Definition of Real Estate Investment Trust Real Property, 27508-27516 [2014-11115]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 79, Number 93 (Wednesday, May 14, 2014)]
[Proposed Rules]
[Pages 27508-27516]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-11115]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-150760-13]
RIN 1545-BM05


Definition of Real Estate Investment Trust Real Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations that clarify the 
definition of real property for purposes of the real estate investment 
trust provisions of the Internal Revenue Code (Code). These proposed 
regulations provide guidance to real estate investment trusts and their 
shareholders. This document also provides notice of a public hearing on 
these proposed regulations.

DATES: Written or electronic comments must be received by August 12, 
2014. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for September 18, 2014 must be received by 
August 12, 2014.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-150760-13), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
150760-13), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-150760-13). The 
public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Andrea Hoffenson, (202) 317-6842, or Julanne Allen, (202) 317-6945; 
concerning submissions of comments, the hearing, and/or to be placed on 
the building access list to attend the hearing, Oluwafunmilayo (Funmi) 
Taylor, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) relating to real estate investment trusts (REITs). Section 
856 of the Code defines a REIT by setting forth various requirements. 
One of the requirements for a taxpayer to qualify as a REIT is that at 
the close of each quarter of the taxable year at least 75 percent of 
the value of its total assets is represented by real estate assets, 
cash and cash items (including receivables), and government securities. 
See section 856(c)(4). Section 856(c)(5)(B) defines real estate assets 
to include real property and interests in real property. Section 
856(c)(5)(C) indicates that real property means ``land or improvements 
thereon.'' Section 1.856-3(d) of the Income Tax Regulations, 
promulgated in 1962, defines real property for purposes of the 
regulations under sections 856 through 859 as--

land or improvements thereon, such as buildings or other inherently 
permanent structures thereon (including items which are structural 
components of such buildings or structures). In addition, the term 
``real property'' includes interests in real property. Local law 
definitions will not be controlling for purposes of determining the 
meaning of the term ``real property'' as used in section 856 and the 
regulations thereunder. The term includes, for example, the wiring 
in a building, plumbing systems, central heating, or central air-
conditioning machinery, pipes or ducts, elevators or escalators 
installed in the building, or other items which are structural 
components of a building or other permanent structure. The term does 
not include assets accessory to the operation of a business, such as 
machinery, printing press, transportation equipment which is not a 
structural component of the building, office equipment, 
refrigerators, individual air-conditioning units, grocery counters, 
furnishings of a motel, hotel, or office building, etc., even though 
such items may be termed fixtures under local law.

Section 1.856-3(d).
    The IRS issued revenue rulings between 1969 and 1975 addressing 
whether certain assets qualify as real property for purposes of section 
856. Specifically, the published rulings describe assets such as 
railroad properties,\1\ mobile home units permanently installed in a 
planned community,\2\ air rights over real property,\3\ interests in 
mortgage loans secured by total energy systems,\4\ and mortgage loans 
secured by microwave transmission property,\5\ and the rulings address 
whether the assets qualify as either real property or interests in real 
property under section 856. Since these published rulings were issued, 
REITs have sought to invest in various types of assets that are not 
directly addressed by the regulations or the published rulings, and 
have asked for and received letter rulings from the IRS addressing 
certain of these assets. Because letter rulings are limited to their 
particular facts and may not be relied upon by taxpayers other than the 
taxpayer that received the ruling, see section 6110(k)(3), letter 
rulings are not a substitute for published guidance. The IRS and the 
Treasury Department recognize the need to provide additional published 
guidance on the definition of real property under sections 856 through 
859. This document proposes regulations that define real property for 
purposes of sections 856 through 859 by providing a framework to 
analyze the types of assets in which REITs seek to invest. These 
proposed regulations provide neither explicit nor implicit guidance 
regarding whether various types of income are described in section 
856(c)(3).\6\
---------------------------------------------------------------------------

    \1\ Rev. Rul. 69-94 (1969-1 CB 189), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    \2\ Rev. Rul. 71-220 (1971-1 CB 210), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    \3\ Rev. Rul. 71-286 (1971-2 CB 263), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    \4\ Rev. Rul. 73-425 (1973-2 CB 222), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    \5\ Rev. Rul. 75-424 (1975-2 CB 269), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    \6\ One of the requirements for qualifying as a REIT is that a 
sufficiently large fraction of an entity's gross income be derived 
from certain specified types of income (which include ``rents from 
real property'' and ``interest on obligations secured by mortgages 
on real property or on interests in real property''). Section 
856(c)(3).
---------------------------------------------------------------------------

Explanation of Provisions

    Consistent with section 856, the existing regulations, and 
published guidance interpreting those regulations, these proposed 
regulations define real property to include land, inherently permanent 
structures, and structural components. In determining whether an item 
is land, an inherently permanent structure, or a structural component, 
these proposed regulations first test whether the item is a distinct 
asset, which is the unit of property to which the definitions in these 
proposed regulations apply.
    In addition, these proposed regulations identify certain types of 
intangible assets that are real property or interests in real property 
for purposes of sections 856 through 859. These proposed regulations 
include examples to illustrate the application of the

[[Page 27509]]

principles of these proposed regulations to determine whether certain 
distinct assets are real property for purposes of sections 856 through 
859.

Distinct Asset

    These proposed regulations provide that each distinct asset is 
tested individually to determine whether the distinct asset is real or 
personal property. Items that are specifically listed in these proposed 
regulations as types of buildings and other inherently permanent 
structures are distinct assets. Assets and systems specifically listed 
in these proposed regulations as types of structural components also 
are treated as distinct assets. Other distinct assets are identified 
using the factors provided by these proposed regulations. All listed 
factors must be considered, and no one factor is determinative.

Land

    These proposed regulations define land to include not only a parcel 
of ground, but the air and water space directly above the parcel. 
Therefore, water space directly above the seabed is land, even though 
the water itself flows over the seabed and does not remain in place. 
Land includes crops and other natural products of land until the crops 
or other natural products are detached or removed from the land.

