Real estate investment trust

Transcription

1 414.1 Additional consideration; boot payment; capital gains. The language and legislative history of section 356(a), as well as a commonsense understanding of the economic substance of the transaction at issue, establish that boot payment to the taxpayer is subject to capital gains rather than ordinary income treatment. (Sec. 356, 86 Ct. D. 2044, C.B Built-in gain of C corporation assets. The service intends to promulgate regulations under the authority of section 337(d), to prevent the avoidance of corporate-level taxation with respect to the net built-in gain of C corporation assets in connection with transactions or events that result in the ownership of such assets by a regulated investment company (a RIC ) or a real estate investment trust (a REIT ) with a basis determined by reference to the C corporation s basis (a carryover basis ). Notice 88-19, C.B Commercial paper in form of promissory notes; source of funds. A qualified real estate investment trust, that enters into an agreement with a bank whereby the bank acts as its agent in issuing commercial paper in the form of promissory notes in order to borrow money, is not considered to be holding property primarily for sale to customers in the ordinary course of its trade or business within the meaning of section 856(a)(4) (Sec. 856, 86 Rev. Rul , C.B Commodity Credit Corporation guaranty agreements. The Federal income tax consequences are set forth for holders of the Commodity Credit Corporation s (CCC) guaranty agreements covering time drafts for no more than one year drawn on domestic and foreign irrevocable letters of credit arising from accounts receivable for exported commodities, for which the CCC delivers its non-interest bearing notes to a custodian, and which are sold at a discount to the public through underwriters , , , , , , , A, (Secs. 61, 454, 593, 851, 856, 895, 1221, 1232, 7701; 86 Rev. Rul. 740, C.B Completion and sale of property by coparticipant after default. A real estate investment trust that participated in a loan by a bank to a developer who subsequently defaulted did not hold property primarily for sale to customers by reason of the bank s acquisition, completion, and sale of the property, the trust being entitled to receive only its proportionate share of the unpaid principal and interest (Sec. 856, 86 Rev. Rul , C.B Deed in lieu of foreclosure; property value exceeding basis. A real estate investment trust that engaged primarily in short term financing activities, such as making construction and development loans, made a construction loan to a borrower who later defaulted. The trust accepted a deed in lieu of foreclosure when the fair market value of the property exceeded the trust s basis in the mortgage note. The gain realized by the trust, the difference between its basis in the note and the value of the property, is ordinary income, and such income qualifies under section 856(c)(2)(D) and (3)(C) , , , (Secs. 61, 857, 1221, 1232; 86 Rev. Rul , C.B Distribution requirement; reserved income. Amounts of a real estate investment trust s taxable income which are used to meet cash reserve requirements and amortize mortgages do Real estate investment trust not reduce the trust s taxable income for purposes of determining the amount which must be distributed in order to meet the 90 percent distribution requirement. Furthermore, the 90 percent distribution requirement can not be met by the distribution of a nontaxable stock dividend equivalent to the amounts paid on amortization of mortgages and into cash reserves (Sec. 857, 86 Rev. Rul , C.B Dividends paid; after close of taxable year. A real estate investment trust that timely filed its return may elect, under section 858, to treat a dividend declared and paid during the taxable year, that was more than sufficient in amount to reduce the trust s taxable income for the prior year to zero, as having been paid during the prior year to the extent of undistributed earnings and profits for that year. If an audit adjustment subsequently increases the trust s earnings and profits for the prior year and if the amount of the dividend exceeds the earnings and profits before the adjustment, an additional amount of the dividend will be treated as having been paid during the prior year up to the amount of adjustment (Sec. 858, 86 Rev. Rul , C.B Dividends paid; after close of taxable year; portion of fixed monthly dividends. A calendar year real estate investment trust that began paying fixed monthly dividends in 1977, the amount paid during that year totaling less than the amount required under section 857(a)(1), may properly elect in January 1978 to treat the entire January 1978 dividend and a portion of the February 1978 dividend as having been paid only during 1977 for purposes of section 858(a) (Sec. 858, 86 Rev. Rul , C.B Dividends paid; close of taxable year. A real estate investment trust that did not timely file its return or receive an extension of time for filing may not elect, under section 858(a), to treat a dividend declared after the due date of its return as having been paid during the prior taxable year (Sec. 858, 86 Rev. Rul , C.B Dividends paid; deduction; reinvestment plan. Factual situations illustrate whether dividend distributions made