In a private letter ruling, the IRS ruled that a real estate investment trust (REIT) could exclude certain patronage dividends from gross income for purposes of Sections 856(c)(2) and (c)(3).
In general, Section 856(c)(2) provides that at least 95% of a REIT's gross income must be derived from certain specified sources. Similarly, Section 856(c)(3) requires 75% of a REIT's gross income to be derived from certain specified sources. Section 856(c)(5)(J) allows the IRS, in certain circumstances, to exclude an item of income from gross income for purposes of Sections 856(c)(2) and (c)(3).
In PLR 201418022, the taxpayer, a publicly held REIT, borrowed money from certain farm cooperatives (lenders). The taxpayer expects to receive a "patronage dividend," within the meaning of Section 1388(a), from the lenders. The taxpayer represented to the IRS that for financial reporting purposes, it reduces its interest expense by the amount of the patronage dividends received.
The IRS ruled that the patronage dividends the taxpayer would receive effectively reduce the interest expense the taxpayer would pay. Thus, even though the taxpayer must include the patronage dividends in gross income under Section 1385, the taxpayer can exclude the patronage dividends from gross income for purposes of Sections 856(c)(2) and (c)(3).
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