Inherently Permanent Structures

    Inherently permanent structures and their structural components are 
real property for purposes of sections 856 through 859. These proposed 
regulations clarify that inherently permanent structures are 
structures, including buildings, that have a passive function. 
Therefore, if a distinct asset has an active function, such as 
producing goods, the distinct asset is not an inherently permanent 
structure under these proposed regulations. In addition to serving a 
passive function, a distinct asset must be inherently permanent to be 
an inherently permanent structure. For this purpose, permanence may be 
established not only by the method by which the structure is affixed 
but also by the weight of the structure alone.
    These proposed regulations supplement the definition of inherently 
permanent structure by providing a safe harbor list of distinct assets 
that are buildings, as well as a list of distinct assets that are other 
inherently permanent structures. If a distinct asset is on one of these 
lists, either as a building or as an inherently permanent structure, 
the distinct asset is real property for purposes of sections 856 
through 859, and a facts and circumstances analysis is not necessary. 
If a distinct asset is not listed as either a building or an inherently 
permanent structure, these proposed regulations provide facts and 
circumstances that must be considered in determining whether the 
distinct asset is either a building or other inherently permanent 
structure. All listed factors must be considered, and no one factor is 
determinative.
    One distinct asset that these proposed regulations list as an 
inherently permanent structure is an outdoor advertising display 
subject to an election to be treated as real property under section 
1033(g)(3). Section 1033(g)(3) provides taxpayers with an election to 
treat certain outdoor advertising displays \7\ as real property for 
purposes of Chapter 1 of the Code.
---------------------------------------------------------------------------

    \7\ Section 1.1033(g)-1(b)(3) defines outdoor advertising 
display for purposes of the section 1033 election as ``a rigidly 
assembled sign, display, or device that constitutes, or is used to 
display, a commercial or other advertisement to the public and is 
permanently affixed to the ground or permanently attached to a 
building or other inherently permanent structure.''
---------------------------------------------------------------------------

Structural Components

    These proposed regulations define a structural component as a 
distinct asset that is a constituent part of and integrated into an 
inherently permanent structure that serves the inherently permanent 
structure in its passive function and does not produce or contribute to 
the production of income other than consideration for the use or 
occupancy of space. An entire system is analyzed as a single distinct 
asset and, therefore, as a single structural component, if the 
components of the system work together to serve the inherently 
permanent structure with a utility-like function, such as systems that 
provide a building with electricity, heat, or water.\8\ For a 
structural component to be real property under sections 856 through 
859, the taxpayer's interest in the structural component must be held 
by the taxpayer together with the taxpayer's interest in the inherently 
permanent structure to which the structural component is functionally 
related. Additionally, if a distinct asset that is a structural 
component is customized in connection with the provision of rentable 
space in an inherently permanent structure, the customization of that 
distinct asset does not cause it to fail to be a structural component.
---------------------------------------------------------------------------

    \8\ See Rev. Rul. 73-425 (1973-2 CB 222), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) (holding that a total energy 
system that provides a building with electricity, steam or hot 
water, and refrigeration may be a structural component of that 
building). The IRS and the Treasury Department are considering 
guidance to address the treatment of any income earned when a system 
that provides energy to an inherently permanent structure held by 
the REIT also transfers excess energy to a utility company.
---------------------------------------------------------------------------

    Under these proposed regulations, an asset or system that is 
treated as a distinct asset is a structural component, and thus real 
property for purposes of sections 856 through 859, if the asset or 
system is included on the safe harbor list of assets that are 
structural components. If an asset or system that is treated as a 
distinct asset is not specifically listed as a structural component, 
these proposed regulations provide a list of facts and circumstances 
that must be considered in determining whether the distinct asset or 
system qualifies as a structural component. No one factor is 
determinative.
    These proposed regulations do not retain the phrase ``assets 
accessory to the operation of a business,'' which the existing 
regulations use to describe an asset with an active function that is 
not real property for purposes of the regulations under sections 856 
through 859. The IRS and the Treasury Department believe that the 
phrase ``assets accessory to the operation of a business'' has created 
uncertainty because the existing regulations are unclear whether 
certain assets that are permanent structures or components thereof 
nevertheless fail to be real property because they are used in the 
operation of a business. Instead, these proposed regulations adopt an 
approach that considers whether the distinct asset in question either 
serves a passive function common to real property or serves the 
inherently permanent structure to which it is constituent in that 
structure's passive function. On the other hand, if an asset has an 
active function, such as a distinct asset that produces, manufactures, 
or creates a product, then the asset is not real property unless the 
asset is a structural component that serves a utility-like function 
with respect to the inherently permanent structure of which it is a 
constituent part. Similarly, if an asset produces or contributes to the 
production of income other than consideration for the use or occupancy 
of space, then that asset is not real property. Thus, items that were 
assets accessory to the operation of a business under the existing 
regulations will continue to be excluded from the definition of real 
property for purposes of sections 856 through 859 either because they 
are not inherently permanent or because they serve an active function. 
These distinct assets include, for example, machinery; office, off-
shore drilling, testing, and other equipment; transportation equipment

[[Page 27510]]

that is not a structural component of a building; printing presses; 
refrigerators; individual air-conditioning units; grocery counters; 
furnishings of a motel, hotel, or office building; antennae; 
waveguides; transmitting, receiving, and multiplex equipment; prewired 
modular racks; display racks and shelves; gas pumps; and hydraulic car 
lifts.

Intangible Assets That Are Real Property

    These proposed regulations also provide that certain intangible 
assets are real property for purposes of sections 856 through 859. To 
be real property, the intangible asset must derive its value from 
tangible real property and be inseparable from the tangible real 
property from which the value is derived. Under Sec.  1.856-2(d)(3) the 
assets of a REIT are its gross assets determined in accordance with 
generally accepted accounting principles (GAAP). Intangibles 
established under GAAP when a taxpayer acquires tangible real property 
may meet the definition of real property intangibles. A license or 
permit solely for the use, occupancy, or enjoyment of tangible real 
property may also be an interest in real property because it is in the 
nature of an interest in real property (similar to a lease or 
easement). If an intangible asset produces, or contributes to the 
production of, income other than consideration for the use or occupancy 
of space, then the asset is not real property or an interest in real 
property. Thus, for example, a permit allowing a taxpayer to engage in 
or operate a particular business is not an interest in real property.

