IRS written determination 201433005

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: 201433005
Release Date: 8/15/2014
Index Number: 856.01-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person ToContact:
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ID No. ------------------
Telephone Number:
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Refer Reply To:
CC:FIP:B03
PLR-112762-14
Date: May 5, 2014
Legend
Taxpayer=-----------------------------------------------------------.
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Bank A=--------------------
Bank B=----------------------
Date 1=----------------------------
Date 2=----------------------
Date 3=----------------------
Date 4=-----------------------------
Date 5=---------------------------
a=----------------
b=--------------
c=----------------
d=--------------
State=--------------
Partnership =---------------------------------------------------------------

PLR-112762-14
2
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LLC 1=---------------------------
LLC 2=-----------------------------------------------
LLC 3=--------------------------------------
Dear --------------:
This responds to a letter dated March 21, 2014, submitted on behalf of Taxpayer.
Taxpayer requests a ruling under § 856(c)(5)(J)(i) of the Internal Revenue Code
("Code") that patronage dividends included in its gross income under § 1385 are
excluded from its gross income for purposes of §§ 856(c)(2) and (c)(3).
FACTS
Taxpayer elected to be treated as a real estate investment trust ("REIT") for
federal income tax purposes beginning with its taxable year ended Date 1. Taxpayer is
a calendar year taxpayer that uses an overall accrual method of accounting.
Taxpayer isa publicly traded REIT whose primary business is to own, manage,
acquire, and dispose of timberland properties. Taxpayer conducts substantially all of its
business through Partnership, a State limited partnership, which is currently disregarded
for federal income purposes. Additionally, Partnership conducts significant activity
through LLC 1, a State limited liability company, which is also disregarded for federal
income tax purposes.
Almost entirely in connection with the acquisition of certain timberland, LLC 1 and
LLC 2 entered into a debt financing arrangement with Bank A, Bank B, and various
other lenders on Date 2, which included a first mortgage loan and a second mortgage
loan. Bank A was the administrative agent and collateral agent for the first mortgage
loan, and Bank B was the administrative agent and collateral agent for the second
mortgage loan. On Date 3, Partnership and LLC 1 entered into an Amended and
Restated Credit Agreement with Bank A, LLC 3, and other lenders. Bank A and LLC 3
served as co-lead lenders and Bank A served as administrative agent. The proceeds
were used to pay off the amounts under the then existing first mortgage loan and
second mortgage loan.
On Date 4, Partnership and LLC 1 entered into a Second Amended and Restated
Credit Agreement with Bank A and other lenders, with Bank A as the administrative
agent. The proceeds of which were used to pay off the outstanding balance of the

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Amended and Restated Credit Agreement and to partially fund the acquisition of
additional timberland.
On Date 5, Partnership and LLC 1 entered into the Third Amended and Restated
Credit Agreement for approximately $a with Bank A, as the administrative agent, and
certain other lenders. This agreement provides for borrowing consisting of a)a $b
revolving credit facility, b) a $c multi-draw term credit facility, and c) the remaining
amount outstanding under the Second Amended and Restated Credit Agreement of
approximately $d.
Bank A is a cooperative subject to taxation under §§ 1381-1388 and is subject to
regulation by the Farm Credit Administration. Taxpayer represents that it does not
receive “patronage dividends” under the Third Amended and Restated Credit
Agreement. Taxpayer intends to amend the Third Amended and Restated Credit
Agreement so that it may receive patronage dividends from Bank A.
Patronage dividends are generally paid either in cash or in both cash and equity.
Taxpayer represents that with respect to the patronage dividends it expects to receive,
each will be a "patronage dividend" within the meaning of the term provided in
§ 1388(a). Taxpayer is required for federal income tax purposes, under § 1385, to
include in gross income all patronage dividends it receives. However, for financial
reporting purposes, Taxpayer represents that it will reduce its interest expense by the
amount of patronage dividends received.
LAW & ANALYSIS
Section 856(c)(2) provides that in order for a corporation to qualify as aREIT, at
least 95 percent of the corporation's gross income (excluding gross income from
prohibited transactions) must be derived from sources that include dividends, interest,
rents from real property, and gain from the sale or other disposition of stock, securities,
and real property (other than property in which the corporation is a dealer).
Section 856(c)(3) provides that in order for a corporation to qualify as a REIT, at
least 75 percent of the corporation's gross income (excluding gross income from
prohibited transactions) must be derived from rents from real property, interest on
obligations secured by real property, gain from the sale or other disposition of real
property (other than property in which the corporation is a dealer), dividends fromREIT
stock and gain from the sale of REIT stock, abatements and refunds of taxes on real
property, income and gain derived from foreclosure property, commitment fees to make
loans secured by mortgages on real property or to purchase or lease real property, gain
from certain sales or other dispositions of real estate assets, and qualified temporary
investment income.

