IRS written determination 201523008

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: 201523008
Release Date: 6/5/2015
Index Number: 1362.02-00, 1362.02-03
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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:PSI:B02
PLR-136311-14
Date:
February 04, 2015
Legend
X = ---------------------------------------------------------------------------------------------------
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State=----------
Date 1= -----------------------
Year 1=-------
N1 =--------------
N2 =------------
Dear -------------:
This letter responds to a letter dated September 25, 2014, submitted by X's
authorized representative on behalf of X, requesting a ruling that rental income that X
received from certain real estate is not passive investment income within the meaning of
§ 1362(d)(3)(C)(i) of the Internal Revenue Code.
The information submitted states that X was incorporated under the laws of State
and anticipates making an election to be treated as an S corporation effective Date 1. X
owns, leases and manages a certain commercial real estate property (the “Property”).
X, through its officers, employees and independent contractors, has provided and
continues to provide certain services with respect to the leasing of the Property. These
services include daily janitorial and rubbish removal services, regular maintenance,
repairs and inspection covering plumbing, electrical and drainage systems as well as
roofing, landscaping and building improvements. These services also include daily
security services and management and control of all common areas, including parking

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2
lots and picnic table areas. X additionally negotiates and executes leases with tenants,
settles tenant disputes and collects rents and monthly sales reports, negotiates bank
loans and insurance contracts for the Property and performs background checks on
prospective tenants.
For the Year 1taxable year, X collected approximately $N1 in gross rents and
paid or incurred approximately $N2 in relevant operating expenses excluding
depreciation. X represents that these figures are generally representative of the
amounts of income and expenses it incurs with respect to the Property in a typical year.
Section 1361(a)(1) of the Codedefines an “S corporation” as a small business
corporation for which an election under § 1362(a) is in effect for such year.
Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be
terminated whenever (at any time after the first day ofthe first taxable year for which the
corporation is an S corporation) such corporation ceases to be a small business
corporation.
Section 1362(d)(3)(A) provides that an election under § 1362(a) shall be
terminated whenever the corporation has accumulatedearnings and profits at the close
of each of 3 consecutive taxable years, and has gross receipts for each of such taxable
years more than 25 percent of which are passive investment income. Any termination
under this paragraph shall be effective on and after the first day of the first taxable year
beginning after the third consecutive taxable year referred to above.
Section 1362(d)(3)(C)(i) provides that except as otherwise provided, the term
"passive investment income" means gross receipts derived from royalties, rents,
dividends, interest, annuities, and sales or exchanges of stock or securities.
Section 1.1362-2(c)(5)(ii)(B)(2) provides that "rents" does not include rents
derived in the active trade or business of renting property. Rents received by a
corporation are derived in an active trade or business of renting property only if, based
on all the facts and circumstances, the corporation provides significant services or
incurs substantial costs in the rental business. Generally, significant services are not
rendered and substantial costs are not incurred in connection with net leases. Whether
significant services are performed or substantial costs are incurred in the rental
business is determined based upon all the facts and circumstances including, but not
limited to, the number of persons employed to provide the services and the types and
amounts of costs and expenses incurred (other than depreciation).
Based solely on the information submitted and the representations made, we
conclude that the rental income that X receives from its operations described above is
not passive investment income under § 1362(d)(3)(C)(i).

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Except as expressly provided herein, we express or imply no opinion concerning
the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter. Specifically, we express or imply no opinion on whether X is a small
business corporation under § 1361(b). Further, the passive investment income rules of
§ 1362 are independent of the passive activity rules of § 469; unless an exception under
§ 469 applies, the rental activity remains passive for purposes of § 469.
This ruling is directed only to the taxpayer who requested it. Section § 6110(k)(3)
of the Code provides that it may not be used or cited as precedent. Pursuant to the
power of attorney on file with this office, a copy of this letter is being sent to X's
authorized representative.
Sincerely,
Bradford R. Poston
Senior Counsel, Branch 3
Office of the Associate Chief Counsel
(Passthroughs andSpecial Industries)
Enclosures: (2)
Copy of this letter
Copy for § 6110 purposes