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More Companies Change Business Designation for Tax Purposes
Author: Scarinci Hollenbeck, LLC
Date: May 3, 2013
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A growing number of companies across a variety of industries are changing their business designations in an effort to lower their liability under federal tax law.
The New York Times exclusively reported on this increasingly common scenario, in which corporations that operate in several sectors – including prisons, casinos and infrastructure – are classifying themselves as Real Estate Investment Trusts (REITs) to reduce or eliminate their tax bills. The trust was traditionally associated with funds the solely hold real estate, but in recent years, the Internal Revenue Service has been expanding the definition of what qualifies as real estate. General REIT qualifying rules require that they do no business, and only own real estate. However, the IRS is increasingly allowing more companies to divide up aspects of their businesses that don’t correspond with real estate. As a result, more corporations are gaining permission from the tax agency to convert to REITs.
Most recently, Corrections Corp. of America, which owns and operates 44 prisons and detention centers, and Penn National Gaming, which operates 22 casinos, were granted permission from the IRS to change their designation under tax law, the Times reports. Many analysts say this trend will only intensify in the coming years as corporations seek out strategies to avoid paying high taxes.
“I’ve been in this business for 30 years, and I’ve never seen the interest in REIT conversions as high as it is today,” Robert O’Brien, head of the real estate practice at Deloitte & Touche, told the Times.
An analyst at Wall Street firm Jeffries also commented on the scenario, saying it’s “not a far stretch to envision REITs concentrated in railroads, highways, mines, landfills, vineyards, farmland or any other ‘immovable’ structure that generates revenues,” according to the news source.
While some analysts may feel that the heavier use of REITs to lower tax liability may allow corporations to skirt their tax responsibilities, there appear to be few obstacles that may slow the growth of this strategy.
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