by a real estate investment trust (REIT) in cash or shares purchased under a dividend reinvestment plan will qualify for the dividends paid deduction under section (Secs. 561, 857; 86 Rev. Rul , C.B Dividends paid; deemed distribution. The deemed distribution resulting from an increase in the conversion ratio of convertible debentures on January 31, 1976, reflecting dividends paid by a calendar-year real estate investment trust in 1975 to its shareholders, the sum of the cash and deemed distributions being less than the trust s earnings and profits for 1975, is not the first regular dividend payment described in section 858(a) and may be treated as having been paid in (Sec. 858, 86 Rev. Rul , C.B Dividends paid; four installments after close of taxable year. Where a real estate investment trust declares a dividend after the close of its taxable year but before the date on which it is required to file its return, distributes the dividend in four installments within the 12 months following the close of the taxable year and pays no other dividends during that period, the installments will, if the trust so elects in its return, be considered as having been paid during such taxable year (Sec. 858, 86 Rev. Rul , (Part 1) C.B Dividends paid; more than one declaration. A real estate investment trust may elect

2 treatment under section 858 with respect to two dividend declarations. Also a portion of a dividend declaration may be subject to an election under that section where the dividend is regarded as having been paid in two taxable years. Such dividends must be included in gross income by shareholders in the taxable year received (Sec. 858, 86 Rev. Rul , C.B Dividends paid; taxable status; effect of capitaf loss carryover. A capital loss carryover does not reduce the earnings and profits of a taxable year available for the payment of dividends by a regulated investment company or a real estate investment trust, but it does reduce the amount of a dividend that may be designated as a capital gain dividend , , , , , (Secs. 312, 316, 852, 857; 86 Rev. Rul , C.B Domestic building and loan association; loan secured by cooperative housing cooperative housing corporation stock. A loan made for the purchase of stock in a cooperative housing corporation, and secured by such stock, qualifies as a loan described in section 7701(a)(19)(C)(v) of the Code if the house or apartment that the stock entitles the stockholder to occupy is to be used as a residence , A. (Secs. 593, 7701; 86 Rev. Rul , C.B Employees stock options; restricted. The shares or certificates of beneficial interest in a real estate investment trust within the meaning of section 856 are shares of stock within the meaning of section 421(d) as in effect prior to the enactment of section 221 of the Revenue Act of 1964, and options granted by the trust will not be disqualified as restricted stock options solely because the grantor is a real estate investment trust , (Secs. 421, 856; 86 Rev. Rul , C.B Fees for commitment to make construction loans. A loan funding fee received by a real estate investment trust in return for the trust s commitment to advance construction funds over a specified period of time at a specified rate of interest does not qualify as interest for purposes of section 856(c) (Sec. 856; 86 Rev. Rul , C.B Fees for commitment to make permanent loan. Fees earned by a real estate investment trust as consideration for issuance of a commitment to make a permanent loan upon maturity of a construction loan do not qualify as interest (Sec. 856, 86 Rev. Rul , C.B FHLMC participation certificates. The tax consequences of the purchase of mortgage participation certificates from an insured savings and loan association by the Federal Home Loan Mortgage Corporation (FHLMC) and the sale of corresponding participation sales certificates to other savings and loan associations and exempt employees trusts are set forth , , , 1.501(a)-1, , , , , , A. (Secs. 61, 162, 451, 501, 593, 671, 856, 1232, 7701; 86 Rev. Rul , C.B. 433; Rev. Rul , C.B. 647; Rev. Rul , C.B. 365; Rev. Rul , C.B. 169; Rev. Rul , C.B. 317; Rev. Rul , C.B Foreclosure; property value exceeding bid. A real estate investment trust that engaged primarily in short term financing activities, such as making construction and development loans, made a construction loan on which it later foreclosed. At the foreclosure sale the trust bid in the property for less than its fair market value. The trust s basis in the mortgage note exceeded the property s value, and the balance due on the note was wholly uncollectable. The gain realized by the trust, the difference between the fair market value of the property and the bid price, is ordinary income , , (Secs. 166, 856, 1221; 86 Rev. Rul , C.B Foreclosure property; new construction. A real estate investment trust s construction of an apartment project s clubhouse and tennis court, construction of which had not begun when the trust acquired the 70 percent-completed project by deed in lieu of foreclosure, will not cause the property to lose its status as foreclosure property (Sec. 856, 86 Rev. Rul , C.B Foreclosure property; redemption period. A real estate investment trust-mortgagee that instituted foreclosure proceedings on its mortgagor s real property and subsequently