Now it seems -- either by word or by legislative action -- many Congresspeople have come to view the tax exemption for REITs as an unwarranted or unfair tax exemption, Willens said. “We are seeing the REIT tax exemption increasingly lumped together with other tax breaks that don't have such pristine lineages."

One likely reason for this has been the creation of alternative asset groups that have gone on to be certified as REITs, such as the prisons, or electronic billboards or cell towers. They are still real estate assets, Willens said, but some in Congress don't see it that way.

That appears to be Wyden's thinking with his new measure, although he also seems to be uncomfortable with the private sector incarcerating people for crimes.

“I am very concerned that the U.S. prison system has become a way for private enterprises to turn an unfair profit,” he said in a prepared statement when announcing the bill. “Our broken down tax code has made this possible by allowing the private prison industry to take advantage of tax rules aimed at REITs.”

“As part of rethinking our criminal justice system, particularly as it results in the mass incarceration of low-income and minority individuals, the tax rules for REITs must be changed so that we are not encouraging companies to unjustly profit from prison detention services.”

Also political affiliations and inclinations have shifted dramatically in the last few years, with the traditional defenders of business and commercial property at odds with others in their parties about business and tax issues.

Whatever the cause, the effect has been clear.

Last December, as part of the larger Consolidated Appropriations Act, Congress updated REIT spinoff rules requiring companies that elected a REIT status for assets that have been spun off within 10 years of that event to recognize the gain as though the assets had been sold at their fair market value on the sale date.

The IRS did Congress one better earlier this year when it updated those rules to include REIT conversions, a loophole Congress had left open.

Now there is Wyden's Ending Tax Breaks for Private Prisons Act of 2016.

The bill is taking aim at the compensation REITs such as CCA receive for providing both space and services at a prison. These services include security, food service for the inmates, rudimentary medical and dental services, and mental health services. The services are all provided by a taxable REIT subsidiary within CCA.

This is how the bill could limit CCA, Willens explained in a client note:

Sec. 856(l)(3)(A) of the Code provides that a TRS cannot "operate or manage" a "health care facility" or a "lodging facility." CCA secured a ruling from the I.R.S. that its Facilities are neither lodging facilities nor health care facilities. This was true, moreover, even though certain medical services were provided by the TRS to the inmates of the Facilities. CCA's Facilities, while neither health care facilities nor lodging facilities, are certainly "prison facilities." Under the Wyden bill, the term, TRS, shall not include any corporation which, directly or indirectly, operates or manages a prison facility. If a TRS that renders services is found to be other than a TRS (because it operates or manages prison facilities), the parent REIT would be treated as furnishing or rendering those services to the tenants. The income derived therefrom would constitute "impermissible tenant service income" ("ITSI"). If ITSI with respect to a property constitutes as little as one percent of all amounts received or accrued...with respect to such property, the ITSI with respect to the property shall include all such amounts. In that event, the REIT would not earn "rents from real property" from the property and would forfeit its REIT status.

A Possible Workaround

Willens concludes that forfeiture is not necessarily inevitable. The REIT could hire an independent contractor to render the services that the TRS had been providing, he said and the bill does not mention independent contractors. Basically the bill would alter the way in which prison REITs conduct their business, but it would not necessarily deprive those corporations of their REIT status, assuming they have independent contractors to perform the services that the REIT is precluded from performing under the new law.

There is another comfort, of course: This bill has no chance of passage in an election year. But, as Willens pointed out in his note, “we are now on notice that a powerful member of the Senate Finance Committee has 'it in for' prison REITs.”

And, oh yes, there is also this: Workaround notwithstanding, if this measure were to become law, it could easily be tailored for REITs with similar structures, Willens warned.

WASHINGTON, DC—Last week, Senate Finance Committee Ranking Member Ron Wyden, D-Ore., introduced legislation that would limit the ability of private companies that operate prisons to take advantage of special tax rules for REITs. To be sure, there are a very small number of such entities, namely the Corrections Corp. of America, based in Nashville, TN and the Boca Raton, FL-based Geo Group. Also, as it happens, a loophole to the legislation could offer these companies a workaround, as one analyst noted.

Still, though, for REIT and commercial real estate industry the proposed legislation is part of a worrisome pattern: lately, it seems, Congress has been nibbling away at REITs' tax exemptions that have been permitted for years under the US corporate tax code.

“Decades ago, when the REIT format was first introduced the idea was to give small investors the same tax-advantages they would get from direct investments in real estate but without the burden of management and operations,” tax expert Robert Willens of Robert Willens LLC in New York City told GlobeSt.com.

“It was one of the few high-minded motivations in Congress for creating a tax exemption.”

Now it seems -- either by word or by legislative action -- many Congresspeople have come to view the tax exemption for REITs as an unwarranted or unfair tax exemption, Willens said. “We are seeing the REIT tax exemption increasingly lumped together with other tax breaks that don't have such pristine lineages."

One likely reason for this has been the creation of alternative asset groups that have gone on to be certified as REITs, such as the prisons, or electronic billboards or cell towers. They are still real estate assets, Willens said, but some in Congress don't see it that way.

That appears to be Wyden's thinking with his new measure, although he also seems to be uncomfortable with the private sector incarcerating people for crimes.

“I am very concerned that the U.S. prison system has become a way for private enterprises to turn an unfair profit,” he said in a prepared statement when announcing the bill. “Our broken down tax code has made this possible by allowing the private prison industry to take advantage of tax rules aimed at REITs.”

“As part of rethinking our criminal justice system, particularly as it results in the mass incarceration of low-income and minority individuals, the tax rules for REITs must be changed so that we are not encouraging companies to unjustly profit from prison detention services.”

Also political affiliations and inclinations have shifted dramatically in the last few years, with the traditional defenders of business and commercial property at odds with others in their parties about business and tax issues.

Whatever the cause, the effect has been clear.

Last December, as part of the larger Consolidated Appropriations Act, Congress updated REIT spinoff rules requiring companies that elected a REIT status for assets that have been spun off within 10 years of that event to recognize the gain as though the assets had been sold at their fair market value on the sale date.

The IRS did Congress one better earlier this year when it updated those rules to include REIT conversions, a loophole Congress had left open.

Now there is Wyden's Ending Tax Breaks for Private Prisons Act of 2016.

The bill is taking aim at the compensation REITs such as CCA receive for providing both space and services at a prison. These services include security, food service for the inmates, rudimentary medical and dental services, and mental health services. The services are all provided by a taxable REIT subsidiary within CCA.