Other Definitions of Real Property

    The terms real property and personal property appear in numerous 
Code provisions that have diverse contexts and varying legislative 
purposes. In some cases, certain types of assets are specifically 
designated as real property or as personal property by statute, while 
in other cases the statute is silent as to the meaning of those terms. 
Ordinarily, under basic principles of statutory construction, the use 
of the same term in multiple Code provisions would imply (absent 
specific statutory modifications) that Congress intended the same 
meaning to apply to that term for each of the provisions in which it 
appears. In the case of the terms real property and personal property, 
however, both the regulatory process and decades of litigation have led 
to different definitions of these terms, in part because taxpayers have 
advocated for broader or narrower definitions in different contexts.
    For example, in the depreciation and (prior) investment tax credit 
contexts, a broad definition of personal property (and a narrow 
definition of real property) is ordinarily more favorable to taxpayers. 
A tangible asset may generally be depreciated faster if it is personal 
property than if it is considered real property, see section 168(c) and 
(g)(2)(C), and (prior) section 38 property primarily included tangible 
personal property and excluded a building and its structural 
components, see Sec.  1.48-1(c) and (d). During decades of controversy, 
taxpayers sought to broaden the meaning of tangible personal property 
and to narrow the meanings of building and structural component in 
efforts to qualify for the investment tax credit or for faster 
depreciation. That litigation resulted in courts adopting a relatively 
broad definition of tangible personal property (and correspondingly 
narrow definition of real property) for depreciation and investment tax 
credit purposes.
    Similarly, in the context of the Foreign Investment in Real 
Property Tax Act (FIRPTA), codified at section 897 of the Code, a 
narrower definition of real property is generally more favorable to 
taxpayers. Enacted in 1980, FIRPTA is intended to subject foreign 
investors to the same U.S. tax treatment on gains from the disposition 
of interests in U.S. real property that applies to U.S. investors. 
Accordingly, foreign investors can more easily avoid U.S. tax to the 
extent that the definition of real property is narrow for FIRPTA 
purposes. As in the depreciation and investment credit contexts, this 
situation has led to vigorous debate over the appropriate 
characterization of certain types of assets (such as intangible assets) 
that may have characteristics associated with real property but do not 
fall within the traditional categories of buildings and structural 
components. See, for example, Advance Notice of Proposed Rulemaking, 
Infrastructure Improvements Under Section 897, published in the Federal 
Register (REG-130342-08, 73 FR 64901) on October 31, 2008 (noting that 
taxpayers may be taking the position that a governmental permit to 
operate a toll bridge or toll road is not a United States real property 
interest for purposes of section 897 and stating that the IRS and the 
Treasury Department are of the view that such a permit may properly be 
characterized as a United States real property interest in certain 
circumstances). In the case of FIRPTA, however, Congress modified the 
definition of real property to include items of personal property that 
are associated with the use of real property. See section 897(c)(6)(B) 
(including as real property movable walls, furnishings, and other 
personal property associated with the use of the real property). 
Consequently, it is explicitly contemplated in section 897 that an item 
of property may be treated as a United States real property interest 
for FIRPTA purposes, notwithstanding that it is characterized as 
personal property for other purposes of the Code.
    In the REIT context, taxpayers ordinarily benefit from a relatively 
broad definition of real property. Consequently, taxpayers have 
generally advocated in the REIT context for a more expansive definition 
of real property than applies in the depreciation, (prior) investment 
tax credit, and FIRPTA contexts. In drafting these regulations, the 
Treasury Department and the IRS have sought to balance the general 
principle that common terms used in different provisions should have 
common meanings with the particular policies underlying the REIT 
provisions. These proposed regulations define real property only for 
purposes of sections 856 through 859. The IRS and the Treasury 
Department request comments, however, on the extent to which the 
various meanings of real property that appear in the Treasury 
regulations should be reconciled, whether through modifications to 
these proposed regulations or through modifications to the regulations 
under other Code provisions.

Proposed Effective Date

    The IRS and the Treasury Department view these proposed regulations 
as a clarification of the existing definition of real property and not 
as a modification that will cause a significant reclassification of 
property. As such, these proposed regulations are proposed to be 
effective for calendar quarters beginning after these proposed 
regulations are published as final regulations in the Federal Register. 
The IRS and the Treasury Department solicit comments regarding the 
proposed effective date.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13653. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations, and because the regulations

[[Page 27511]]

do not impose a collection of information on small entities, the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 
Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on all aspects of 
these proposed rules. All comments will be available for public 
inspection and copying at https://www.regulations.gov, or upon request.
    A public hearing has been scheduled for September 18, 2014, at 
10:00 a.m., in the IRS Auditorium, Internal Revenue Building, 1111 
Constitution Avenue NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 15 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed and 
the time to be devoted to each topic (signed original and eight (8) 
copies) by August 12, 2014. A period of ten minutes will be allotted to 
each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.

Drafting Information

    The principal authors of these regulations are Andrea M. Hoffenson 
and Julanne Allen, Office of Associate Chief Council (Financial 
Institutions and Products). However, other personnel from the IRS and 
the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. In Sec.  1.856-3, paragraph (d) is revised to read as follows:


Sec.  1.856-3  Definitions.

* * * * *
    (d) Real property. See Sec.  1.856-10 for the definition of real 
property.
* * * * *
0
Par. 3. Section 1.856-10 is added to read as follows:


Sec.  1.856-10  Definition of real property.

    (a) In general. This section provides definitions for purposes of 
part II, subchapter M, chapter 1 of the Internal Revenue Code (Code). 
Paragraph (b) of this section defines real property, which includes 
land as defined under paragraph (c) of this section, and improvements 
to land as defined under paragraph (d) of this section. Improvements to 
land include inherently permanent structures as defined under paragraph 
(d)(2) of this section, and structural components of inherently 
permanent structures as defined under paragraph (d)(3) of this section. 
Paragraph (e) of this section provides rules for determining whether an 
item is a distinct asset for purposes of applying the definitions in 
paragraphs (b), (c), and (d) of this section. Paragraph (f) of this 
section identifies intangible assets that are real property or 
interests in real property. Paragraph (g) of this section provides 
examples illustrating the rules of paragraphs (b) through (f) of this 
section.
    (b) Real property. The term real property means land and 
improvements to land. Local law definitions are not controlling for 
purposes of determining the meaning of the term real property.
    (c) Land. Land includes water and air space superjacent to land and 
natural products and deposits that are unsevered from the land. Natural 
products and deposits, such as crops, water, ores, and minerals, cease 
to be real property when they are severed, extracted, or removed from 
the land. The storage of severed or extracted natural products or 
deposits, such as crops, water, ores, and minerals, in or upon real 
property does not cause the stored property to be recharacterized as 
real property.
    (d) Improvements to land--(1) In general. The term improvements to 
land means inherently permanent structures and their structural 
components.
    (2) Inherently permanent structure--(i) In general. The term 
inherently permanent structure means any permanently affixed building 
or other structure. Affixation may be to land or to another inherently 
permanent structure and may be by weight alone. If the affixation is 
reasonably expected to last indefinitely based on all the facts and 
circumstances, the affixation is considered permanent. A distinct asset 
that serves an active function, such as an item of machinery or 
equipment, is not a building or other inherently permanent structure.
    (ii) Building--(A) In general. A building encloses a space within 
its walls and is covered by a roof.
    (B) Types of buildings. Buildings include the following permanently 
affixed distinct assets: houses; apartments; hotels; factory and office 
buildings; warehouses; barns; enclosed garages; enclosed transportation 
stations and terminals; and stores.
    (iii) Other inherently permanent structures--(A) In general. Other 
inherently permanent structures serve a passive function, such as to 
contain, support, shelter, cover, or protect, and do not serve an 
active function such as to manufacture, create, produce, convert, or 
transport.
    (B) Types of other inherently permanent structures. Other 
inherently permanent structures include the following permanently 
affixed distinct assets: microwave transmission, cell, broadcast, and 
electrical transmission towers; telephone poles; parking facilities; 
bridges; tunnels; roadbeds; railroad tracks; transmission lines; 
pipelines; fences; in-ground swimming pools; offshore drilling 
platforms; storage structures such as silos and oil and gas storage 
tanks; stationary wharves and docks; and outdoor advertising displays 
for which an election has been properly made under section 1033(g)(3).
    (iv) Facts and circumstances determination. If a distinct asset 
(within the meaning of paragraph (e) of this section) does not serve an 
active function as described in paragraph (d)(2)(iii)(A) of this 
section, and is not otherwise listed in paragraph (d)(2)(ii)(B) or 
(d)(2)(iii)(B) of this section or in guidance published in the Internal 
Revenue Bulletin (see

[[Page 27512]]

Sec.  601.601(d)(2)(ii) of this chapter), the determination of whether 
that asset is an inherently permanent structure is based on all the 
facts and circumstances. In particular, the following factors must be 
taken into account:
    (A) The manner in which the distinct asset is affixed to real 
property;
    (B) Whether the distinct asset is designed to be removed or to 
remain in place indefinitely;
    (C) The damage that removal of the distinct asset would cause to 
the item itself or to the real property to which it is affixed;
    (D) Any circumstances that suggest the expected period of 
affixation is not indefinite (for example, a lease that requires or 
permits removal of the distinct asset upon the expiration of the 
lease); and
    (E) The time and expense required to move the distinct asset.
    (3) Structural components--(i) In general. The term structural 
component means any distinct asset (within the meaning of paragraph (e) 
of this section) that is a constituent part of and integrated into an 
inherently permanent structure, serves the inherently permanent 
structure in its passive function, and, even if capable of producing 
income other than consideration for the use or occupancy of space, does 
not produce or contribute to the production of such income. If 
interconnected assets work together to serve an inherently permanent 
structure with a utility-like function (for example, systems that 
provide a building with electricity, heat, or water), the assets are 
analyzed together as one distinct asset that may be a structural 
component. Structural components are real property only if the interest 
held therein is included with an equivalent interest held by the 
taxpayer in the inherently permanent structure to which the structural 
component is functionally related. If a distinct asset is customized in 
connection with the rental of space in or on an inherently permanent 
structure to which the asset relates, the customization does not affect 
whether the distinct asset is a structural component.
    (ii) Types of structural components. Structural components include 
the following distinct assets and systems: Wiring; plumbing systems; 
central heating and air conditioning systems; elevators or escalators; 
walls; floors; ceilings; permanent coverings of walls, floors, and 
ceilings; windows; doors; insulation; chimneys; fire suppression 
systems, such as sprinkler systems and fire alarms; fire escapes; 
central refrigeration systems; integrated security systems; and 
humidity control systems.
    (iii) Facts and circumstances determination. If a distinct asset 
(within the meaning of paragraph (e) of this section) is not otherwise 
listed in paragraph (d)(3)(ii) of this section or in guidance published 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii) of this 
chapter), the determination of whether the asset is a structural 
component is based on all the facts and circumstances. In particular, 
the following factors must be taken into account:
    (A) The manner, time, and expense of installing and removing the 
distinct asset;
    (B) Whether the distinct asset is designed to be moved;
    (C) The damage that removal of the distinct asset would cause to 
the item itself or to the inherently permanent structure to which it is 
affixed;
    (D) Whether the distinct asset serves a utility-like function with 
respect to the inherently permanent structure;
    (E) Whether the distinct asset serves the inherently permanent 
structure in its passive function;
    (F) Whether the distinct asset produces income from consideration 
for the use or occupancy of space in or upon the inherently permanent 
structure;
    (G) Whether the distinct asset is installed during construction of 
the inherently permanent structure;
    (H) Whether the distinct asset will remain if the tenant vacates 
the premises; and
    (I) Whether the owner of the real property is also the legal owner 
of the distinct asset.
    (e) Distinct asset--(1) In general. A distinct asset is analyzed 
separately from any other assets to which the asset relates to 
determine if the asset is real property, whether as land, an inherently 
permanent structure, or a structural component of an inherently 
permanent structure.
    (2) Facts and circumstances. The determination of whether a 
particular separately identifiable item of property is a distinct asset 
is based on all of the facts and circumstances. In particular, the 
following factors must be taken into account:
    (i) Whether the item is customarily sold or acquired as a single 
unit rather than as a component part of a larger asset;
    (ii) Whether the item can be separated from a larger asset, and if 
so, the cost of separating the item from the larger asset;
    (iii) Whether the item is commonly viewed as serving a useful 
function independent of a larger asset of which it is a part; and
    (iv) Whether separating the item from a larger asset of which it is 
a part impairs the functionality of the larger asset.
    (f) Intangible assets--(1) In general. If an intangible asset, 
including an intangible asset established under generally accepted 
accounting principles (GAAP) as a result of an acquisition of real 
property or an interest in real property, derives its value from real 
property or an interest in real property, is inseparable from that real 
property or interest in real property, and does not produce or 
contribute to the production of income other than consideration for the 
use or occupancy of space, then the intangible asset is real property 
or an interest in real property.
    (2) Licenses and permits. A license, permit, or other similar right 
solely for the use, enjoyment, or occupation of land or an inherently 
permanent structure that is in the nature of a leasehold or easement 
generally is an interest in real property. A license or permit to 
engage in or operate a business generally is not real property or an 
interest in real property because it produces or contributes to the 
production of income other than consideration for the use or occupancy 
of space.
    (g) Examples. The following examples demonstrate the rules of this 
section. Examples 1 and 2 illustrate the definition of land as provided 
in paragraph (c) of this section. Examples 3 through 10 illustrate the 
definition of improvements to land as provided in paragraph (d) of this 
section. Finally, Examples 11 through 13 illustrate whether certain 
intangible assets are real property or interests in real property as 
provided in paragraph (f) of this section.

    Example 1. Natural products of land.  A is a real estate 
investment trust (REIT). REIT A owns land with perennial fruit-
bearing plants. REIT A leases the fruit-bearing plants to a tenant 
on a long-term triple net lease basis and grants the tenant an 
easement on the land. The unsevered plants are natural products of 
the land and qualify as land within the meaning of paragraph (c) of 
this section. Fruit from the plants is harvested annually. Upon 
severance from the land, the harvested fruit ceases to qualify as 
land. Storage of the harvested fruit upon or within real property 
does not cause the harvested fruit to qualify as real property.
    Example 2. Water space superjacent to land.  REIT B leases a 
marina from a governmental entity. The marina is comprised of U-
shaped boat slips and end ties. The U-shaped boat slips are spaces 
on the water that are surrounded by a dock on three sides. The end 
ties are spaces on the water at the end of a slip or on a long,

[[Page 27513]]

straight dock. REIT B rents the boat slips and end ties to boat 
owners. The boat slips and end ties are water space superjacent to 
land that qualify as land within the meaning of paragraph (c) of 
this section and, therefore, qualify as real property.
    Example 3. Indoor sculpture.  (i) REIT C owns an office building 
and a large sculpture in the atrium of the building. The sculpture 
measures 30 feet tall by 18 feet wide and weighs five tons. The 
building was specifically designed to support the sculpture, which 
is permanently affixed to the building by supports embedded in the 
building's foundation. The sculpture was constructed within the 
building. Removal would be costly and time consuming and would 
destroy the sculpture. The sculpture is reasonably expected to 
remain in the building indefinitely. The sculpture does not 
manufacture, create, produce, convert, transport, or serve any 
similar active function.
    (ii) When analyzed to determine whether it is an inherently 
permanent structure using the factors provided in paragraph 
(d)(2)(iv) of this section, the sculpture--
    (A) Is permanently affixed to the building by supports embedded 
in the building's foundation;
    (B) Is not designed to be removed and is designed to remain in 
place indefinitely;
    (C) Would be damaged if removed and would damage the building to 
which it is affixed;
    (D) Will remain affixed to the building after any tenant vacates 
the premises and will remain affixed to the building indefinitely; 
and
    (E) Would require significant time and expense to move.
    (iii) The factors described in this paragraph (g) Example 3 
(ii)(A) through (ii)(E) all support the conclusion that the 
sculpture is an inherently permanent structure within the meaning of 
paragraph (d)(2) of this section and, therefore, is real property.
    Example 4. Bus shelters.  (i) REIT D owns 400 bus shelters, each 
of which consists of four posts, a roof, and panels enclosing two or 
three sides. REIT D enters into a long-term lease with a local 
transit authority for use of the bus shelters. Each bus shelter is 
prefabricated from steel and is bolted to the sidewalk. Bus shelters 
are disassembled and moved when bus routes change. Moving a bus 
shelter takes less than a day and does not significantly damage 
either the bus shelter or the real property to which it was affixed.
    (ii) The bus shelters are not enclosed transportation stations 
or terminals and do not otherwise meet the definition of a building 
in paragraph (d)(2)(ii) of this section nor are they listed as types 
of other inherently permanent structures in paragraph (d)(2)(iii)(B) 
of this section.
    (iii) When analyzed to determine whether they are inherently 
permanent structures using the factors provided in paragraph 
(d)(2)(iv) of this section, the bus shelters--
    (A) Are not permanently affixed to the land or an inherently 
permanent structure;
    (B) Are designed to be removed and are not designed to remain in 
place indefinitely;
    (C) Would not be damaged if removed and would not damage the 
sidewalks to which they are affixed;
    (D) Will not remain affixed after the local transit authority 
vacates the site and will not remain affixed indefinitely; and
    (E) Would not require significant time and expense to move.
    (iv) The factors described in this paragraph (g) Example 4 
(iii)(A) through (iii)(E) all support the conclusion that the bus 
shelters are not inherently permanent structures within the meaning 
of paragraph (d)(2) of this section. Although the bus shelters serve 
a passive function of sheltering, the bus shelters are not 
permanently affixed, which means the bus shelters are not inherently 
permanent structures within the meaning of paragraph (d)(2) of this 
section and, therefore, are not real property.
    Example 5. Cold storage warehouse.  (i) REIT E owns a 
refrigerated warehouse (Cold Storage Warehouse). REIT E enters into 
long-term triple net leases with tenants. The tenants use the Cold 
Storage Warehouse to store perishable products. Certain components 
and utility systems within the Cold Storage Warehouse have been 