purchased the property at foreclosure sale, in a state whose laws provide that the mortgagor may redeem the property within one year, is considered to have acquired the property for purposes of section 856(e) upon the expiration of the unexercised right of redemption (Sec. 856, 86 Rev. Rul. 78 3, C.B Foreign corporation; treatment. A foreign corporation cannot qualify as a real estate investment trust (REIT) (Sec. 856, 86 Rev. Rul , C.B Forfeited good-faith deposits; time for reporting income. Good-faith deposits that, pursuant to an agreement between an accrual method real estate investment trust and an investment counseling company, are paid by loan applicants to the counseling company, deposited in a separate bank account, and eventually refunded to them unless forfeited to the trust are includable in the trust s gross income only in the year that forfeiture of a particular deposit occurs , (Secs. 451, 856; 86 Rev. Rul , C.B General Services Administration participation certificates. Participation certificates, issued by the General Services Administration, that are considered by the Securities and Exchange Commission to be government securities under the Investment Company Act of 1940 are Government securities within sections 851(b)(4) and 856(c)(5)(A) and obligations of the United States under section 7701(a)(19)(C)(ii) , , , (Secs. 851, 856, 895, 7701; 86 Rev. Rul , C.B Interest; contingent. Contingent interest received by an otherwise qualifying real estate investment trust from a corporation, under a land development loan agreement and note that provide for a fixed rate of interest plus additional contingent interest of the greater of 1.75 percent of the gross receipts or $300 per acre from the sale of portions of the property, qualifies as interest (Sec. 856, 86 Rev. Rul , C.B Interest; real estate assets ; hypothecation loans. An otherwise qualifying real estate investment trust makes nonrecourse hypothecation loans to developers of commercial real estate. The loans are secured by first mortgage notes on commercial real property owned by third parties that are assigned to the trust. Until maturity of the hypothecation loans, the trust collects all payments on the mortgage notes, retains interest due from the hypothecation borrower, and remits the balance to such borrower. The interest received by the trust meets the requirements of section 856(c)(3)(B), and the hypothecation loans held by the trust are real estate assets (Sec. 856, 86 Rev. Rul , C.B Interest; unequal rates on joint loan. A real estate investment trust issued a joint mortgage loan commitment at a fixed interest rate of 9 percent under an agreement providing for 10 percent interest on the trust s portion of the loan and 8 percent on the other unrelated lender s portion. The interest on the trust s portion of the joint loan qualifies as interest provided the unequal rates are attributable to the lenders differing costs of acquiring funds. However, if fund acquisition costs are the same for both and unequal rates are due to the trust s locating and originating the loan, the amount in excess of 9 percent received by the trust does not qualify as interest (Sec. 856, 86 Rev. Rul , C.B Interest; wrap-around mortgage loan. The portion of payments received by a real estate investment trust from a borrower on a wrap-around mortgage loan and paid by the trust on the senior obligation are considered made on behalf of the borrower; the portion attributable to interest on the amount of cash advanced by the trust is includable in the trust s gross income and constitutes interest (Sec. 856, 86 Rev. Rul , C.B Interest on obligations of cooperative housing corporation. For purposes of the gross income test, interest received by a real estate investment trust on notes secured by stock in a cooperative housing corporation qualifies as interest on obligations secured by mortgages on interests in real property (Sec. 856, 86 Rev. Rul , C.B Interest on unsecured obligations; cash items. Interest received on unsecured obligations of the Federal National Mortgage Association, Federal Home Loan Banks, and Federal Land Banks does not qualify as interest on real estate mortgages under section 856(c)(3)(B); Bankers Acceptances do not qualify as cash items under section 856(c)(5)(A) , (Secs. 856, 7701; 86 Rev. Rul , C.B Investment in certificates of deposit. Certificates of deposit held by a regulated investment company or a real estate investment trust as short term investments are cash items , (Secs. 851, 856; 86 Rev. Rul , C.B Investment in U.S. Postal Service obligations. Obligations of the U.S. Postal Service qualify as government securities under sections 851(b)(4) and 856(c)(5)(A) and obligations of a corporation which is an instrumentality of the U.S. under section 7701(a)(19)(C)(ii). Thus, investments therein by regulated investment companies, real estate investment trusts, and domestic building and loan associations will not affect their status. Also, investments by foreign central banks of issue may be treated as investments in obligations of an instrumentality under section 895, Such obligations also qualify as other security of the U.S. used in reg (c)(7)(iii)(a)(1) in defining book entry securities , , , , (Secs. 851, 856, 895, 1012, 7701; 86 Rev. Rul , C.B. 262.

