The Treasury Department is planning to put real estate investment trusts under a microscope after American companies started taking advantage of a loophole in new IRS rules that allow them to avoid paying corporate taxes,
The Hill reports.
Known as REITs, property trusts were introduced by Congress in the 1960s as a way to encourage the average American to invest in shopping centers and office buildings.
But earlier this year, the Internal Revenue Service redefined what these trusts can consist of, resulting in such "real estate" as a telecommunications company's fiber optic and copper networks being included.
The obscure new IRS provision led to U.S. firms spinning off their property assets into new REIT companies, meaning they would effectively be exempt from paying corporate taxes.
"What's happened here is a lot of assets that normal people wouldn't think of as real estate are now considered real estate," Howard Gleckman of the Urban-Brookings Tax Policy Center told The Hill. "And now you've got another way to eliminate the corporate-level tax."
Although the IRS is not concerned about the potential revenue loss from its new regulations, a spokeswoman for the Treasury Department said the administration plans to closely examine the use of REITs, according to The Hill.
"We at Treasury are looking into the issues presented by these transactions and considering what action, if any, might be appropriate," the spokeswoman said.
After the loophole came to the attention of House Ways and Means Committee Chairman Dave Camp, he put forward proposals in his tax reform draft to make it more difficult for companies to get tax benefits from spinning off real estate trusts.
Although the Michigan Republican said that it would save the government $6 billion over a decade, his plan was given the cold shoulder by Democrats and even some GOP members.
Despite Camp's draft being dismissed, lobbyists on K Street in Washington are working feverishly behind the scenes to keep the new REIT regulations in place whenever the tax reform debate starts up again, The Hill said.
One lobbyist working on the issue told the website that companies "know that all things in Washington can turn political" at any stage. "And they'd rather have their applications considered in the current environment than an uncertain future environment," the lobbyist added.