customized to accommodate the tenants' need for refrigerated storage 
space. For example, the Cold Storage Warehouse has customized 
freezer walls and a central refrigeration system. Freezer walls 
within the Cold Storage Warehouse are specifically designed to 
maintain the desired temperature within the warehouse. The freezer 
walls and central refrigeration system are each comprised of a 
series of interconnected assets that work together to serve a 
utility-like function within the Cold Storage Warehouse, were 
installed during construction of the building, and will remain in 
place when a tenant vacates the premises. The freezer walls and 
central refrigeration system were each designed to remain 
permanently in place.
    (ii) Walls and central refrigeration systems are listed as 
structural components in paragraph (d)(3)(ii) of this section and, 
therefore, are real property. The customization of the freezer walls 
does not affect their qualification as structural components. 
Therefore, the freezer walls and central refrigeration system are 
structural components of REIT E's Cold Storage Warehouse.
    Example 6. Data center.  (i) REIT F owns a building that it 
leases to a tenant under a long-term triple net lease. Certain 
interior components and utility systems within the building have 
been customized to accommodate the particular requirements for 
housing computer servers. For example, to accommodate the computer 
servers, REIT F's building has been customized to provide a higher 
level of electrical power, central air conditioning, 
telecommunications access, and redundancies built into the systems 
that provide these utilities than is generally available to tenants 
of a conventional office building. In addition, the space for 
computer servers in REIT F's building is constructed on raised 
flooring, which is necessary to accommodate the electrical, 
telecommunications, and HVAC infrastructure required for the 
servers. The following systems of REIT F's building have been 
customized to permit the building to house the servers: central 
heating and air conditioning system, integrated security system, 
fire suppression system, humidity control system, electrical 
distribution and redundancy system (Electrical System), and 
telecommunication infrastructure system (each, a System). Each of 
these Systems is comprised of a series of interconnected assets that 
work together to serve a utility-like function within the building. 
The Systems were installed during construction of the building and 
will remain in place when the tenant vacates the premises. Each of 
the Systems was designed to remain permanently in place and was 
customized by enhancing the capacity of the System in connection 
with the rental of space within the building.
    (ii) The central heating and air conditioning system, integrated 
security system, fire suppression system, and humidity control 
system are listed as structural components in paragraph (d)(3)(ii) 
of this section and, therefore, are real property. The customization 
of these Systems does not affect the qualification of these Systems 
as structural components of REIT F's building within the meaning of 
paragraph (d)(3) of this section.
    (iii) In addition to wiring, which is listed as a structural 
component in paragraph (d)(3)(ii) of this section and, therefore, is 
real property, the Electrical System and telecommunication 
infrastructure system include equipment used to ensure that the 
tenant is provided with uninterruptable, stable power and 
telecommunication services. When analyzed to determine whether they 
are structural components using the factors in paragraph (d)(3)(iii) 
of this section, the Electrical System and telecommunication 
infrastructure system--
    (A) Are embedded within the walls and floors of the building and 
would be costly to remove;
    (B) Are not designed to be moved, are designed specifically for 
the particular building of which they are a part, and are intended 
to remain permanently in place;
    (C) Would not be significantly damaged upon removal and although 
they would damage the walls and floors in which they are embedded, 
they would not significantly damage the building if they were 
removed;
    (D) Serve a utility-like function with respect to the building;
    (E) Serve the building in its passive function of containing, 
sheltering and protecting computer servers;
    (F) Produce income as consideration for the use or occupancy of 
space within the building;
    (G) Were installed during construction of the building;
    (H) Will remain in place when the tenant vacates the premises; 
and
    (I) Are owned by REIT F, which also owns the building.
    (iv) The factors described in this paragraph (g) Example 6 
(iii)(A), (iii)(B), and (iii)(D) through (iii)(I) all support the 
conclusion that the Electrical System and telecommunication 
infrastructure system are structural components of REIT F's building 
within the meaning of paragraph (d)(3) of this section and, 
therefore, are real property. The factor described in this paragraph 
(g) Example 6 (iii)(C) would support a conclusion that the

