Read the letter ruling: PLR 201310020 [PDF 57 KB]
*Private letter rulings are taxpayer-specific rulings furnished by the IRS National Office in response to requests made by taxpayers and/or IRS officials and can only be relied upon by the taxpayer to whom issued. It is important to note that, pursuant to section 6110(k)(3), such items cannot be used or cited as precedent. Nonetheless, such rulings can provide useful information about how the IRS may view certain issues.
The taxpayer owned an apartment complex with a marina containing boat slips and end ties.
- Boat slips are owned independently of the apartments.
- The boat slips are accessible by means of large floating docks that are held in place by fixed pilings attached to the harbor floor.
- The marina has security gates, locker storage boxes and cleats, electrical and water systems, a fire suppression system, and a sewage pumpout system.
- Marina tenants have access to restrooms, showers, and lockers.
- Utilities are sub-metered by the utility company to each marina tenant.
The marina employs a dock master, who manages all aspects of the marina, such as leasing, collecting rents, enforcing rules, servicing late rental notices, filing unlawful detainer actions, advertising, maintaining income receipts, determining compliance with rules, and managing tenant relationships.
Marina boat slips are leased via standard lease agreements containing typical real estate lease terms—such as the lessee’s provision of a security deposit, rental payments due on the first day of each month, lessor’s rights to enter the premises during an emergency, lessee’s obligation to carry liability insurance, prohibitions on assignment, and the landlord’s right to retake possession of each leased slip by legal action after a payment default.
The IRS ruled that the boat slips (i.e., the water space where a ship is berthed, rather than the piers) are “real property” citing Rev. Rul. 71-286 (air rights over real property are interests in real property) because as the IRS found, the right to use a geographically fixed plot of water and the seabed beneath it is directly analogous to air rights.
The IRS also ruled that the taxpayer’s rental income from the boat slips constitutes “rents from real property” within the meaning of section 856(c).
Finally, the IRS ruled that the services provided to tenants of the boat slips do not cause otherwise qualifying income to be excluded from the definition of “rents from real property” because such services are not provided primarily for the convenience of tenants. Section 856(d)(7)(C) provides that any amount which would be excluded from unrelated business taxable income as rents from real property under section 512(b)(3) is not impermissible tenant service income.
The IRS ruled that the services in question are not services provided primarily for the convenience of the tenants under Reg. section 1.512(b)-1(c)(5) and therefore would not cause the income to fail to be excluded from unrelated business taxable income if received by a tax-exempt organization.
The IRS position with respect to income from rental of boat slips under the facts in the letter ruling appears to be inconsistent with the position previously taken by the IRS and the courts that income from the operation of a parking lot for automobiles is not rents from real property under section 512(b)(3). See, e.g.—
- Rev. Rul. 2004-24, 2004-1 C.B. 550 (parking revenue under various scenarios was UBTI)
- Ocean Pines Ass’n v. Commissioner, 135 T.C. 276 (2010), aff’d, 672 F.3d 284 (4th Cir. 2012) (income derived from the operation of a parking lot is not rent from real property under section 512(b)(3))
For more information, contact:
Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax)