Revenue Procedure 2002-22

Revenue Procedure 2002-22 (2002-14 I.R.B. 733) is Internal Revenue Service (IRS) guidance that sets out the conditions under which the IRS will consider a ruling that an undivided fractional (tenant-in-common) interest in rental real property is not an interest in a business entity for U.S. federal income tax purposes under Treasury Regulation § 301.7701-2/-3. The revenue procedure is most frequently discussed in connection with tenant-in-common (TIC) interests used in § 1031 like-kind exchanges. It was published on April 8, 2002, in the Internal Revenue Bulletin.^[1][2] Professional commentary in tax and legal publications has described the procedure as an important clarification of how tenancy-in-common interests may be structured so they are more likely to be respected as direct real-property interests, rather than partnership interests, in § 1031 exchanges.^[3][4]

Background

For tax classification, co-ownership of real estate turns on whether the arrangement rises to the level of a partnership or other business entity. Prior authorities recognized that mere co-ownership with customary rental-property activities is not a partnership, but broader joint ventures with centralized management or profit-sharing features can be.^[1] Rev. Proc. 2002-22 superseded Rev. Proc. 2000-46, under which the Service would not issue rulings in this area, and modified Rev. Proc. 2002-3 by effectively removing TIC classification issues from the “no-rule” list and reopening the path to request IRS advance rulings.^[1] For context, Treasury regulations state that “mere co-ownership of property that is maintained, kept in repair, and rented or leased” is not a separate entity for federal tax purposes; Rev. Proc. 2002-22 provides criteria the Service uses when considering advance rulings that a given co-ownership is within that principle.^[5]

Commentary in professional journals and practitioner literature has treated Revenue Procedure 2002-22 as a significant development in the use of TIC interests as replacement property in § 1031 exchanges. An early article in the Journal of Accountancy explained that the procedure provided a framework for sponsors to structure TIC offerings and opened the door to a new "ready-to-buy" replacement-property product for exchangers.^[3] A Tax Management Memorandum article by Howard J. Levine similarly described the guidance as the culmination of the IRS’s earlier study of undivided fractional interests under Rev. Proc. 2000-46, clarifying when such interests may constitute a separate business entity while also noting areas of remaining uncertainty.^[4]

Law firm analyses published shortly after the guidance, including memoranda by Willkie Farr & Gallagher, Robins Kaplan, and Smith, Gambrell & Russell, characterized Revenue Procedure 2002-22 as providing a practical framework or "guidelines" for structuring TIC investments intended to qualify for § 1031 treatment, and discussed in detail how its conditions affect TIC offerings and co-ownership arrangements.^[6][7][8]

Academic and treatise sources also discuss Revenue Procedure 2002-22 as central to the development of syndicated TIC exchanges. A 2006 article in the University of Miami Business Law Review by Marilyn B. Cane and Jennifer C. Erdelyi analyzes the burgeoning TIC industry and the interaction between § 1031 TIC exchanges, securities regulation, and the IRS guidance.^[9] Bradley T. Borden’s treatise Tax-Free Like-Kind Exchanges devotes extended discussion to Revenue Procedure 2002-22, including its treatment of TIC interests as potential replacement property, the legal status of the procedure, and its role in opinion practice for TIC offerings.^[10] Later articles in The Tax Adviser on fractional interests in property and like-kind exchanges likewise cite Revenue Procedure 2002-22 as key guidance on when a co-ownership arrangement will be treated as a business entity or as direct ownership of real property.^[11]

Scope

The procedure applies to co-ownership of rental real property (other than mineral property) held as a tenancy in common under local law. It outlines information that must accompany a ruling request and states that the IRS will “ordinarily” not consider a request unless specified conditions are met.^[2]

Conditions commonly cited

Section 6 lists conditions the Service expects to see before it will generally consider a favorable ruling. Key conditions include:^[2]

TIC ownership: Each co-owner must hold title (directly or via a disregarded entity) as a tenant in common; the property as a whole may not be titled in an entity.

