Estate Investment Trust (“REIT”). The REIT was developed as a vehicle for investors to pool money and share costs when investing in a diversified real estate portfolio. In short, a REIT is an investment pool in which a company (a trust) essentially manages the money of its investors and returns the profits to the investors. For more information about a REIT, please click here to learn about NNN, the REIT that once employed me.
The REIT has been around for decades and was largely used by only for real estate holdings. Recently, companies such as the Correction Corporation of America, a large prison company, has received the IRS’s blessing to be reclassified as a REIT. Other companies, such as Penn National Gaming, M Resort Spa and Casino, and Geo Group have also received the ok to be designated as a REIT.
The cornerstone of a REIT is that the investment has to be for real estate. Common examples are shopping malls, warehouses, hospitals, or even timberland. So, the obvious question surfaces, how is a prison or a casino a REIT? These types of businesses have taken the position that the company owns the real estate and the payments collected from governments for holding prisoners is no different than rent. Casinos have been able to accomplish REIT status by holding the real estate in a REIT and operating the casino through a tax-free subsidiary spinoff. The IRS has given its blessing via private letter rulings saying that these types of companies can qualify as a REIT.
From a tax perspective, the beauty of a REIT classification is that the entity itself, unlike a C-Corporation, is exempt from entity level income tax. In exchange for the tax break, the entity must distribute 90% of its taxable income to its shareholders.
To date there are over 1,000 REITs and about 10 are publically traded. With higher tax rates, one can only expect more and more creative tax planning. I look forward to reading about new developments and feedback as to techniques practitioners have seen in the recent year to avoid high tax rates.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390.