Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 65-91

1965-1 C.B. 431

Sec. 1371

Sec. 1372

IRS Headnote

Determination of whether payments received by certain corporations for the storage of property are rents within the meaning of section 1372(e)(5) of the Internal Revenue Code of 1954.

Full Text

Rev. Rul. 65-91

Advice has been requested whether payments received by corporations for the storage of personal property, under the circumstances described below, are rents within the meaning of section 1372(e)(5) of the Internal Revenue Code of 1954.

Several corporations are in the business of providing storage space for personal property. Each corporation is a small business corporation which has elected pursuant to section 1372(a) of the Code, not to be subject to a corporate income tax, but to have all its income taxed directly to its shareholders.

Under section 1372(e)(5) of the Code, such an election is terminated in any year in which more than 20 percent of the gross receipts of an electing corporation is derived from rents and certain other types of income.

Section 1.1372-4(b)(5)(iv) of the Income Tax Regulations provides, in part, that the term `rents,' as used in section 1372(e)(5) of the Code, means amounts received for the use of, or right to use, property (whether real or personal) of the corporation. However, the term does not include payments for the use or occupancy of rooms or other space where significant services are also rendered to the occupant. Generally, services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only. Thus, payments for the parking of automobiles ordinarily do not constitute rents. Payments for the warehousing of goods or for the use of personal property do not constitute rents if significant services are rendered in connection with such payments.

The question for each corporation involved in this Revenue Ruling is whether payments received by it for the storage of property are rents within the meaning of section 1372(e)(5) of the Code.

(1) M corporation owns two buildings and related equipment used for the storage of grain. Separate fees are charged for receiving the grain and for taking the grain out of storage and loading it on carriers for shipment. While in storage, services must be performed to prevent spoilage and infestation of the grain. These services include periodic inspection and turning of the grain. If the grain were to be improperly handled during storage, the corporation would be liable without the possibility of insurance protection for the full value of the spoiled grain.

Under these circumstances, it is held that fees received for the storage of grain are not rents within the meaning of section 1372(e)(5) of the Code because of the significant services performed in connection with the storage.

(2) O corporation operates a cotton warehouse. Because the cotton available for storage in the area where O's warehouse is located has declined in recent years, the corporation has endeavored to store other commodities in its warehouse. At the present time, three of the eight rooms in the warehouse are used for the storage of manufactured goods under a specific contract between O and a manufacturer of cotton cloth. Under this contract, denominated a lease, the manufacturer has the right to use for a term of 1 year specific rooms in the warehouse for storage. The manufacturer uses his own employees for transporting the cloth in and out of storage and assumes all liability for the hazards of handling and storage in the leased areas. The manufacturer is also responsible for the locks and fastenings on the doors of the rented compartments.

Since, under the terms of the contract, the owner of the stored goods is entitled to specific space for a fixed term and provides for its own storing, loading, unloading, and other handling and protecting services required for its goods, the payments received under the contract are rents within the meaning of section 1372(e)(5) of the Code.

(3) The gross receipts of P corporation are derived from payments received for the handling and storage of goods in its refrigerated warehouse. Most owners of goods pay on a per pound or per container basis. These charges include refrigeration service, maintenance of proper humidities, housekeeping, handling in and out of the warehouse, and record keeping in connection with the preservation of and accounting for the commodities in storage. An arrangement is occasionally made whereby a customer has exclusive use for a fixed term of specified space. Charges for this type of arrangement are usually on a square foot or flat-rate basis and vary depending on whether P or the customer supplies the necessary labor for moving the goods in and out of the warehouse and for providing housekeeping services. In any event, P supplies the refrigeration and other necessary services, and is responsible for maintenance.

Under these circumstances, it is held that none of the payments received by P corporation are rents within the meaning of section 1372(e(5) of the Code.

(4) Q corporation owns and operates an automobile parking lot. The cars are left with an attendant at the entrance to the lot who parks them in any available space.

The payments received by Q from the customers under these circumstances are not rents within the meaning of section 1372(e)(5) of the Code.