IRS written determination 201429024

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201429024
Release Date: 7/18/2014
856.00-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---------------------, ID No. ------------------
Telephone Number:
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Refer Reply To:
CC:FIP:B01
PLR-143265-13
Date:
March 28, 2014
Legend:
Taxpayer=-------------------------------
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Company=-------------------------------
Club-1=----------------------
Date 1=----------------------
Year 1=-------
A=--
B=------------
C=----------
D=--
E=--
F=--
Dear ------------:
This letter responds to your letter dated October 14, 2013 and subsequent
correspondence dated March 10, 2014, requesting a ruling on behalf of Taxpayer

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regarding the definition of a “qualified lodging facility” within the meaning of Section
856(d)(9)(D) of the Internal Revenue Code. Specifically, you have requested the
following rulings:
(1) The sports clubs owned indirectly by Taxpayer through a subsidiary of
Taxpayer under the circumstances described below will not constitute part of a
“qualified lodging facility” within the meaning of Section 856(d)(9)(D).
(2) The Subsidiary will not be treated as directly or indirectly operating or
managing a “qualified lodging facility” within the meaning of Sections 856(d)(9)(D) or
856(l) by reason of operating the sports clubs as described below.
Facts:
Taxpayer is a newly formed corporation that intends to elect to be taxed as a real
estate investment trust (“REIT”) beginning Date 1. Taxpayer will adopt the calendar
year for Federal income tax reporting and will use the accrual method as its overall
method of accounting. Taxpayer was formed to acquire a portfolio of hotels that
Taxpayer represents constitute qualified lodging facilities within the meaning of Section
856(d)(9)(D).
Taxpayer’s acquisition of the hotels will be effectuated by a contribution of the
properties into an operating partnership (the “OP”) that will be controlled by Taxpayer.
Through the OP, Taxpayer intends to lease these hotels to a taxable REIT subsidiary
(“Hotel TRS”) that will engage an eligible independent contractor to operate the hotels
on behalf of the Hotel TRS. As part of a related transaction, Taxpayer will also
contribute its sports club business, as described more fully below, to the OP; the sports
club business will be operated in a separate taxable REIT subsidiary (the “Sports Club
TRS”).
Company operates under the name Club-1, and comprises a fitness center
operator and A sports clubs in A different cities. Company is a partnership that holds its
interests in the various clubs through a series of wholly-owned limited liability
companies (“LLCs”) that are treated as entities disregarded as separate from their
owner for U.S. federal income tax purposes. The sports clubs owned by Company are
located in urban locations with an average size of approximately B square feet. The
clubs owned by Company have approximately C members.
Upon the formation of Taxpayer and the OP, the Company will contribute its LLC
interests to the OP in exchange for partnership units. The OP will concurrently form an
entity to which these LLC interests will be contributed. That entity will, jointly with
Taxpayer, make an election effective upon the date of the contribution by the OP to be
treated as a taxable REIT subsidiary (“TRS”) and this newly formed TRS, the Sports
Club TRS, will assume the ongoing operations of the sports clubs.

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Of the A sports clubs that will be owned by the Sports Club TRS, D are located
adjacent or contiguous to one of the hotel properties that will be owned by Taxpayer,
and E is located on a floor within one of the hotels. The remaining F sports clubs are
stand-alone locations not located near any hotel. The sports clubs deliver a range of
programs and services including cardiovascular and weight training, group exercise
programs, sports and aquatic programs, spa and salon services, food cafes, child care
services, private training, and nutritional counseling.
The sports clubs offer membership to the general public. There are also
arrangements between the clubs that are located adjacent to a hotel property and the
adjoining hotels such that the guests of the hotels may gain access to the respective
club. The hotels generally pay a fixed monthly or annual fee to the respective club for
this service. This fee may be offset by either (i) the daily member fee charged by the
hotel to the guest user and turned over to the respective club, or (ii) the payment directly
to the respective club of the daily use fee by hotel guests who wish to use the club
facilities. The sum of all fees paid to the Company by the hotels in Year 1 accounted for
less than F percent of Company’s total revenues.
Taxpayer represents that the sports clubs described above and operated by the
Company are not amenities and facilities that are customary for other lodging properties
of a comparable size and class owned by other owners unrelated to Taxpayer within the
meaning of Section 856(d)(9)(iii).
Law and Analysis:
Section 856(c)(2) provides that at least 95 percent of a REIT’s gross income
must be derived from specified sources that include rents from real property, and
Section 856(c)(3) provides that at least 75 percent must be derived from sources, that
likewise include, rents from real property.
Section 856(d)(2)(B) provides that rents from real property do not include any
amount received or accrued directly or indirectly from any person if the REIT owns
directly or indirectly: (1) in the case of a corporation, stock possessing 10 percent or
more of the total combined voting power of all classes of stock entitled to vote, or 10
percent or more of the total value of shares of all classes of stock of the corporation; or
(2) in the case of any person that is not a corporation, an interest of 10 percent or more
in the assets or net profits of the person.
Section 856(d)(8)(B) provides that amounts paid to a REIT by a TRS shall not be
excluded from rents from real property by reason of Section 856(d)(2)(B) when a REIT
leases a qualified lodging facility or qualified health care facility to a TRS, and the facility
or property is operated on behalf of the TRS by a person who is an eligible independent
contractor.