3 Isolated sale of long-term mortgages. A qualified real estate investment trust that sells several long-term mortgages to an unrelated mortgage broker in a single isolated transaction to correct an imbalance in its loan portfolio is not considered to beholding property primarily for sale to business (Sec. 856, 86 Rev. Rul , C.B Isolated sales of mortgages. An otherwise qualified real estate investment trust that sold several long-term mortgages to two unrelated mortgage brokers in two separate transactions within one taxable year as part of a single plan to reduce the trust s long-term investments was not holding the mortgages primarily for sale to customers in the ordinary course of its trade or business in violation of section 856(a)(4) (Sec. 856, 86 Rev. Rul , C.B Management company; independent contractor; qualification. A management company, a wholly owned subsidiary of a real estate investment trust s adviser, that operates as a separate entity from the adviser with separate officers, employees. and books and records but has a nonemployee director who is a director-employee of the adviser is not precluded from qualifying as an independent contractor for the management of the trust s properties (Sec. 856, 86 Rev. Rul , C.B Management corporation also trust s investment adviser. The delegation of authority by the trustees of a REIT to a corporation, which already performs management services for the trust, to act as the trust s investment advisor under a separate agreement that may be terminated by the trustees or by the shareholders of the trust, does not violate the requirement for qualification as a REIT that the trust must be managed by one or more trustees. However, the corporation s status as investment advisor and fiduciary to the trust disqualifies it as an independent contractor under the management agreement, and rents received by the trust from property managed by the corporation do not qualify as rents from real property. Amplified to provide that a subsidiary, wholly owned by a corporate investment advisor to a REIT, operating as a separate entity with separate officers and employees and with separate books and records clearly reflecting its management activities with respect to the trust s property may qualify as an independent contractor. These rulings will not be applied to rents accrued or received prior to July, 1975, that are attributable to periods prior to such date, nor will they be applied to disqualify an entity or individual from serving as an independent contractor for purposes of section 856 prior to such date. Rev. Rul superseded , (Secs. 856, 7805; 86 Rev. Rul , C.B. 198; Rev. Rul , C.B Management corporation owned by trustee; independent contractor. A management corporation, the sole stockholder of which is both a trustee owning less than 10 percent of the shares of beneficial interest in a real estate investment trust and a salaried employee of the trust, is not precluded by the relationship of its sole stockholder to the trust from qualifying as an independent contractor managing the trust s property (Sec. 856, 86 Rev. Rul , C.B Management rights delegated to advisory company. The trustees of a real estate investment trust did not violate the centralization of management and continuing exclusive authority requirements by delegating their authority to an advisory company to make loan commitments and investments within guidelines set forth in the declaration of trust , (Secs. 856, 7701; 86 Rev. Rul , C.B Management rights granted shareholders. The granting of rights to shareholders of a real estate investment trust to approve or refuse an increase in the rate of compensation of the trust advisers, and to approve or refuse a merger, sale, or other reorganization of the trust does not violate the requirement that the trust be managed by one or more trustees (Sec. 856, 86 Rev. Rul , C.B Mortgage backed certificates; mortgage pool. Tax consequences associated with purchases by real estate investment trusts of straight pass-through or fully-modified pass-through mortgage backed certificates which are guaranteed by the Government National Mortgage Association and issued by savings and loan associations, engaged in the financing of residential mortgages, against a pool of mortgages insured by Federal Housing Administration, Farmers Home Administration or are insured and guaranteed by the Veterans Administration. Modified by Rev. Rul , , , 1.501(a)-1, , , , , (Secs. 61, 162, 212, 501, 671, 856, 1232, 7701; 86 Rev. Rul , C.B. 6; Rev. Rul , C.B Mortgage-backed certificates; residential mortgage pool. Tax consequences associated with straight pass-though mortgagebacked certificates, representing undivided interests in a pool of residential mortgage loans, sold to building and loan associations, real estate in vestment trusts, and individuals are explained , , , , , , , (Secs. 61; 162, 212, 671, 856, 1232, 7701; 86 Rev. Rul , C.B Mortgage-backed certificates; residential mortgage pools. Tax consequences associated with straight pass-through mortgage-backed certificates, representing undivided interests in a pool of residential mortgage loans created by the Federal National Mortgage Association and sold to investors are explained. Rev. Ruls and clarified , , , , , , , , , A. (Secs. 61, 162, 171, 212, 593, 671, 856, 1232, 1232A, 7701; 86 Rev. Rul , C.B Mortgage by Illinois land trust. A real estate investment trust s income from a construction loan secured by a first mortgage on real property that was the only asset of an Illinois land trust, whose sole beneficiary also