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To cut taxes, companies turn to trusts

Those claiming to be real estate firms include prison and casino operators

People viewed a model of MGM’s proposed Springfield casino in December. Penn National Gaming, which is converting a real estate trust, also offered a plan for a casino in the city.

Jackie Ricciardi for The Boston Globe/File 2012

People viewed a model of MGM’s proposed Springfield casino in December. Penn National Gaming, which is converting a real estate trust, also offered a plan for a casino in the city.

NEW YORK — A small but growing number of US corporations, operating in businesses as diverse as private prisons, billboards, and casinos, are making a forehead-slapping move to reduce — or even eliminate — their federal tax bills.

They are declaring they are not ordinary corporations. Instead, they say, they are special trusts that are typically exempt from paying federal taxes.

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The trust structure has been around for years but, until recently, was generally used only by funds holding real estate. Now, the likes of the Corrections Corp. of America, which owns and operates 44 prisons and detention centers, have quietly gotten permission from the Internal Revenue Service to put on new corporate clothes and, as a result, save many millions on taxes.

Corrections Corp., which is in the process of making the switch, expects to save $70 million in 2013. Penn National Gaming, which operates 22 casinos, recently won approval to change its tax designation, too.

Changing from a standard corporation to a real estate investment trust, or REIT — a designation signed into law by President Dwight D. Eisenhower — has suddenly become a hot corporate trend. One Wall Street analyst characterized the label as a ‘‘golden ticket’’ for corporations. It is often a boon for executives and stockholders, who receive generous dividends, as well.

‘’I’ve been in this business for 30 years, and I’ve never seen the interest in REIT conversions as high as it is today,’’ said Robert O’Brien, head of the real estate practice at Deloitte & Touche, the big accounting firm.

As deficits and taxes loom large in Washington, some question whether the new REITs — or perhaps even the trusts in general — deserve their privileged position.

‘I worry that in a world where Congress is very sensitive to taxes, that a lot of these structures could end up attracting a lot of attention that might not be entirely positive.’

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Created in 1960, they were meant to be passive investment vehicles, like mutual funds, that buy up a broad portfolio of real estate — whether shopping malls, warehouses, hospitals, even timberland — and derive almost all of their income from those holdings.

But one of the bedrock principles of most real estate investment trusts — and the reason for their tax exemption — was that they do no business other than own real estate. That has slowly changed as a result of a number of low-profile decisions by the IRS that have broadened the definition of real estate, and allowed companies to split off parts of their business that are unrelated to real estate.

The IRS released its latest decision, allowing a data and document storage company to convert, on April 5. The letter did not include the name of the company, but several data storage companies, including Boston-based Iron Mountain Inc. and Equinix Inc., are in the process of converting.

A few days later, a strategist at the Wall Street firm Jefferies wrote: ‘‘It is not a far stretch to envision REITs concentrated in railroads, highways, mines, landfills, vineyards, farmland or any other ‘immovable’ structure that generates revenues.’’

Advocates of the traditional trusts fear that the newcomers may eventually jeopardize the tax status of older funds.

“I worry that in a world where Congress is very sensitive to taxes, that a lot of these structures could end up attracting a lot of attention that might not be entirely positive,’’ said Ross L. Smotrich, an analyst at Barclays.

Most of the activity over the last few years has involved companies asking the IRS to expand the definition of ‘‘real estate’’ revenue.

Companies like Corrections Corp. and GEO Group, which also converted, successfully argued the money they collect from governments for holding prisoners is essentially rent. Companies that operate cellphone towers said the towers themselves are real estate.

The conversions generally do not require companies to change their underlying businesses. The chief executive at Corrections Corp., Damon T. Hininger, told investors in February that the new structure should help in the company’s aim of ‘‘housing more and more population for federal, state and local levels as they grow or deal with overcrowding.’’

Lawyers have also been finding creative ways to follow the letter of the law by splitting off parts of a company into subsidiaries that can be taxed. In the legal world, the most controversial such effort is being undertaken by Penn National, the casino company. It won approval last year to create a separate company that holds all of its real estate and collects rent from the casino operations.

The ruling could open the door for restaurant companies like McDonald’s and retailers like J.C. Penney to follow a similar route, though neither company has indicated it is considering such a move.

For now, companies like Corrections Corp. are quickly moving through the process.

“The good news about this is that we are going to be able to enjoy a full year of tax savings for 2013,’’ Hininger, the chief executive, said in February.

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