99-011
Response April 26, 1999
REQUEST LETTER
January 20, 1999
Dear Mr. Chapman:
We are writing on behalf of our client, hereinafter
referred to as "S," to request an advisory opinion regarding whether
a Real Estate Investment Trust (REIT) is subject to the Utah water's edge
combined reporting provisions enumerated in Utah Code Ann. (UCA) Sections
59-7-402 through 404. We have discussed this matter with Mr. Kim Ferrell,
corporate tax manager for the Utah State Tax Commission, in advance of our
submitting this request. We have included below the factual background and our
analysis of the issue.
Background
"P," a Utah domiciled corporation, is the
parent company of a group of subsidiaries doing business in various states. One
of P's subsidiaries is S, a corporation electing REIT status, domiciled in a
state other than Utah. P and S are unitary under UCA. Section 59-7-101 (28)(a).
In addition, S would be included in P's
consolidated federal income tax return, but for its election to be taxed
as a REIT.
Utah currently has no provisions that directly address
whether a REIT, that is a member of a unitary group, should be subjected to
Utah's combined reporting rules. The logical application of existing Utah law,
however, suggests that a REIT should
file a separate Utah income tax return and should not be subjected to
Utah's combined reporting rules.
Analysis
In support of our conclusion in this matter we submit
the following for your consideration:
UCA Section 59-7-402 states that except as provided in
Section 59-7-403, if any corporation listed in Subsection 59-7-101(33)(a) is
doing business in Utah, the unitary
group shall file a water's edge combined report. "Water's edge combined
report" means a report combining the income and activities of all members
of a unitary group which are corporations organized or incorporated in the
United States. UCA Section 59-7-101(33)(a).
S would be construed as a member of P's unitary group
as these entities are related through common ownership and are economically
interdependent with one another by
centralized management, financial integration and economies of scale. See UCA
Section 59-7-101(28). S consequently would be included in P's combined return.
UCA Section 59-7-116.5(1), however, states that a REIT
"shall be taxed on the same income taxed for federal purposes under the
Internal Revenue Code." In
reviewing this section, it appears that there are two compelling reasons
supporting the exclusion of REITs from Utah's combined returns.
First, including a REIT in a Utah combined return
would result in a portion of the unitary income being allocated to the REIT
pursuant to the customary combined reporting methodology. Accordingly, the
REIT's Utah taxable income would necessarily be different than its separate
income taxed for federal tax purposes."
Second, the Internal Revenue Code provides a deduction
from REIT taxable income dividends paid. I.R.C. Section 857(b)(2)(13). It is
through this deduction that REITs act as quasi-pass-through entities; however,
a REIT cannot pass through any losses to its shareholders and is thus not the
equivalent of a partnership which is a "true" pass-through entity. This inability to pass through losses, and
the requirement that a REIT distribute a certain amount of its taxable earnings
and profits in order to qualify as a REIT and not be subject to an excise tax
(see I.R.C. Sections 857(a)(l) and 4981), is consistent with Internal Revenue
Code's prohibition on REITs being "includible corporations" for
purposes of filing federal consolidated returns. See I.R.C. Section 1504(b). If a REIT were to be included in a
federal consolidated return, its losses could be combined with income of other
members of its affiliated group, and its dividend distributions would be
eliminated. Both of these results would
seem to be contrary to the status of a REIT as a separate taxpayer.
It appears that, if the Utah legislature's intent is
to tax a REIT based on the same income as is taxed federally, a REIT must be
excluded from the combined reporting
group, and file a separate return.
In summary, we request the Tax Commission rule that S
should not be subjected to combined reporting provisions enumerated in UCA
Sections 59-7-402 through 404 and be allowed to file a separate Utah return.
Should you be inclined to rule to the contrary on this
matter, we request the opportunity to meet with you and further discuss the
issue. Your cooperation in this matter will be very much appreciated.
Very truly yours,
INDIVIDUAL
RESPONSE
LETTER
April 26, 1999
COMPANY
ADDRESS
RE: Utah=s Corporate Franchise Tax Reporting Requirements for
Real Estate Investment Trusts (AREITs@)
Dear NAME,
We have received your request for an advisory opinion
concerning reporting requirements for Utah=s
corporate franchise tax as they relate to REITs. You have specifically asked whether Utah will require a REIT that
qualifies as a member of a unitary group to be included in the combined return
filed for unitary groups under Utah Code Ann. '59-7-402 or whether the REIT may file separately, as may be required
under Utah Code Ann. '59-7-116.5.
We agree with your summation of the issue and the
result you propose. First, there are
other corporations, such as regulated investment companies, that do not report
their taxable income on the combined return that is filed for unitary groups. Second, section 59-7-116.5 clearly states
that a REIT shall be taxed on the same income taxed for federal purposes. Including the REIT on Utah=s combined return for unitary groups could tax the
REIT differently than it is taxed for federal purposes. For these reasons, the REIT should not be
included on the combined return.
Instead, a REIT=s taxable income should be reported separately on Utah=s Form TC-20REIT.
Please contact us if you have any other questions.
For the Commission,
R. Bruce Johnson
^^ Commissioner
--------------------------------------------------------------------------------------------------------------
SECOND RESPONSE LETTER
May 28, 1999
RE: Clarification
of Advisory Opinion Issued on Utah=s
Corporate Franchise Tax Reporting Requirements for Real Estate Investment
Trusts (AREITs@)
Dear Mr. Lang,
You recently asked the Commission to issue an advisory
opinion as to whether REITs should file a separate return or be included on a
combined return that is filed for unitary groups. We provided you an advisory opinion that included the following
advice:
Including the REIT on Utah=s combined return for unitary groups could tax the
REIT differently than it is taxed for federal purposes. For these reasons, the REIT should not be
included on the combined return.
Instead, a REIT=s taxable income should be reported separately on Utah=s Form TC-20REIT.
By phone, you indicated that this response does not
adequately address your request that the Commission rule that REITs are not
subject to the provisions of Utah Code Ann. ''59-7-402
through -404. Depending upon the
specific facts concerning a REIT, there may be circumstances where portions of
these statutes would have application to a REIT. Accordingly, the Commission cannot issue a broad ruling without
knowing the specific facts relating to the REIT.
The Commission, however, will answer any question you
have that relates to specific circumstances.
You asked by phone if Section 59-7-404(1)(c) would have application to a
REIT when that REIT files separately from the unitary group. Subsection 404(1)(c) provides that a unitary
group filing a combined report shall calculate unadjusted income of the
combined group by making appropriate eliminations and adjustments between
members included in the combined report.
You specifically asked whether, subject to this subsection, a member of
the unitary group would need to report dividends it receives from a REIT on its
unitary report when the REIT files separately from the unitary group. Because the REIT files separately from the
unitary group, the unitary groups=
combined report should reflect the taxable income that any of its members
receive from the REIT.
Also, we point out that a REIT that files separately
from the unitary group is still subject to the provisions of Utah Code Ann. '59-7-113.
Accordingly, the Commission is authorized to distribute, apportion, or
allocate gross income or deductions between a REIT and any other corporation
owned or controlled directly or indirectly by the same interest, if such action
is necessary in order to prevent evasion of taxes or clearly to reflect the
income of any such corporation. Such
action is authorized whether or not the REIT files separately from the unitary group.
Please contact us if you have any other questions.
For the Commission,
R. Bruce Johnson
Commissioner
^^