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14 September 20234 minute read

IRS rules subsurface carbon dioxide storage payments are qualifying REIT income

On August 25, 2023, the Internal Revenue Service (IRS) published Private Letter Ruling 202334007 (PLR), which ruled that payments to a real estate investment trust (REIT) for the underground storage of carbon dioxide are qualifying income either as gain from the sale or other disposition of interest in real property or as rents from real property.

In this alert, we take a concise look at the ruling.

Legal overview

The REIT rules under Sections 856(c)(2) and 856(c)(3) of the Internal Revenue Code of 1986, as amended (Code), provide that a REIT is required to predominantly generate qualifying income, including “rents from real property” and gain from the sale or other disposition of real property, to maintain its REIT status.

Section 1.856-4(a) of the Treasury Regulations issued by the IRS and the Treasury Department (Treasury Regulations) further provides that the term “rents from real property” generally refers to the gross amounts received for the use of, or right to use, real property of a REIT. Section 1.856-10(b) of the Treasury Regulations defines “real property” to mean land or improvements to land.

REITs, as primarily passive income vehicles, are limited in the types of services that can be provided to tenants. As a result, the provision of tenant services and amenities requires special tax planning for REITs.

Please see our prior client alert on PLR 202304003 for a more detailed discussion of the tenant service rules for REITs.

Facts of the PLR

The taxpayer (Taxpayer) in the PLR is a REIT that owns timberlands in the US. Pursuant to an agreement, an unrelated third-party storage user (Storage User) shall pay Taxpayer (a) a monthly payment (Subsurface Payment) for the right to inject and permanently store carbon dioxide into the subsurface of the timberlands owned by the REIT, and (b) a one-time payment (Surface Payment) for the non-exclusive right to use the surface of the timberland (Subsurface Payment and Surface Payment – together, Payment). See the below illustration:

The Storage User intends to capture carbon dioxide from emitters near the timberlands and use the rights granted to it under the agreement in connection with the underground storage of the captured carbon dioxide. The Taxpayer represented that it will not provide, directly or indirectly, any services to Storage User, other than customary services.

In summary

The IRS ruled that (a) the REIT’s gross income attributable to any Payment that is for a permanent interest in the timberlands is gain from the sale or other disposition of an interest in real property for purposes of Code Section 856(c)(2)(D) and Code Section 856(c)(3)(C), and (b) the REIT’s gross income attributable to any Payment that is not for a permanent interest in the timberlands is rents from real property under Code Section 856(c)(2)(C) and Code Section 856(c)(3)(A).

The PLR signals continual positive support from the government on ESG (Environmental, Social and Governance) efforts within the REIT community. Earlier this summer, the Treasury Department and the IRS issued long-awaited proposed Treasury Regulations addressing transfers of green energy tax credits under the Inflation Reduction Act (IRA) and the impact on REITs. Please see our prior client alert for more information.

To learn more about PLR 202334007, please contact any of the authors listed above.


About DLA Piper’s National REIT Tax practice

DLA Piper’s National REIT Tax practice has in-depth knowledge and experience with US-listed public REITs, Singapore-listed public REITs, non-traded public NAV REITs, and private REITs. We advise on the acquisition, disposition, and operation of real estate assets through fund, REIT, and joint venture vehicles. Our attorneys are recognized as industry leaders and regularly publish articles in legal and trade publications and actively participate in real estate and REIT industry organizations.

For more information, please check out our REIT Tax Resource Center and this snapshot of our team.

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