assigned its interest in the land trust to simplify foreclosure if default occured, constitutes interest on obligations secured by mortages under section 856(c)(3)(B) and the loan constitutes a real estate asset under section 856(c)(5)(A), even though the beneficial interest assigned is personal property under Illinois law. No apportionment is required of either the interest or assets under the provisions of section (Secs. 856, 86 Rev. Rul , C.B Real estate investment trust Mortgagee-in-possession; construction project sold. A real estate investment trust that made a loan to a construction company to finance a low-rent housing project to be sold to a local housing authority, took possession to protect its investment when the company was unable to complete construction, and sold the completed project to the housing authority on behalf of the construction company, receiving no income from the property while it was mortgagee-in-possession, did not hold property primarily for sale to business in violation of section 856(a)(4) and is not disqualified as a real estate investment trust (Sec. 856, 86 Rev. Rul , C.B Notes secured by real property; mobile home unit. Mobile home units permanently installed in a planned community are real property within the meaning of section 856, and notes of purchasers are considered obligations secured by mortgages on real property or on interests in real property (Sec. 856, 86 Rev. Rul , C.B Options held by bank on joint loans. A real estate investment trust making conventional residential mortgage loans in cooperation with a commercial bank, pursuant to an agreement under which the bank holds the junior notes for the REIT s part of the joint loans and has the option to purchase them at any time for book value, is not considered to hold property primarily for sale to business by reason of the existence or exercise of the options (Sec. 856, 86 Rev. Rul , C.B Ownership test; qualified pension and profit-sharing trusts. Pension and profit-sharing trusts, which qualify under sections 401(a) and 501(a), are persons for the purposes of the one hundred persons requirement of section 856(a)(5) relating to the definition of a real estate investment trust (Sec. 856, 86 Rev. Rul. 65 3, C.B Qualification; condominium units; voting membership. A real estate investment trust s voting membership in a council of condominium unit owners does not preclude condominium units, acquired by the REIT through foreclosure, from qualifying as real estate assets and interests in real property (Sec. 856, 86 Rev. Rul , C.B Qualification; corporate reorganization. An unincorporated trust formed pursuant to a corporate reorganization under section 368(a)(1)(F) does not qualify as a real estate investment trust in the taxable year of the reorganization (Sec. 856, 86 Rev. Rul , C.B Qualification; Government securities defined. The securities of the Federal Housing Administration, Federal National Mortgage Association, Federal Home Loan Bank, Federal Land Bank, Federal Intermediate Credit Banks, Banks for Cooperatives, and Public Housing Administration are Government securities within the meaning of section (Sec. 856, 86 Rev. Rul , (Part 1) C.B Qualification; investment in air rights. Air rights over real property are considered interest in real property and real estate assets for purposes of qualifying a trust as a real estate investment trust. Any gain from the sale or disposition of the air rights is gain from the sale or other disposition of an interest in real property and any income derived from rental of the air rights is gross income derived from an interest in real property (Sec. 856, 86 Rev. Rul , C.B Qualification; management relation to corporate partner. A real estate investment trust entered into a partnership with an unrelated corporation for the purpose of constructing apartment buildings and holding them for investment. A management company was hired by the partnership in an arms-length transaction to manage the

4 buildings. The corporate partner is the wholly owned subsidiary of a corporation that substantially owns the management company. Held, the trust s income from the partnership is not disqualified as rents from real property by reason of the relationship between the corporate partner and the management company (Sec. 856, 86 Rev. Rul , C.B Qualification; microwave transmission facility. To determine qualification as a real estate investment trust, a trust that made mortgage loans for the construction of microwave transmission systems may include as real estate assets the building and its heating and air conditioning system, transmitting and receiving towers, and the chain link fence surrounding the site, but may not include the antennae, waveguides, prewired modular racks, or the transmitting, receiving, or multiplex equipment (Sec. 856, 86 Rev. Rul , C.B Qualification; mortgage interests in total energy systems. For the purpose of qualifying a trust as a real estate investment trust, interests in mortgages covering both a total energy system and the building it serves, whether installed within or attached to the building or housed separately, and an undivided 50 percent interest in a mortgage on a shopping center and its total energy system, qualify as real estate assets within the meaning of section 856(c)(6)(B); however, a mortgage interest covering the total energy system only does not qualify (Sec. 856, 86 Rev. Rul , C.B Qualification; mortgage originated by trust. Interest income derived by a trust or association from mortgages it originates and holds as investments constitutes