CONDEMNATION OF THREE PROPERTIES IN PLAN TO WIDEN ROAD WILL BE ONE SALE FOR PURPOSES OF REIT PROVISIONS.

Date: March 31, 1986

Refer Reply to: CC:IND:I:3:2 - 5H2204

LEGEND:

This is in response to your letter of August 15, 1985, submitted by your authorized representative. You inquire about the status of the condemnation of certain parcels of real estate owned by X through Y for purposes of the real estate investment trust (REIT) provisions found in sections 856 through 859 of the Internal Revenue Code.

It is represented that X qualifies as a real estate investment trust under the provisions of sections 856 through 859 of the Code.

X has a partnership interest in each of two partnerships that comprise Y. Y owns C, a shopping center, that abuts state road A and interstate road B. Because of traffic congestion, the Department of Transportation of the State planned to widen A. Y owned two parcels of real estate and leased a third parcel that were condemned by the State as part of the plan to widen A.

The condemnation proceedings for the three parcels were initiated and completed separately:

(1) The condemnation proceeding with respect to one parcel was initiated on October 26, 1984; the order for taking was entered on January 9, 1985; and the funds deposited for payment were released to Y in February, 1985.

(2) The condemnation proceeding with respect to another parcel was initiated on March 21, 1985; the order for taking was entered on May 14, 1985, and the funds were released to Y on August 13, 1985.

(3) The condemnation proceeding with respect to the third parcel was initiated on August 14, 1985; the owner of the parcel that Y leased entered into a settlement agreement prior to entry of an order for taking; the owner received payment for the exchange of the leased property on May 28, 1985, (Y has not yet received payment for its leasehold interest).

You request a ruling that (1) a condemnation does not constitute a "sale" within the meaning of section 857(b)(6)(C)(iii) of the Code, or (2) if a condemnation does constitute a sale then the three condemnations are one sale within the intendment of section 857(b)(6)(D)(vi) of the Code.

In general, the REIT provisions of the Code tax only the undistributed income and capital gains on primarily passive investments in real estate and real estate mortgages. Distributed income is taxed only once in the hands of the shareowners of the REIT. There are status and income requirements that must be met to qualify for REIT tax treatment.

A tax is imposed if the REIT violates its primarily passive investment purpose. Section 857(b)(6) of the Code provides, in general, that a REIT shall be subject to a 100 percent tax on the net income derived from a "prohibited transaction." A prohibited transaction is defined as a sale or other disposition of "dealer property" described in section 1221(1) (that is not foreclosure property as defined in section 856(c)(1) of the Code).

Whether the sale of property will be regarded as a sale or other disposition of "dealer property" is a factual determination. Consequently, whether a sale by a REIT constitutes a prohibited transaction is a factual question. However, section 857(b)(6)(C) of the Code provides that a sale that meets the four conditions set forth in sections 857(b)(6)(c)(i) through (iv) shall not constitute a prohibited transaction.

The present inquiry is concerned with satisfying the conditions set forth in section 857(b)(6)(c)(iii) of the Code. Section 857(b)(6)(C)(iii) requires that a REIT not make more than five sales of property (other than foreclosure property) during the taxable year. Section 857(b)(6)(D)(vi) of the Code provides that in applying section 857(b)(6)(C) the sale of more than one property to one buyer as part of one transaction constitutes one sale.

The courts and the Internal Revenue Service have consistently held that a condemnation constitutes a sale or exchange. Hawaiian Gas Products v. Commissioner, 126 F.2d 4 (CA 9 1942) (condemnation constitutes a sale or exchange such that taxpayer's loss is limited by capital loss provisions of the Code); Rev. Rul. 59-108, 1959-1 C.B. 72 (condemnation constitutes a sale or exchange for purposes of a complete liquidation under section 337 of the Code even though payment was not made during the 12-month period); Wood-Harmon Corp. v. United States, 206 F. Supp 773 (1962), aff'd on another issue, 311 F.2d 918 (CA 2 1963) (condemnation is a sale which occurred prior to adoption of plan of complete liquidation); Place Realty Corp. v. Commissioner, T.C.M. 1962-144, (condemnation prior to plan of liquidation results in gain from sale or exchange).

Although the above case law and revenue ruling do not address whether a condemnation of REIT property constitutes a sale or exchange, a principle of statutory construction requires that the same term be treated consistently throughout a statute. See United States v. Montgomery Ward & Co., 150 F.2d 369 (1945), vacated on other grounds, 326 U.S. 690 (1945) (it is possible Congress might have given a different meaning to the same word in the same statute or in statutes which are in pari materia, but a rather heavy load rests on him who would give different meanings to the same word or the same phrase when used a plurality of times in the same Act or in Acts which are in pari materia with each other); and Bankers Trust Co. et al v. Bowers, 295 F. 89 (1923) (construction should be had with reference both to the history of the legislation and to other sections of the law with which it is in pari materia).

Accordingly, a condemnation of REIT property constitutes a sale or exchange. A REIT will not be characterized as deriving income from a "prohibited transaction" for purposes of the imposition of the 100 percent tax as long as it does not make more than five sales of property nor have more than five condemnations of property, or any combination thereof, during a taxable year. However, a sale (or condemnation) of more than one property to one buyer as part of one transaction constitutes one sale.

The State condemned the three parcels as part of a plan to widen A. Accordingly, the condemnation of more than one property by one "buyer" (the State) as part of one transaction constitutes one sale as provided in section 857(b)(6)(D)(vi) of the Code. Therefore, the condemnations by State of X's parcels of real estate (owned through Y) constitute only one of the five permissible sales for purposes of section 857(b)(6)(C) of the Code.

No opinion is expressed as to the federal income tax consequences of the transaction described herein except as specifically ruled upon above.

This ruling is addressed solely to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this ruling should be attached to X's tax return for the taxable year in which the transaction covered by this ruling is consummated. A copy is enclosed for that purpose.

In accordance with the power of attorney submitted, a copy of this letter is being sent to your authorized representative.

                                   Sincerely yours,