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Section 856(l) provides that a REIT and a corporation (other than a REIT) may
jointly elect to treat such corporation as a TRS. To be eligible for treatment as a TRS,
Section 856(l)(1) provides that the REIT must directly or indirectly own stock in the
corporation, and the REIT and the corporation must jointly elect such treatment.
Section 856(l)(2)(A) provides that any corporation in which a TRS owns directly
or indirectly more than 35 percent of the total voting power of the outstanding securities
of another corporation shall be treated as a TRS. Section 856(l)(2)(B) provides that any
corporation in which a TRS owns directly or indirectly more than 35 percent of the total
value of the outstanding securities of another corporation shall be treated as a TRS.
Section 856(l)(2) provides that for purposes of Section 856(l)(2)(B), securities described
in section 856(m)(2)(A) are not taken into account.
Section 856(l)(3)(A) provides that a TRS cannot directly or indirectly operate or
manage a lodging facility or a health care facility. Section 856(l)(4)(A) provides that the
term “lodging facility” has the meaning given such term in Section 856(d)(9)(D)(ii).
Section 856(d)(9)(D)(i) provides that the term “qualified lodging facility” means
any lodging facility unless wagering activities are conducted at or in connection with
such facility by any person who is engaged in the business of accepting wagers and
who is legally authorized to engage in such business at or in connection with such
facility.
Section 856(d)(9)(D)(ii) provides that the term “lodging facility” means a hotel,
motel, or other establishment more than one-half of the dwelling units in which are used
on a transient basis.
Section 856(d)(9)(D)(iii) provides that the term “lodging facility” includes
customary amenities and facilities operated as part of, or associated with, the lodging
facility so long as such amenities and facilities are customary for other properties of a
comparable size and class owned by other owners unrelated to such real estate
investment trust.
Taxpayer has represented thatthe sports clubs described above and operated
by the Company are not amenities and facilities that are customary for other lodging
properties of a comparable size and class owned by other owners unrelated to
Taxpayer with the meaning of Section 856(d)(9)(D)(iii). Because the sports clubs are
not such customary amenities and facilities, they are not included in the definitions of
“lodging facility” or “qualified lodging facility” in Section 856(d)(9)(D). The fact that
several of the sports clubs are located either on a floor of a hotel or in close proximity to
a hotel that is a qualified lodging facility does not change the nature of whether the
amenities and services offered by the sports clubs are customary. Moreover, the sports
clubs offer their services primarily to the general public. While the sports clubs located

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adjacent to hotels also offer services to hotelguests through arrangements with the
hotel, a relatively small percentage of their revenue is attributable to hotel guests.
Additionally, the sports clubs do not have any dwelling units. As a result, the sports
clubs will not be considered part of a qualified lodging facility nor will the Sports Club
TRS be considered as directly or indirectly operating a qualified lodging facility by
reason of owning and operating the sports clubs.
Conclusion:
We hereby rule as follows:
(1) The sports clubs ownedindirectly by Taxpayer through the Sports Club TRS
and operated by the Sports Club TRS under the circumstances described above will not
constitute part of a “qualified lodging facility” within the meaning of Section 856(d)(9)(D).
(2) The Sports Club TRSwill not be treated as directly or indirectly operating or
managing a “qualified lodging facility” within the meaning of Sections 856(d)(9)(D) or
856(l) by reason of operating the sports clubs as described above.
This ruling's application is limited to the facts, representations, Code Sections,
and regulations cited herein. Except as expressly provided herein, no opinion is
expressed or implied concerning the tax consequences of any aspect of any transaction
or item discussed or referenced in this letter. In particular, no opinion is expressed with
regard to whether Taxpayer otherwise qualifies as a REIT under subchapter M of the
Code.
This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
provides that it may not be used orcited as precedent. In accordance with the
provisions of a Power of Attorney on file, we are sending a copy of this ruling letter to
your authorized representatives.
The rulings contained in this letter are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.
Sincerely,
Robert A. Martin
Senior Technician Reviewer, Branch 1
(Financial Institutions & Products)