interest on obligations secured by mortgages within the meaning of section 856(c)(3)(B). (Sec. 856, 86 Rev. Rul , C.B Qualification; property interests outside U.S. Foreign real estate acquired by a real estate investment trust with foreign funds is real property and security interests in foreign real property that are legally equivalent to mortgages or deeds of trust in the U.S. are mortgages on real property (Sec. 856, 86 Rev. Rul , C.B Qualification; repurchase agreements. A discussion sets forth the treatment by a real estate investment trust of investments in short-term repurchase agreements, under which the trust purchases U.S. Treasury obligations or other negotiable obligations from a bank agreeing to resell them to the bank on a fixed date at the purchase price plus the current rate of interest for such obligations, while assuming no benefits and risking no losses from changes in the market value or interest rate of the obligations (Sec. 856, 86 Rev. Rul , C.B Qualification; second class of shares of beneficial interest issued. The issuance of a second class of shares of beneficial interest that gives the beneficial owners a preference as to dividends and a preference on liquidation does not in and of itself prevent an unincorporated trust from continuing to qualify as a real estate investment trust (Sec. 856, 86 Rev. Rul , C.B Qualification; share option plan. The adoption by a real estate investment trust of a share option plan and the granting of options thereunder providing for the sale of its shares of beneficial interest to its employees will not in and of itself impair or adversely affect the qualification of the trust. Options granted under the plan and the beneficial shares subsequently issued upon exercise are property transferred in connection with the performance of services under section (Secs. 83, 856; 86 Rev. Rul , C.B Qualification; shareholders empowered with certain rights. An unincorporated trust will not fail to qualify as a real estate investment trust merely because the trust instrument provides (1) that the trust may be amended, altered, or terminated by affirmative action of the holders of three-fourths of the outstanding shares of the trust, (2) that any or all of the trustees may be removed, and new trustees elected, by affirmative vote of the holders of three-fourths of the outstanding shares of the trust, and (3) that the holders of one-fourth of the shares of the trust may require a trustee or other officer of the trust to call a shareholders meeting for the purpose of considering the amendment, alteration, termination of the trust, or the removal of trustees (Sec. 856, 86 Rev. Rul , C.B Qualification; two classes of shares of beneficial interest issued. The issuance of two classes of shares of beneficial interest designated as income shares and capital shares, does not prevent an unincorporated trust from continuing to qualify as a real estate investment trust (Sec. 856, 86 Rev. Rul , C.B Qualification; unincorporated trust; leased railroad property. In determining whether an unincorporated trust qualifies as a real estate investment trust, leased properties which include all railroad land and improvements or other inherently permanent structures situated thereon which may be under, along, or adjacent to certain railroad lines, including trackage, roadbed, buildings, bridges and tunnels owned by the trust are real estate assets within the meaning of section 856(c)(6)(B) (Sec. 856, 86 Rev. Rul , C.B Qualifications; 100 or more insured associations; participants in trust. For the purpose of determining whether an urban renewal investment trust, formed under the provisions of section 901(d) of the Housing Act of 1961 by several federally insured savings and loan associations, may qualify as a real estate investment trust, the phrase 100 or more persons as used in section 856(a)(5), requires that 100 or more insured associations participate in the trust (Sec. 856, 86 Rev. Rul , C.B Refund and interest; reorganization. Where a real estate investment trust obtained the right to the refund of Federal income taxes from a building corporation pursuant to a reorganization, the refund is not taxable income; however, interest received in conjunction with the refund is taxable income (Sec. 857, 86 Rev. Rul , C.B Rents; based on fixed percentage of tenant s sales. Rents received by a real estate investment trust based on a percentage of a tenant s gross sales, but excluding from gross sales returns of merchandise, exchange of merchandise between stores of the tenant, sales of used fixtures, and sales and excise taxes, qualify as rents from real property (Sec. 856, 86 Rev. Rul , C.B Rents; based on fixed rent pins percentage of gross sales. A real estate investment trust that enters into leases with tenants of its shopping center, providing for an annual fixed rental payable in equal monthly installments and percentage rentals equal to an amount, if my, by which a certain fixed percentage of a tenant s gross sales for each lease-quarter-year exceeds the fixed monthly installments for such period, may treat the rental payments as rents from real property (Sec. 856, 86 Rev. Rul , C.B Rents; based on tenant s net profits. Rents based on a percentage of a tenant s net profits will not adversely affect the status of a real estate investment trust if at least 90 percent of its gross income is derived from fixed rentals from other tenants (Sec. 856, 86 Rev. Rul , C.B Rents; building sold; concurrent lease of land. Amounts received for leased land by an unincorporated trust (otherwise qualifying as a real estate investment trust) that sold a building and concurrently leased the land are rents from real property (Sec. 856, 86 Rev. Rul , C.B Rents; electric power furnished. Income received by a real estate investment trust from the rental of real property of which the trust and an unrelated corporation are coowners will not be disqualified as rents from real property by reason of the corporation s distribution of electricity to the tenants and retention of the entire proceeds (Sec. 856, 86 Rev. Rul , C.B Rents; electric power furnished. Tenants rent payments received by a real estate investment trust under fixed yearly space leases that provide for tenants proportionate cost, including escalator clause adjustments, of electric power supplied by a public utility company, through facilities it or independent contractors maintain, qualify as rents from real property under section 856(d)(3) (Sec. 856, 86 Rev. Rul , C.B Rents; escalator provision. Amounts received by a real estate investment trust under the terms of a lease which has an escalator provision, protecting the trust against increases caused by inflation or other circumstances and insuring a fair return on its investment, qualify as rents from real property where the arrangement conforms with normal business practices and is not, in reality, used as a means of basing the rent on income or profits (Sec. 856, 86 Rev. Rul , (Part 1) C.B Rents; independent contractor as manager and borrower. Interest received by an unincorporated real estate investment trust from a mortgage loan made to a corporation s subsidiary that also serves as an independent contractor to manage properties in which the trust has an interest is income within the meaning of section 856(d)(3) and, therefore, the rents received from the managed properties do not qualify as rents from real property (Sec. 856, 86 Rev. Rul , C.B Rents; independent contractor as manager and tenant. Amounts received from tenants of the property managed for an unincorporated trust by a real estate management company will not fail to qualify as rents from real property solely because the management company is a tenant in the building of the trust. Rev. Rul superseded. (Sec. 856, 86 Rev. Rul , C.B Rents; independent contractor as operator or manager of trust property. Amounts received by a trust from tenants of property managed or operated by an independent contractor will not qualify as rents from real property where the trust receives any amount directly or

5 indirectly from the independent contractor for the exploitation of the trust properties (Sec. 856, 86 Rev. Rul , C.B Rents; leased mineral property. Payments received under a lease of mineral bearing real properties owned, in whole or in part, in fee by a real estate trust which are measured primarily by quantities of the minerals periodically mined are royalty payments and do not qualify as rents from real property. Further, the trust s interest in the real properties are mineral royalty interests and do not qualify as real estate assets (Sec. 856, 86 Rev. Rul , (Part 1) C.B Rents; payment for subordination agreement. The portion of the net proceeds received by a real estate investment trust for subordinating its fee interest to a mortgage obtained by the tenant, who owns the improvements and is liable for repayment of the mortgage, to retire an existing mortgage and construct additional improvements qualifies as rents from real property (Sec. 856, 86 Rev. Rul , C.B Rents; premises subleased underprofit-sharing arrangement. Where an unincorporated trust leases premises under terms providing for the payment of a fixed percentage of gross sales or receipts on any part of the leased premises and the tenant subleases part of the premises under a profit-sharing arrangement, payments from the tenant to the trust qualify for treatment as rents from real property (Sec Rev. Rul , C.B Rents; real estate assets; limited partnership. An unincorporated trust s interest in the income-producing real estate owned by a partnership in which the trust is a limited partner is an interest inrealestate assets. The trust s share of the partnership s gross income from such assets is considered rents from real property (Sec. 856, 86 Rev. Rul , C.B Rents; real property taxes paid by lessee. The State and local real property taxes on an apartment complex leased from a real estate investment trust, which are paid by the lessee pursuant to the lease agreement, qualify as rents from real property (Sec. 856, 86 Rev. Rul , C.B Rents; trustees as directors of corporate tenant. Payments by a corporate tenant to a real estate investment trust, where neither the corporation or trust nor their shareholders actually or constructively own 10 percent or more of the shares of stock of the other, are rents from real property even though some of the trustees of the trust are also directors of the corporate tenant (Sec. 856, 86 Rev. Rul , C.B Rents; unrelated coowner as manager. A specified annual payment (accumulated if not paid) received by a real estate investment trust out of the net rental income from real property it coowns with an unrelated corporation, under an agreement that the corporation manage the property, receive no management fee, but retain the net income that exceeds the payment to the trust, does rents from real property. not qualify as (Sec. 856, 86 Rev. Rul , C.B Reorganization; spin-off; active business requirement. The active business requirement is not satisfied by a trust, qualifying as an association taxable as a corporation, that