Number of co-owners: Limited to 35 persons (with certain aggregation rules).

No entity treatment: The co-ownership may not file partnership/corporate returns or hold itself out as a business entity.

Voting: Unanimous approval is required for hiring a manager, sale or disposition, leasing, and creation or modification of a blanket lien; other actions may be by majority vote.

Restrictions on alienation: Each co-owner generally retains rights to transfer, partition, and encumber their interest, subject to commercially customary lender restrictions; rights of first offer are permitted.

Sharing of proceeds and liabilities on sale: Blanket debt must be satisfied and remaining proceeds distributed to co-owners.

Proportionate sharing: Revenues, expenses, and blanket debt must be shared in proportion to each co-owner’s undivided interest; short recourse advances (≤31 days) are permitted.

Options: Call options must reflect fair market value; put options to sponsors, lessees, co-owners, or lenders are not allowed.

No business activities beyond customary rental operations, measured with reference to unrelated-business income tax rental standards.

Management and brokerage agreements: Allowed (manager may be a sponsor or co-owner but not a lessee); must be renewable at least annually, pay fair-market fees not tied to income or profits, and distribute net revenues to owners within three months.

Leases and loans: Leases must be bona fide at fair-market rent (not profit-based), and lenders may not be related to the co-owners, sponsor, manager, or lessee.

The Service also states it may consider ruling requests that do not meet every condition if overall facts and circumstances warrant.^[2]

Nature of the guidance

Commentators generally describe Rev. Proc. 2002-22 as setting out advance ruling criteria or “guidelines” rather than a substantive safe harbor in the Code or regulations. Levine, for example, emphasizes that the conditions are framed as guidelines for obtaining private rulings and are expressly stated not to be substantive rules, while noting that they are likely to be treated as such in practice.^[4] A Real Estate Finance Journal article reprinted by Robins Kaplan similarly stresses that the procedure does not change the underlying law but instead provides a framework for approaching the IRS for rulings on TIC structures.^[7]

In practice, however, the conditions have often functioned as benchmarks for structuring TIC offerings and co-ownership arrangements in § 1031 exchanges. Law firm analyses and practitioner articles describe the guidelines as a practical “safe harbor” that sponsors and advisers attempt to follow in order to increase the likelihood that TIC interests will be respected as direct real-property interests rather than disqualified partnership interests.^{[6][8][3][11]}

Application and subsequent developments

After publication, taxpayers sought private letter rulings applying the procedure to specific TIC arrangements; for example, a 2016 ruling discusses compliance with the voting and management-agreement conditions. While private letter rulings are not precedent, they illustrate how the IRS analyzes the conditions in particular fact patterns.^[12] More recently, the Service has continued to address TIC facts in private letter rulings, including PLR 202416012, which analyzed § 1031 consequences where TIC interests arose from a trust context.^[13] Private letter rulings are not precedent, but they illustrate how the Service applies Rev. Proc. 2002-22 to particular facts.^[14]

Relation to Delaware statutory trusts

In 2004, the Service issued Rev. Rul. 2004-86, concluding that, in specified circumstances, a Delaware statutory trust (DST) is treated as a trust (not a business entity) and that an interest in such a DST can qualify as real property for § 1031 exchanges.^[15] Following that ruling, many syndicated § 1031 programs shifted from TIC structures (which are subject to the 35-owner limit and various unanimous-consent expectations in Rev. Proc. 2002-22) to DST structures, which avoid some of those operational constraints.^[16]

Regulatory considerations

Broker-dealer sales of syndicated TIC interests have been treated as securities offerings. In Notice to Members 05-18, the NASD (now FINRA) reminded members that TIC programs generally are investment contracts and that suitability, supervision, and disclosure rules apply when recommending them to customers.^[17] Academic commentary has also examined the securities-law dimensions of TIC exchanges, including whether TIC interests constitute “securities” for federal and state law purposes and how that characterization interacts with § 1031 eligibility.^[9]

See also

• Like-kind exchange
• Tenancy in common
• Delaware statutory trust
• Private letter ruling