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Section 856(c)(5)(J) provides that to the extent necessary to carry out the
purposes of Part II of subchapter M of the Code, the Secretary is authorized to
determine, solely for purposes of such part, whether any item of income or gain which –
(i) does not otherwise qualify under §§ 856(c)(2) or (c)(3) may be considered as not
constituting gross income for purposes of §§ 856(c)(2) or (c)(3), or (ii) otherwise
constitutes gross income not qualifying under §§ 856(c)(2) or (c)(3) may be considered
as gross income which qualifies under §§ 856(c)(2) or (c)(3).
Section 301(a) provides that in general, except as otherwise provided in this
chapter (chapter 1 of subtitle A of the Code, which chapter and subtitle include, among
other sections, §§ 301, 316, 317, 856, and § 1388), a distribution of property (as defined
in § 317(a)) made by a corporation to a shareholder with respect to its stock shall be
treated in the manner provided in § 301(c).
Section 301(c) provides, in part, that in the case of a distribution to which
§ 301(a) applies, that portion of the distribution which is a dividend (as defined in § 316)
shall be included in gross income.
Section 316(a) provides that for purposes of this subtitle (subtitle A, which
subtitle, as noted, includes, among other sections, both § 856 and § 1388), the term
“dividend” means any distribution of property made by a corporation to its
shareholders-- (1) out of its earnings and profits accumulated after February 28, 1913,
or (2) out of its earnings and profits of the taxable year (computed as of the close of the
taxable year without diminution by reason of any distributions made during the taxable
year), without regard to the amount of the earnings and profits at the time the
distribution was made.
Section 316(a) provides in the flush language that, except as otherwise provided
in this subtitle, every distribution is made out of earnings and profits to the extent
thereof, and from the most recently accumulated earnings and profits. The flush
language provides further that to the extent that any distribution is, under any provision
of this subchapter (subchapter C of chapter 1 of subtitle A of the Code), treated as a
distribution of property to which § 301 applies, such distribution shall be treated as a
distribution of property for purposes of this subsection.
Section 1388(a) provides that, for purposes of subchapter T, the term "patronage
dividend"means an amount paid to a patron by an organization to which part I of
subchapter T applies--
(1) on the basis of quantity or value of business done with or
for such patron,

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(2) under an obligation of such organization to pay such
amount, which obligation existed before the organization
received the amount so paid, and
(3) which is determined by reference to the net earnings of
the organization from business done with or forits patrons.
The flush language of § 1388(a) provides that such term does not include any
amount paid to a patron to the extent that (A) such amount is out of earnings other than
from business done with or for patrons, or (B) such amount is out of earnings from
business done with or for other patrons to whom no amounts are paid, or to whom
smaller amounts are paid, with respect to substantially identical transactions. The flush
language provides further that, for purposes of paragraph (3), net earnings shall not be
reduced by amounts paid during the year as dividends on capital stock or other
proprietary capital interests of the organization to the extent that the articles of
incorporation or bylaws of such organization or other contract with patrons provide that
such dividends are in addition to amounts otherwise payable to patrons which are
derived from business done with or for patrons during the taxable year.
Section 1385(a)(1) provides, in part, that, except as otherwise provided, each
person shallinclude in gross income the amount of any patronage dividend which is
paid in money, a qualified written notice of allocation, or other property (except a
nonqualified written notice of allocation), and which is received by him during the
taxable year from an organization described in § 1381(a).
The legislative history underlying the tax treatment of REITs indicates that a
central concern behind the gross income restrictions is that a REIT’s gross income
should largely be composed of passive income. Forexample, H.R. Rep. No. 2020, 86th
Cong., 2d Sess. 4 (1960) at 6, 1960-2 C.B. 819, at 822-23 states, “[o]ne of the principal
purposes of your committee in imposing restrictions on types of income of a qualifying
real estate investment trust is to be sure the bulk of its income is from passive income
sources and not from the active conduct of a trade or business.”
Patronage dividends paid by a subchapter T cooperative are a return of earnings
to its cooperative patrons based on the amount of business thatthe patron transacts
with the cooperative. The patronage dividends paid by a subchapter T financing
cooperative effectively reduce the costs that its patrons incur to borrow funds from the
cooperative. The amounts paid by Banks A represent earnings thatthe cooperative is
able to refund to Taxpayer based on the average amounts that Taxpayer borrowed from
the banks during the prior year. Thus, while Taxpayer must include patronage dividend
income in its gross income under § 1385(a)(1), the patronage dividends Taxpayer
receives effectively reduce Taxpayer’s interest expense paid during the prior year.
Under the facts of the instant case, exclusion of these patronage dividends from gross

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income for purposes of §§ 856(c)(2) and (c)(3) does not interfere withCongressional
policy objectives in enacting the income tests under those provisions.
CONCLUSION
Accordingly, pursuant to § 856(c)(5)(J)(i), we conclude that the patronage
dividends included in Taxpayer's gross income under § 1385 are excluded from its
gross income for purposes of §§ 856(c)(2) and (c)(3).
This ruling’s application is limited to the facts, representations and Code sections
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 requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, copies of this
letter are being sent 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,
Julanne Allen
Assistant to the Branch Chief, Branch 3
Associate Chief Counsel
(Financial Institutions & Products)