This responds to a letter dated June 29, 2011, and supplemental correspondence dated October 28, 2011, requesting a ruling on behalf of Taxpayer.
Taxpayer is requesting a ruling that under the circumstances described below, TRS 2 will not be considered to be directly or indirectly operating or managing a lodging facility in violation of section 856(l)(3)(A) of the Internal Revenue Code (the Code) and that TRS 2 will not fail to qualify as a taxable REIT subsidiary (TRS) under section 856(l) of the Code.
Taxpayer is a domestic corporation which has elected to be treated as a real estate investment trust (REIT) for Federal income tax purposes under section 856(c) of the Code. Taxpayer is the managing general partner of OP and owns approximately a percent of the outstanding common units of OP. OP, through various separate limited liability companies, partnerships, and REITs, owns and operates numerous real properties throughout the United States.
TRS 1 is a TRS of Taxpayer and is wholly owned by OP. TRS 2 is a limited liability company that has elected to be treated as a corporation for Federal income tax purposes. TRS 2 is wholly owned by TRS 1 and is also a TRS of Taxpayer. TRS 2 currently owns a b percent interest in LLC, a limited liability company which is classified as a partnership for Federal tax purposes. LLC currently owns and operates Property in City.
LLC plans to construct a hotel and ———(the Facility) in City assuming it can obtain a license to operate such a facility. In anticipation of receiving the license, LLC has entered into a management agreement (Management Agreement) with an affiliate of Corporation to manage and operate the Facility.
Under the Management Agreement, LLC will continue to own the Facility and Corporation will make a contribution of capital to LLC obtaining a c percent membership interest in LLC. TRS 2 will then have a d percent minority membership interest in LLC.
Two members unrelated to Taxpayer and TRS 2 will hold the largest interests in LLC, a collective e percent and other members will own the remaining f percent. LLC will be managed by a board consisting of g members. TRS 2 will appoint h of those g members of the board. Taxpayer represents that TRS 2 will not have the ability to control the operation or management of the Facility. Pursuant to the Management Agreement, Corporation will manage and operate the Facility for LLC in exchange for a fee.
Taxpayer represents that Corporation is unrelated to Taxpayer and TRS 2 for purposes of section 52(a) and (b) of the Code. Taxpayer also represents that Corporation is an “independent contractor” with respect to Taxpayer, within the meaning of section 856(d)(3). Corporation is actively engaged in the trade or business of operating “lodging facilities” (within the meaning of section 856(d)(9)(D)(ii)) for persons unrelated to the Taxpayer. Corporation operates numerous facilities, each of which has
———— activities conducted at or in connection with the facility.