retains its real estate leasing business, the properties being managed and operated by an independent contractor, after it spins-off its real estate, held primarily for sale to customers, to a newly formed corporation and distributes the stock to its beneficiaries and converts into a real estate investment trust. Accordingly, the transaction is not a section 368(a)(1)(D) reorganization and the stock distribution is taxable to the beneficiaries , , (Secs. 355, 368, 856; 86 Rev. Rul , C.B Reporting requirements for REMICS and other issuers of collateralized debt obligations. New temporary regulations concerning reporting requirements that will be imposed on REMICS and other issuers of collateralized debt obligation will soon be issued. These regulations will require that REMICS and certain other issuers file new Form 8811 with the Service by July 31, Notice 89-72, C.B Sale of construction note and mortgage. A real estate investment trust that makes a construction loan and, at the completion of construction and pursuant to an agreement with the borrower and the permanent mortgagee, assigns the borrower s note and mortgagee to the permanent mortgage upon its payment of the outstanding principal and interest is not holding property primarily for sale to customers in the ordinary course of its trade or business (Sec. 856, 86 Rev. Rul , C.B Sale of mortgages under recourse agreement. A real estate investment trust is not holding property primarily for sale to its customers within the meaning of section 856(a)(4) by purchasing lot buyers mortgage notes from real estate developer under a recourse agreement that the developer will repurchase the notes or assume the mortgagor obligations on lot trade-ins, deedbacks, or note defaults whether or not a repurchase occurs (Sec. 856, 86 Rev. Rul , C.B Sales of mortgages. A real estate in vestment trust that, to protect its investment in a construction loan to a builder of town houses, made mortgage loans to purchasers for whom the builder could not arrange financing and immediately sold them to investors at no profit or premium was not holding the mortgages primarily for sale in the ordinary course of its business (Sec. 856, 86 Rev. Rul , C.B Short taxable year; quarters. In the case of short taxable year, the phrase at the close of each quarter of the taxable year in sections 851(b)(4) and 856(c)(5) refers to quarterly periods that end, to the extent possible, on the same dates as the quarters of a 12-month year, even though the use of 3-month quarters may result in one quarter of less than three months , (Secs. 851, 856; 86 Rev. Rul , C.B Small Business Administration guaranty agreements; debentures. Guaranty agreements issued by the Small Business Administration (SBA) evidencing ownership of Small Business Investment Company debentures sold to investors by the SBA and held by it as bailee are Government securities and obligations , , , , (Secs. 61, 851, 856, 895, 7701; 86 Rev. Rul , C.B Taxable income increased by change in accounting method. The portion of the net adjustment required to be included in a real estate investment trust s taxable income for the taxable year in which it changes its method of accounting is real estate investment trust taxable income for the taxable year of change. The remainder of the net adjustment will be included in the real estate investment trust taxable income ratably over the following nine years. Rev. Rul modified (Sec. 857, 86 Rev. Rul , C.B Taxable income increased by change in accounting method. Where the taxable income of a real estate investment trust has been increased as a result of the trust changing from the cash to the accrual method of accounting, the increase constitutes real estate investment trust taxable income and must be taken into consideration for the purpose of determining whether the deduction for dividends paid during the taxable year equals or exceeds ninety percent of its real estate investment trust taxable income for the taxable year. Modified by Rev. Rul (Sec. 857, 86 Rev. Rul , C.B Trustees; construction on trust property. Trustees may contract for the construction of an office building on land owned by a trust without adversely affecting its qualification as a real estate investment trust (a)-1, (Secs. 263, 856; 86 Rev. Rul , C.B Trustees; relationship with advisory organization. A trust which otherwise qualifies as a real estate investment trust will not be disqualified solely because one of its trustees is concurrently a stockholder, officer, or employee of an organization which renders only legal or investment advisory services to the trustee about the trust property (Sec. 856, 86 Rev. Rul , C.B Trustees; relationship with independent contractor. A trustee of a real estate investment trust may bean officer or an employee of, or have a director indirect proprietary interest in, an independent contractor which confines its activities to the servicing of real estate mortgages owned by the trust (Sec. 856, 86 Rev. Rul , C.B Warrants; extension of expiration date. The unilateral extension of the expiration date of warrants issued by a qualified real estate investment trust or any other corporation has the effect of the grant of new warrants, and the issuer recognizes gain on the date the original unexercised warrants lapse. This holding shall not apply to warrants issued on or before April 24, 1972, or warrants issued pursuant to a binding contract under which the issuer was obligated on April 24, 1972, to issue the warrants. Rev. Rul amplified , , (Secs. 856, 1234, 7805; 86 Rev. Rul , C.B. 187.