IRS Rules that REIT's Investment in Money Market Fund is "Cash or Cash Items"

The IRS has issued a ruling favorable to real estate investment trusts (“REITs”). In Revenue Ruling 2012-17, which appears in Internal Revenue Bulletin 2012-25, dated June 18, 2012, the IRS ruled that a REIT’s investment in a money market fund is an investment in “cash or cash items” for purposes of the “75% asset test” applicable to REITs under the Code.

Background
Among other requirements, a REIT must meet certain asset tests. At the close of each quarter of the REIT’s taxable year, at least 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items (including receivables) and Government securities (This is known as the “75% asset test”). In addition, other quarterly asset tests under section limit the REIT’s ownership of securities.

While the term “cash and cash items” is not defined in the Code, generally terms not specifically defined have the same meaning as when used in the Investment Company Act of 1940 (the “1940 Act”).

The Ruling
The Revenue Ruling concluded that shares held in a money market fund are cash items for purposes of the 75% asset test. The facts of the Ruling include the following:

During the first quarter of a REIT’s 2011 taxable year, its assets, by value consisted of:

• 20 percent: securities that were neither Government securities, real estate assets nor cash or cash items;
• 7 percent: shares in the money market fund; and
• 73 percent: real estate assets.

The taxpayer (REIT) requested a ruling by the IRS to determine how to classify the money market fund for purposes of the 75% test. Within the Ruling, the IRS noted that the term “cash item” is not defined in either the 1940 Act or its regulations. However, the IRS found that a no-action letter issued in 2000 by the Division of Investment referred to money market funds to be deemed essentially a cash item. Based on this no action letter, the IRS concluded that the REIT’s shares in the money market fund were “cash and cash items.” Therefore, the REIT in question satisfied the 75% asset test. Furthermore, since the shares were to be treated as “cash and cash items,” the shares were not investments in securities for purposes of the other quarterly asset tests that limit a REIT’s ownership of securities.

Should you have any questions regarding this recent Revenue Ruling or the 75% asset test, please contact your Marcum Tax Professional.