[[Page 27514]]

Electrical System and telecommunication infrastructure system are 
not structural components. However this factor does not outweigh the 
factors supporting the conclusion that the Electric System and 
telecommunication infrastructure system are structural components.
    Example 7. Partitions.  (i) REIT G owns an office building that 
it leases to tenants under long-term triple net leases. Partitions 
are used to delineate space between tenants and within each tenant's 
space. The office building has two types of interior, non-load-
bearing drywall partition systems: a conventional drywall partition 
system (Conventional Partition System) and a modular drywall 
partition system (Modular Partition System). Neither the 
Conventional Partition System nor the Modular Partition System was 
installed during construction of the office building. Conventional 
Partition Systems are comprised of fully integrated gypsum board 
partitions, studs, joint tape, and covering joint compound. Modular 
Partition Systems are comprised of assembled panels, studs, tracks, 
and exposed joints. Both the Conventional Partition System and the 
Modular Partition System reach from the floor to the ceiling.
    (ii) Depending on the needs of a new tenant, the Conventional 
Partition System may remain in place when a tenant vacates the 
premises. The Conventional Partition System is designed and 
constructed to remain in areas not subject to reconfiguration or 
expansion. The Conventional Partition System can be removed only by 
demolition, and, once removed, neither the Conventional Partition 
System nor its components can be reused. Removal of the Conventional 
Partition System causes substantial damage to the Conventional 
Partition System itself but does not cause substantial damage to the 
building.
    (iii) Modular Partition Systems are typically removed when a 
tenant vacates the premises. Modular Partition Systems are not 
designed or constructed to remain permanently in place. Modular 
Partition Systems are designed and constructed to be movable. Each 
Modular Partition System can be readily removed, remains in 
substantially the same condition as before, and can be reused. 
Removal of a Modular Partition System does not cause any substantial 
damage to the Modular Partition System itself or to the building. 
The Modular Partition System may be moved to accommodate the 
reconfigurations of the interior space within the office building 
for various tenants that occupy the building.
    (iv) The Conventional Partition System is a wall, and walls are 
listed as structural components in paragraph (d)(3)(ii) of this 
section. The Conventional Partition System, therefore, is real 
property.
    (v) When analyzed to determine whether it is a structural 
component using the factors provided in paragraph (d)(3)(iii) of 
this section, the Modular Partition System--
    (A) Is installed and removed quickly and with little expense;
    (B) Is not designed specifically for the particular building of 
which it is a part and is not intended to remain permanently in 
place;
    (C) Is not damaged, and the building is not damaged, upon its 
removal;
    (D) Does not serve a utility-like function with respect to the 
building;
    (E) Serves the building in its passive function of containing 
and protecting the tenants' assets;
    (F) Produces income only as consideration for the use or 
occupancy of space within the building;
    (G) Was not installed during construction of the building;
    (H) Will not remain in place when a tenant vacates the premises; 
and
    (I) Is owned by REIT G.
    (vi) The factors described in this paragraph (g) Example 7 
(v)(A) through (v)(D), (v)(G), and (v)(H) all support the conclusion 
that the Modular Partition System is not a structural component of 
REIT G's building within the meaning of paragraph (d)(3) of this 
section and, therefore, is not real property. The factors described 
in this paragraph (g) Example 7 (v)(E), (v)(F), and (v)(I) would 
support a conclusion that the Modular Partition System is a 
structural component. These factors, however, do not outweigh the 
factors supporting the conclusion that the Modular Partition System 
is not a structural component.
    Example 8. Solar energy site.  (i) REIT H owns a solar energy 
site, among the components of which are land, photovoltaic modules 
(PV Modules), mounts, and an exit wire. REIT H enters into a long-
term triple net lease with a tenant for the solar energy site. The 
mounts (that is, the foundations and racks) support the PV Modules. 
The racks are affixed to the land through foundations made from 
poured concrete. The mounts will remain in place when the tenant 
vacates the solar energy site. The PV Modules convert solar photons 
into electric energy (electricity). The exit wire is buried 
underground, is connected to equipment that is in turn connected to 
the PV Modules, and transmits the electricity produced by the PV 
Modules to an electrical power grid, through which the electricity 
is distributed for sale to third parties.
    (ii) REIT H's PV Modules, mounts, and exit wire are each 
separately identifiable items. Separation from a mount does not 
affect the ability of a PV Module to convert photons to electricity. 
Separation from the equipment to which it is attached does not 
affect the ability of the exit wire to transmit electricity to the 
electrical power grid. The types of PV Modules and exit wire that 
REIT H owns are each customarily sold or acquired as single units. 
Removal of the PV Modules from the mounts to which they relate does 
not damage the function of the mounts as support structures and 
removal is not costly. The PV Modules are commonly viewed as serving 
the useful function of converting photons to electricity, 
independent of the mounts. Disconnecting the exit wire from the 
equipment to which it is attached does not damage the function of 
that equipment, and the disconnection is not costly. The PV Modules, 
mounts, and exit wire are each distinct assets within the meaning of 
paragraph (e) of this section.
    (iii) The land is real property as defined in paragraph (c) of 
this section.
    (iv) The mounts are designed and constructed to remain 
permanently in place, and they have a passive function of supporting 
the PV Modules. When analyzed to determine whether they are 
inherently permanent structures using the factors provided in 
paragraph (d)(2)(iv) of this section, the mounts--
    (A) Are permanently affixed to the land through the concrete 
foundations or molded concrete anchors (which are part of the 
mounts);
    (B) Are not designed to be removed and are designed to remain in 
place indefinitely;
    (C) Would be damaged if removed;
    (D) Will remain affixed to the land after the tenant vacates the 
premises and will remain affixed to the land indefinitely; and
    (E) Would require significant time and expense to move.
    (v) The factors described in this paragraph (g) Example 8 
(iv)(A) through (iv)(E) all support the conclusion that the mounts 
are inherently permanent structures within the meaning of paragraph 
(d)(2) of this section and, therefore, are real property.
    (vi) The PV Modules convert solar photons into electricity that 
is transmitted through an electrical power grid for sale to third 
parties. The conversion is an active function. The PV Modules are 
items of machinery or equipment and are not inherently permanent 
structures within the meaning of paragraph (d)(2) of this section 
and, therefore, are not real property. The PV Modules do not serve 
the mounts in their passive function of providing support; instead, 
the PV Modules produce electricity for sale to third parties, which 
is income other than consideration for the use or occupancy of 
space. The PV Modules are not structural components of REIT H's 
mounts within the meaning of paragraph (d)(3) of this section and, 
therefore, are not real property.
    (vii) The exit wire is buried under the ground and transmits the 
electricity produced by the PV Modules to the electrical power grid. 
The exit wire was installed during construction of the solar energy 
site and is designed to remain permanently in place. The exit wire 
is inherently permanent and is a transmission line, which is listed 
as an inherently permanent structure in paragraph (d)(2)(iii)(B) of 
this section. Therefore, the exit wire is real property.
    Example 9. Solar-powered building.  (i) REIT I owns a solar 
energy site similar to that described in Example 8, except that REIT 
I's solar energy site assets (Solar Energy Site Assets) are mounted 
on land adjacent to an office building owned by REIT I. REIT I 
leases the office building and the solar energy site to a single 
tenant. Although the tenant occasionally transfers excess 
electricity produced by the Solar Energy Site Assets to a utility 
company, the Solar Energy Site Assets are designed and intended to 
produce electricity only to serve the office building. The Solar 
Energy Site Assets were designed and constructed specifically for 
the office building and are intended to remain permanently in place 
but were not installed during construction of the office building. 
The Solar Energy Site Assets will not be removed if the tenant 
vacates the premises.
    (ii) With the exception of the occasional transfers of excess 
electricity to a utility

