PILOT payments can be deducted as property taxes, the IRS said.

“PILOT” stands for payments in lieu of taxes. Developers in some states arrange for a county or state agency to hold title to a project as a way to reduce sales and property taxes. Equipment purchased by a state or county agency is usually exempted from sales taxes, and property owned by the agency is not subject to property tax. The developer negotiates payments in lieu of property taxes that are a fraction of the property taxes it would otherwise have had to pay.

US taxpayers can deduct property taxes.

A condominium association asked the IRS for a ruling that PILOT payments are a form of property tax that can be deducted. The association owns a condominium building on land that a not-for-profit corporation leases from a state development authority and then subleases to the association. The association makes PILOT payments to the not-for-profit corporation which makes them, in turn, to the state development authority. Each condominium owner pays his share of the PILOT payments.

The IRS said payments qualify as a tax if they satisfy three tests. These do. The payments must be measured by or equal to amounts imposed by regular taxing statutes. They must be imposed by a specific state statute. The proceeds must be designated for a public purpose rather than for some privilege, service or regulatory function, or for some other local benefit tending to increase the value of the property upon which the payments are made.

In this case, state law exempts land owned by the state development authority from taxes, but requires the authority to collect PILOT payments and use the payments either to improve or maintain the property involved or transfer them to the general fund of the city for general public purposes.

The IRS analysis is in Private Letter Ruling 201442020. The agency made the ruling public in October.

— contributed by Keith Martin in Washington