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IRS Releases Favorable Guidance on the Tax Treatment of Payments to REITs and MLPs for Subsurface Carbon Dioxide Storage

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Along with the broader market, real estate investment trusts (“REITs”) and publicly traded partnerships, frequently referred to as master limited partnerships (“MLPs”), have increasingly embraced the principles of environmental, social, and governance (“ESG”) in their operations and investment strategies. As interest in environmental sustainability rises, REITs and MLPs have sought guidance from the Internal Revenue Service (“IRS”) on how to implement various ESG initiatives within a REIT or MLP structure.

Most recently, in Private Letter Ruling 202334007 (August 25, 2023) (the “PLR”), the IRS held that payments made to a REIT by an unrelated party under an agreement for the underground storage of carbon dioxide constituted “qualifying income” for purposes of the REIT gross income tests. This ruling provides helpful clarity to REITs considering carbon initiatives and may further encourage REITs to enter into carbon storage agreements similar to the one described in the PLR.


In the PLR, a REIT that owns timberlands entered into an agreement with an unrelated third party (the “Storage User”) pursuant to which the Storage User will pay the REIT for the right to use a specified area of the REIT’s timberlands (the “Premises”) for the underground storage of carbon dioxide. Under the agreement, the Storage User plans to capture carbon dioxide from emitters near the Premises and transport the carbon dioxide via pipeline from the points of emission to a carbon injection facility to be located on the Premises. The carbon injection facility will inject the carbon dioxide underground where it will be prevented from escaping into the atmosphere by various trapping mechanisms.

The agreement grants the Storage User the following rights:

  1. The right to survey, construct, own, and operate a carbon injection facility on the surface of the Premises;
  2. The right to inject, sequester, and permanently store carbon dioxide in the pore space at a specified depth in the subsurface of the Premises;
  3. The right to construct and maintain pipeline facilities from the boundaries of the Premises in, along, and over certain adjacent areas of the Premises; and
  4. The rights of ingress and egress necessary to access and operate the carbon injection facility and pipelines.

The agreement provides for an “Exploratory Term” and an “Operational Term.” The Exploratory Term is for one year, but may be extended for additional one-year terms. If, during the Exploratory Term, the Storage User determines that the Premises are suitable for its storage of carbon dioxide, it will begin constructing the carbon injection facility. The PLR noted that the REIT will treat the payments for the Exploratory Term as rents from real property, but no ruling was sought to that effect.

At the end of the Exploratory Term, the Storage User may elect to enter into the Operational Term. During the Operational Term, the Storage User will make three types of payments. First, the Storage User will make monthly payments for the use of the Premises based on the volume of pore space used each year (or, if a certain volume is not used, based on a minimum payment amount). Second, the Storage User will pay all taxes or government charges that may be imposed on the REIT in connection with the injection or storage of the carbon dioxide in the pore space. Third, the Storage User will make a fixed one-time payment with respect to its rights to use the surface. The REIT represented that none of these payments would be based on the net income or profits of any person.

The IRS concluded that each Operational Term payment will be “a payment for the use of the Premises during the term of the agreement, a payment for a permanent interest in the Premises, or a combination of both.” Because the surface and subsurface of the Premises constitute “real property,” the IRS determined that, to the extent an Operational Term payment is for a permanent interest in the Premises, the Storage User’s rights are akin to a permanent easement, and therefore such payment is a payment for a sale of an interest in real property, and, to the extent an Operational Term payment is for the use of the Premises during the term of the agreement, such payment meets the general definition of “rents from real property.” As such, all three types of payments will be “qualifying income” for purposes of the REIT gross income tests.


The PLR is the first time that the IRS has addressed the tax treatment of amounts earned by a REIT or an MLP in connection with a carbon storage agreement that grants a third party the right to inject and permanently store carbon dioxide on its real property. As REITs and MLPs look for new ways to embrace ESG initiatives and reduce their carbon footprint, the PLR may act as a helpful blueprint in structuring carbon capture and storage arrangements with unrelated third parties.

What is a REIT?

REITs are entities that own or finance income-producing real property in various industry sectors. Traditionally designed for investors who want to make passive investments in real estate, REITs are subject to various organizational and operating requirements under the Code.  Among other requirements, REITs must generally distribute at least 90% of their taxable income to shareholders each year, derive at least 75% of their gross income from rents from real property and certain other real estate-related activities, such as making loans secured by real estate, and derive at least 95% of their gross income from passive income such as interest, dividends, and items qualifying for the 75% gross income test.  A REIT is not subject to U.S. federal corporate income tax to the extent it distributes its 100% of taxable income to shareholders.  In general, REITs generate income by financing or leasing real estate and collecting rent or interest. For more on this topic, visit our REITs page.

What is a Master Limited Partnership?

An MLP is a business structure that attracts low-cost capital due to its favorable tax status. While a traditional corporation is taxed twice, once at the corporate level and again when the shareholders receive dividends, an MLP is taxed as a partnership. This means that its income and deductions flow through to the partners, resulting in a single layer of tax at the partner level. Investors in an MLP are limited partners who contribute capital and receive quarterly distributions but have no management power, while the MLP’s general partners manage the day to day operations of the partnership. Unlike regular partnerships, however, ownership interests in MLPs can be traded on a public market. Therefore, MLPs combine the favorable tax treatment of partnerships with the liquidity and limited liability of corporate stock.

To maintain this partnership tax treatment, 90% or more of an MLP’s gross income must be “qualifying income,” which in addition to certain income from natural resource activities commonly carried on by MLPs includes real property rents.  While this carbon storage PLR was issued to a REIT, the MLP rules reference the REIT rules to determine whether real property rents are treated as MLP qualifying income.  As a result, while PLRs are only authoritative to the taxpayer that receives the PLR, MLPs can look to this REIT PLR as an indication of types of energy transition business activities that generate MLP qualifying income. For more on this topic, visit our MLP Qualifying Income page.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.