[[Page 27515]]

company, the Solar Energy Site Assets serve the office building to 
which they are constituent, and, therefore, the Solar Energy Site 
Assets are analyzed to determine whether they are a structural 
component using the factors provided in paragraph (d)(3)(iii) of 
this section. The Solar Energy Site Assets--
    (A) Are expensive and time consuming to install and remove;
    (B) Are designed specifically for the particular office building 
for which they are a part and are intended to remain permanently in 
place;
    (C) Will not cause damage to the office building if removed (but 
the mounts would be damaged upon removal);
    (D) Serve a utility-like function with respect to the office 
building;
    (E) Serve the office building in its passive function of 
containing and protecting the tenants' assets;
    (F) Produce income from consideration for the use or occupancy 
of space within the office building;
    (G) Were installed after construction of the office building;
    (H) Will remain in place when the tenant vacates the premises; 
and
    (I) Are owned by REIT I (which is also the owner of the office 
building).
    (iii) The factors described in this paragraph (g) Example 9 
(ii)(A), (ii)(B), (ii)(C) (in part), (ii)(D) through (ii)(F), 
(ii)(H), and (ii)(I) all support the conclusion that the Solar 
Energy Site Assets are a structural component of REIT I's office 
building within the meaning of paragraph (d)(3) of this section and, 
therefore, are real property. The factors described in this 
paragraph (g) Example 9 (ii)(C) (in part) and (ii)(G) would support 
a conclusion that the Solar Energy Site Assets are not a structural 
component, but these factors do not outweigh factors supporting the 
conclusion that the Solar Energy Site Assets are a structural 
component.
    (iv) The result in this Example 9 would not change if, instead 
of the Solar Energy Site Assets, solar shingles were used as the 
roof of REIT I's office building. Solar shingles are roofing 
shingles like those commonly used for residential housing, except 
that they contain built-in PV modules. The solar shingle 
installation was specifically designed and constructed to serve only 
the needs of REIT I's office building, and the solar shingles were 
installed as a structural component to provide solar energy to REIT 
I's office building (although REIT I's tenant occasionally transfers 
excess electricity produced by the solar shingles to a utility 
company). The analysis of the application of the factors provided in 
paragraph (d)(3)(ii) of this section would be similar to the 
analysis of the application of the factors to the Solar Energy Site 
Assets in this paragraph (g) Example 9 (ii) and (iii).
    Example 10. Pipeline transmission system.  (i) REIT J owns an 
oil pipeline transmission system that contains and transports oil 
from producers and distributors of the oil to other distributors and 
end users. REIT J enters into a long-term, triple net lease with a 
tenant for the pipeline transmission system. The pipeline 
transmission system is comprised of underground pipelines, storage 
tanks, valves, vents, meters, and compressors. Although the pipeline 
transmission system serves an active function, transporting oil, a 
distinct asset within the system may nevertheless be an inherently 
permanent structure that does not itself perform an active function. 
Each of these distinct assets was installed during construction of 
the pipeline transmission system and will remain in place when a 
tenant vacates the pipeline transmission system. Each of these 
assets was designed to remain permanently in place.
    (ii) The pipelines and storage tanks are inherently permanent 
and are listed as inherently permanent structures in paragraph 
(d)(2)(iii)(B) of this section. Therefore, the pipelines and storage 
tanks are real property.
    (ii) Valves are placed at regular intervals along the pipeline 
to control oil flow and isolate sections of the pipeline in case 
there is need for a shut-down or maintenance of the pipeline. Vents 
equipped with vent valves are also installed in tanks and at regular 
intervals along the pipeline to relieve pressure in the tanks and 
pipeline. When analyzed to determine whether they are structural 
components using the factors set forth in paragraph (d)(3)(iii) of 
this section, the valves and vents--
    (A) Are time consuming and expensive to install and remove from 
the tanks or pipeline;
    (B) Are designed specifically for the particular tanks or 
pipeline for which they are a part and are intended to remain 
permanently in place;
    (C) Will sustain damage and will damage the tanks or pipeline if 
removed;
    (D) Do not serve a utility-like function with respect to the 
tanks or pipeline;
    (E) Serve the tanks and pipeline in their passive function of 
containing tenants' oil;
    (F) Produce income only from consideration for the use or 
occupancy of space within the tanks or pipeline;
    (G) Were installed during construction of the tanks or pipeline;
    (H) Will remain in place when a tenant vacates the premises; and
    (I) Are owned by REIT J.
    (iii) The factors described in this paragraph (g) Example 10 
(ii)(A) through (ii)(C) and (ii)(E) through (ii)(I) support the 
conclusion that the vents and valves are structural components of 
REIT J's tanks or pipeline within the meaning of paragraph (d)(3) of 
this section and, therefore, are real property. The factor described 
in this paragraph (g) Example 10 (ii)(D) would support a conclusion 
that the vents and valves are not structural components, but this 
factor does not outweigh the factors that support the conclusion 
that the vents and valves are structural components.
    (iv) Meters are used to measure the oil passing into or out of 
the pipeline transmission system for purposes of determining the end 
users' consumption. Over long distances, pressure is lost due to 
friction in the pipeline transmission system. Compressors are 
required to add pressure to transport oil through the entirety of 
the pipeline. The meters and compressors do not serve the tanks or 
pipeline in their passive function of containing the tenants' oil, 
and are used in connection with the production of income from the 
sale and transportation of oil, rather than as consideration for the 
use or occupancy of space within the tanks or pipeline. The meters 
and compressors are not structural components within the meaning of 
paragraph (d)(3) of this section and, therefore, are not real 
property.
    Example 11. Goodwill.  REIT K acquires all of the stock of 
Corporation A, whose sole asset is an established hotel in a major 
metropolitan area. The hotel building is strategically located and 
is an historic structure viewed as a landmark. The hotel is well run 
by an independent contractor but the manner in which the hotel is 
operated does not differ significantly from the manner in which 
other city hotels are operated. Under GAAP, the amount allocated to 
Corporation A's hotel is limited to its depreciated replacement 
cost, and the difference between the amount paid for the stock of 
Corporation A and the depreciated replacement cost of the hotel is 
treated as goodwill attributable to the acquired hotel. This 
goodwill derives its value and is inseparable from Corporation A's 
hotel. If REIT K's acquisition of Corporation A had been a taxable 
asset acquisition rather than a stock acquisition, the goodwill 
would have been included in the tax basis of the hotel for Federal 
income tax purposes, and would not have been separately amortizable. 
The goodwill is real property to REIT K when it acquires the stock 
of Corporation A.
    Example 12. Land use permit.  REIT L receives a special use 
permit from the government to place a cell tower on federal 
government land that abuts a federal highway. Governmental 
regulations provide that the permit is not a lease of the land, but 
is a permit to use the land for a cell tower. Under the permit, the 
government reserves the right to cancel the permit and compensate 
REIT L if the site is needed for a higher public purpose. REIT L 
leases space on the tower to various cell service providers. Each 
cell service provider installs its equipme