NAREIT Forwards to Treasury Draft Guidance on REITs' Treatment of Foreign Currency Issues

Respectfully submitted,

 

 

Tony Edwards

 

Senior Vice President &

 

General Counsel

 

NAREIT

 

Washington, DC

 

 

.01 To qualify as a REIT, an entity must derive (i) at least 95 percent of its gross income for the taxable year from sources listed in § 856(c)(2) and (ii) at least 75 percent of its gross income for the taxable year from sources listed in § 856(c)(3). In addition, to qualify as a REIT, (i) at least 75% of the value of an entity's total assets at the close of each quarter must be represented by real estate assets, cash and cash items (including receivables), and Government securities, and (ii) the entity's assets must meet the diversification tests under § 856(c)(4)(B) at the close of each quarter.

.02 A REIT may acquire real property located outside the United States or may acquire a debt instrument that is denominated in a foreign currency.

.03 In Rev. Rul. 74-191, the Internal Revenue Service concluded that the term "real estate assets" as defined by § 856(c)(5)(B) includes land and improvements thereon located outside the United States and security interests that, under the laws of the jurisdiction in which the property is located is the legal equivalent of a mortgage or deed of trust in the United States.

.04 In Rev. Rul. 64-247, the Internal Revenue Service treated excess management fees recovered as the result of legal action against former officers and directors of a regulated investment company (RIC) as qualifying income for RIC purposes, notwithstanding that these types of income were not enumerated in § 851(b)(2). In Rev. Rul. 74-248, the Internal Revenue Service reached a similar result in the RIC context with respect to amounts received from a settlement related to litigation with the investment advisor of a predecessor of the RIC, notwithstanding that these types of income were not enumerated in § 851(b)(2).

.05 Section 985(a) provides in general that all determinations for federal income tax purposes shall be made in the taxpayer's functional currency. Section 985(b)(1)(B) defines functional currency as the dollar except in the case of a qualified business unit (QBU), in which case the functional currency is "the currency of the economic environment in which a significant part of such unit's activities are conducted and which is used by such unit in keeping its books and records." Section 989(a) defines QBU as any separate and clearly identified unit of a trade or business of a taxpayer that maintains separate books and records. Section 1.985-1(b)(1)(iii) states that except as otherwise provided by ruling or administrative pronouncement,

denominated in a foreign currency, or (3) becomes an obligor under a debt instrument that is denominated in a foreign currency.

 

.01 The Internal Revenue Service will treat Section 987 Gains as qualifying income under § 856(c)(2)(H) and -(3)(H) provided the QBU meets the asset test under § 856(c)(4)(A) for each quarter that the REIT owns the QBU.

.02 The Internal Revenue Service will treat gains recognized under § 988 attributable to the acquisition of a debt instrument that is secured by real property (under the laws of the jurisdiction in which the property is located is the legal equivalent of a mortgage or deed of trust in the United States) as qualifying income under § 856(c)(2)(D) and (3)(C).

.03 The Internal Revenue Service will treat gains recognized under § 988 attributable to the acquisition of a debt instrument that is not secured by real property as qualifying income under § 856(c)(2)(D) only.

.04 The Internal Revenue Service will treat gains recognized under § 988 attributable to a REIT becoming an obligor under a debt instrument as qualifying income under § 856(c)(2)(H) and -(3)(H), provided that the indebtedness was incurred by the REIT to acquire or carry real estate assets.