IRS Rules That Interest In Money Market Fund Is Cash Item For REITs.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

ISSUE

If a real estate investment trust (REIT) holds shares in a money market fund, are those shares "cash items" for purposes of section 856(c)(4)(A) of the Internal Revenue Code?

FACTS

R has elected to be taxed as a REIT under sub chapter M of Chapter 1 of the Code. During the first quarter of its 2011 taxable year, R purchased shares of F, a money market fund. F is subject to regulation under the Investment Company Act of 1940, 15 U.S.C. 80a-1, et seq. (1940 Act), and complies with the requirements of Rule 2a-7 under the 1940 Act, as amended in 2010. At the close of the first quarter of its 2011 taxable year, 20 percent of the value of R's total assets for purposes of section 856(c)(4) was represented by securities that are neither Government securities, real estate assets within the meaning of section 856(c)(5)(B), nor cash or cash items; 7 percent was represented by the shares in F; and 73 percent was represented by as sets that are real estate assets.

LAW AND ANALYSIS

Section 856(c)(4)(A) provides that at the close of each quarter of its taxable year, at least 75 percent of the value of a REIT's total assets must be represented by real estate assets, cash and cash items (including receivables), and Government securities (the "75 percent value test"). Section 856(c)(4)(B) provides, in relevant part, that at the end of each quarter of a taxable yea r, not more than 25 percent of the value of a REIT's total assets may be represented by securities (other than those includible under section 856(c)(4)(A)). Section 856(c)(4)(B) further provides (with certain exceptions) that not more than 5 percent of the REIT's total assets may be represented by securities of any one issuer, and that a REIT may not hold securities possessing more than 10 percent of the total voting power or value of the outstanding securities of a single issuer. The term "cash and cash items" is not defined in the Code. Section 856(c)(5)(F) provide s that all terms that are not defined in section 856(c)(5) shall have the same meaning as when used in the 1940 Act.

The term "cash item" is not defined in either the 1940 Act or the regulations under the 1940 Act. However, with respect to the issue addressed by this revenue ruling, the staff of the Division of Investment Management at the Securities and Exchange Commission (SEC) has issued a no-action letter that is directly on point. See Willkie Farr & Gallagher, SEC No-Action Letter, IM Ref. No. 2000 10 24 1124, File No. 132-3 (October 23, 2000), viewable at http://www.sec.gov/divisions/investment/noaction/2000/willkie-farrgallagher102300.pdf (hereinafter, "the SEC No-Action Letter"). The Division of Investment Management generally permits a third party to rely on no-action letters issued to other persons to the extent that the third party's facts and circumstances are substantially similar to those described i n the underlying request for the letter.¹

At issue in t he SEC No-Action Letter was whether an issuer:

The SEC No-Action Letter concluded that the SEC Division of Investment Management would not object if an issuer calculated the amount of its investment securities without including the money market fund shares. The SEC staff stated in the letter,

The conclusion reached in the SEC No-Action Letter is not inconsistent with the language of section 856(c)(4)(A) or its underlying legislative history.

HOLDINGS

R's shares in F are described in section 856(c)(4)(A), which includes "cash and cash items (including receivables)." R, therefore, satisfies the 75 percent value test under section 856(c)(4)(A). In addition, as an investment that is includible under subparagraph (A) of section 856(c)(4), R's shares in F are not treated as investments in securities for purposes of section 856(c)(4)(B).

The conclusions in this revenue ruling are predicated on provisions of nontax law applicable to money market funds. See Rev. Proc. 89-14, § 7.01(6), 1989-1 C.B. 814, 815.

DRAFTING INFORMATION

The principal author of this revenue ruling is Jonathan D. Silver of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Jonathan D. Silver at (202) 622-3930 (not a toll-free call).