[Vision2020] Helping The Wealthy

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

------------------------------
April 21, 2013
Restyled as Real Estate Trusts, Varied Businesses Avoid Taxes By NATHANIEL
POPPER<http://topics.nytimes.com/top/reference/timestopics/people/p/nathaniel_popper/index.html>

A small but growing number of American corporations, operating in
businesses as diverse as private prisons, billboards and casinos, are
making an aggressive move to reduce — or even eliminate — their federal tax
bills.

They are declaring that they are not ordinary corporations at all. Instead,
they say, they are something else: special trusts that are typically exempt
from paying federal taxes.

The trust structure has been around for years but, until recently, it was
generally used only by funds holding real estate. Now, the likes of
the Corrections
Corporation of America<http://topics.nytimes.com/top/news/business/companies/corrections-corporation-of-america/index.html?inline=nyt-org>,
which owns and operates 44 prisons and detention centers across the nation,
have quietly received permission from the Internal Revenue
Service<http://topics.nytimes.com/top/reference/timestopics/organizations/i/internal_revenue_service/index.html?inline=nyt-org>to
put on new corporate clothes and, as a result, save many millions on
taxes.

The Corrections Corporation, which is making the switch, expects to save
$70 million in 2013. Penn National
Gaming<http://topics.nytimes.com/top/news/business/companies/penn-national-gaming-inc/index.html?inline=nyt-org>,
which operates 22 casinos, including the M Resort Spa Casino in Las Vegas,
recently won approval to change its tax designation, too.

Changing from a standard corporation to a real estate investment trust, or
REIT — a designation signed into law by President Dwight D. Eisenhower —
has suddenly become a hot corporate trend. One Wall Street analyst has
characterized the label as a “golden ticket” for corporations.

“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,” said Robert O’Brien, the head
of the real estate practice at Deloitte & Touche, the big accounting firm.

At a time when deficits and taxes loom large in Washington, some question
whether the new real estate investment trusts deserve their privileged
position.

When they were created in 1960, they were meant to be passive investment
vehicles, like mutual funds, that buy up a broad portfolio of real estate —
whether shopping malls, warehouses, hospitals or even timberland — and
derive almost all of their income from those holdings.

One of the bedrock principles — and the reason for the tax exemption — was
that the trusts do not do any business other than owning real estate.

But bit by bit, especially in recent years, that has changed as the I.R.S.,
in a number of low-profile decisions, has broadened the definition of real
estate, and allowed companies to split off parts of their business that are
unrelated to real estate.

For example, prison companies like the Corrections Corporation and the Geo
Group successfully argued that the money they collect from governments for
holding prisoners is essentially rent. Companies that operate cellphone
towers have said that the towers themselves are real estate.

The conversions generally do not require the companies to change their
underlying business. The chief executive of the Corrections Corporation,
Damon T. Hininger, told investors in February that the new structure should
help in the company’s aim of “housing more and more population for federal,
state and local levels as they grow or deal with overcrowding.”

The I.R.S. released its latest
decision<http://www.irs.gov/pub/irs-wd/1314002.pdf>,
allowing a data and document storage company to convert, on April 5. The
letter did not include the name of the company, but several data storage
companies, including Iron Mountain and Equinix, are in the process of
converting.

A few days later, a strategist at the Wall Street firm Jefferies wrote in a
report <http://bit.ly/16OWoS0>: “It is not a far stretch to envision REITs
concentrated in railroads, highways, mines, landfills, vineyards, farmland
or any other ‘immovable’ structure that generates revenues.”

Today, there are more than 1,000 real estate investment trusts, about 10
percent of them traded publicly on the stock market. Investors like them
because, by law, they must distribute at least 90 percent of their taxable
income to their shareholders — a particularly alluring prospect today,
given the low interest rates paid by many other basic investments.

The benefits of converting are obvious for stockholders and corporate
insiders as well. The conversion typically drives up a company’s stock
price. Investors are drawn by the prospect of lucrative dividends under the
new structure. The mere rumor that a company might convert has been enough
to send its stock price soaring.

The trend has been a concern to advocates of the traditional trusts, who
fear that the newcomers may eventually jeopardize the tax status of older
funds that do not do any business other than owning real estate.

“I worry that in a world where Congress is very sensitive to taxes, that a
lot of these structures could end up attracting a lot of attention that
might not be entirely positive,” said Ross L. Smotrich, an analyst at
Barclays.

Steven Rosenthal, a staff member at the Joint Committee on Taxation during
the 1990s and now a visiting fellow at the nonpartisan Tax Policy Center,
said that the trend raises questions about the purpose of corporate income
taxes at a time when there are so many ways around them. The conversions
are one of many strategies that businesses use to avoid paying the
corporate tax rate of 35 percent.

“What is there about a business owning real estate that suggests we should
not tax them?” Mr. Rosenthal said.

Some Congressional staff members said they had noticed the recent
conversions and were monitoring the issue.

This is not the first wave of companies seeking out a new type of corporate
status to avoid taxes. In the 1980s, dozens of companies, including Sahara
Resorts and the Boston Celtics, became master limited partnerships, another
corporate form that is tax-exempt. After the practice attracted notice,
Congress passed laws that limited the industries that could use the
structure. In the 1990s, hotel companies took advantage of the laws, but a
change to the laws in 1999 soon snuffed that out.

It is too soon to tell how far the current round of conversions will
spread. PricewaterhouseCoopers recently counted 20 companies that are at
some stage in the process of converting, and there has been a steady stream
of suggestions for what industry might next secure I.R.S. approval.

Lawyers have also been finding creative ways to follow the letter of the
law by splitting off parts of a company into subsidiaries that can be
taxed. In the legal world, the most controversial such effort is being
undertaken by Penn National, the casino company. It won approval from the
I.R.S. late last year to turn itself into a real estate holding company. In
the process, it created a tax-paying subsidiary that holds the casino
operations and pays rent to the parent company.

Mr. O’Brien, at Deloitte & Touche, said he has been talking with other
casino operators that are looking at making similar moves. The ruling could
also open the door for restaurant companies like McDonald’s and retailers
like J. C. Penney to follow a similar route, though neither company has
indicated it is considering such a move.

For now, companies like the Corrections Corporation are quickly moving
through the process.

“The good news about this is that we are going to be able to enjoy a full
year of tax savings for 2013,” Mr. Hininger, the chief executive, said in
February. Last week, the company’s share price hit its highest level in
over a decade.
  --
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://mailman.fsr.com/pipermail/vision2020/attachments/20130422/6aac7a1f/attachment-0001.html>