Senators Call On IRS To Increase Scrutiny For Healthcare, Hotel REITs Pushing Tax Boundaries
Sen. Elizabeth Warren this week called on the Internal Revenue Service to increase scrutiny on medical and hospitality real estate investment trusts that may be violating tax law.
Warren's press release cited a report from Bloomberg Tax on Tuesday that the IRS issued a warning against REITs that push the boundaries of the tax law that governs them and reiterated its ability to remove their special tax status. The IRS' warning came in response to a letter Sen. Ron Wyden sent the agency in July that raised the issue of tax rules around lodging REITs.
Wyden's letter doesn't appear to be public, and his office didn't respond to a request for comment. Warren's office didn't respond to a request for additional information beyond the release.
"As the IRS continues to identify massive corporations and businesses that may be violating tax law, I urge you to increase enforcement scrutiny of REITs, especially large health and hospitality REITs that may be illegally claiming significant tax breaks while meddling in the operations of their tenants," Warren wrote in the letter.
"Decades-long underfunding of the IRS may have let bad actors feel safe to claim large REIT tax breaks while violating REIT rules, but such tax cheating should not be allowed to continue."
The IRS declined to comment on Warren's letter.
But in its response to Wyden's letter, IRS Chief Counsel Marjorie Rollinson wrote that a taxable REIT subsidiary — a flexible vehicle that may perform some actions not allowable by the parent company — is not allowed to directly or indirectly manage or operate facilities. That means it can't perform day-to-day operations like managing, hiring supervising and directing employees.
"Unfortunately, we have become aware that some in the industry have advocated the view that an appropriate structure is for the TRS to lease the qualified lodging facility from the REIT and indirectly operate the qualified lodging facility," Rollison wrote. "Any TRS that implements such an approach will lose its tax status."
If a REIT were to violate the tax laws that govern the sector, it would be required to pay the corporate tax rate and lose its special tax status for five years, according to Rollinson.
Industry association Nareit pushed back on the IRS letter in a statement to Bisnow, saying there are no signs that any REITs have violated tax laws.
“Nareit is unaware of any lodging REIT or any other REIT that has ‘advocated the view’ that it is appropriate for the REIT or the TRS to indirectly operate a qualified lodging facility or any other facility contrary to the law," a Nareit spokesperson wrote in the statement.
"The rule governing REITs and their use of a TRS is a critical component of the REIT tax regime, and Nareit supports current law and the IRS’s description of it.”
Warren's letter specifically called out Birmingham, Alabama-based Medical Properties Trust for its part in Steward Health Care's Chapter 11 bankruptcy filing, which prompted the system to put its 31 hospitals up for sale and close at least two in Massachusetts.
Since then, state officials and lawmakers have been scrambling to make sure the rest of Steward's Massachusetts portfolio continues to operate, with Gov. Maura Healey's administration planning to use eminent domain to take over Steward's flagship St. Elizabeth's Medical Center.
In June, Warren and Sen. Ed Markey of Massachusetts introduced the Corporate Crimes Against Health Care Act of 2024 — a bill in response to the bankruptcy proceeding that aimed to hold private equity firms and REITs accountable for their negative impact on the healthcare system.
Earlier this week, MPT agreed to take over the operations of several Steward Health Care hospitals following the healthcare systems' Chapter 11 bankruptcy. MPT has agreed to pay all costs in order to keep the facilities running and will scrape billions in back rent owed while Steward looks to sell its assets.
