The IRS ruled in PLR 202410005 that a REIT’s allocable share of tariffs paid by pipeline users qualifies as rents from real property under section 856(d) for purposes of the 75% and 95% gross income tests applicable to REITs.

The pipeline at issue was regulated by a government commission. (A prior private letter ruling (PLR 202346008) identified the regulating entity for that taxpayer as the Federal Energy Regulatory Commission, which is responsible for regulating interstate gas pipelines. It is not clear why the regulating entity was not identified in this new ruling.) In PLR 202410005, the commission approves the tariffs that the pipeline owner charges for pipeline use. The commission also requires a monthly “nomination” process whereby the pipeline users request or “nominate” a specific volume they will use in the upcoming month, and the pipeline owner confirms the amount if certain requirements are satisfied. The pipeline user pays a tariff equal to the barrels of oil placed on the pipeline by such user during such month multiplied by the tariff rate. There is no minimum or base tariff due. The pipeline user is contractually obligated to deliver oil and economically compelled to use the pipeline to make that delivery. Pipeline users generally utilize the pipeline “on a continuous and consistent basis for extended periods, often years.”

As with prior pipeline rulings, the pipeline owner represented that it would not oversell its capacity, that the pipelines themselves were inherently permanent structures, that pipeline use fees associated with personal property constituted less than 15% of the total pipeline use fees and that most services would be performed by an independent contractor or TRS. 

Based on these facts, the IRS ruled that the REIT’s share of the tariffs was qualifying “rents from real property.” Although a prior private letter ruling did involve a regulated pipeline, this is the first ruling to directly address the regulated tariffs and monthly nomination process. In addition, this ruling approves volume-based rent with no minimum amount. Pure volume-based rent was previously approved in PLR 201907001, but the two more recent pipeline private letter rulings both involved arrangements with minimum pipeline use fees.

Patrick C. Tricker, Emily Benedict, and Zachary Roop also contributed to this article.