July 14,2016

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Wyden Introduces Bill to Stop Private Prisons from Exploiting Tax Incentives for Profit

WASHINGTON – Senate Finance Committee Ranking Member Ron Wyden, D-Ore., today introduced legislation that would limit the ability of private companies that operate prisons to take advantage of special tax rules for Real Estate Investment Trusts (REITS) -- U.S. corporations that invest in real estate. 

“I am very concerned that the U.S. prison system has become a way for private enterprises to turn an unfair profit,” said Wyden. “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.”

To qualify as a REIT for tax purposes, a company must meet specific rules such as deriving most of its income from passive, generally real-estate-related, investments.  Unlike a subchapter C Corporation, to the extent REIT rules are met, the income distributed to shareholders is deductible, and therefore not taxed at the corporate level.  In addition, a portion of a REIT’s income can be derived from active business activity to the extent it is from a taxable subsidiary of the REIT.    

Private prison REITs derive a significant portion of their income from services related to the management and operation of detention facilities.   Similar to a rule for hotel and health care facilities, Senator Wyden’s legislation prevents any kind of active business activity at or in connection with the prison facility from qualifying for REIT status through a subsidiary.   

The Ending Tax Breaks for Private Prisons Act of 2016 introduced today can be found here.