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the other shops and stores, a specific (iii) The performing of repair or range and variety of goods and services maintenance described in paragraph with which to attract customers to the (e)(5)(i) of this section after property is shopping center. The trust may com- acquired that was deferred by the deplete construction of the bank: Pro- faulting party and that does not convided, That the bank and the other stitute renovation under paragraph buildings and improvements which the (e)(2) of this section. trust undertakes to complete, taken (6) Independent contractor required. If together as a unit, were more than 10 any construction takes place on the percent complete when default became foreclosure property more than 90 days imminent. If the trust chooses not to after the day on which such property construct the bank, no actual or esti- was acquired by the trust, such conmated construction costs attributable struction must be performed by an to the bank are to be taken into ac

independent contractor (as defined in count in applying the 10-percent test

section 856(d)(3) and $1.856-4(b)(5)(iii)) with respect to the other buildings and

from whom the trust does not derive or improvements in the shopping center.

receive any income. Otherwise, the For a third example, assume that a de

property will cease to be foreclosure faulting mortgagor had planned to con

property. struct two identical apartment build

(7) Failure to complete construction. ings, A and B, on the same tract of

Property will not cease to be foreland, that neither building is to pro

closure property solely because a trust vide substantial facilities or services to

which undertakes the completion of be used in connection with the other,

construction of a building or other imand that only building A was more

provement on the property that was than 10 percent complete when default

more than 10 percent complete when became imminent. The trust, in this

default became imminent does not case, may not complete building B. On

complete the construction. Thus, for the other hand, if the facts are the

example, if a trust continues construc

tion of a building that was 20 percent same except that pursuant to the plans of the defaulting mortgagor, one of the

complete when default became immi

nent, and the trust constructs an addibuildings is to contain the furnace and central air conditioning machinery for

tional 40 percent of the building and

then sells the property, the property both buildings A and B, the trust may

will not lose its status as foreclosure complete both buildings A and B: Provided, That, taken together as a unit,

property solely because the trust fails the two buildings meet the more-than

to complete construction of the build

ing. 10-percent test.

(f) Termination of 2-year grace period; (5) Repair and maintenance. Under this

use of foreclosure property in a trade or paragraph (e), “construction” does not

business (1) In general. Under section include

856(e)(4)(C), all real property (and any (1) The repair or maintenance of a

incidental personal property) for which building or other improvement (such as

a particular election has been made the replacement of worn or obsolete

(see paragraph (C)(1) of this section) furniture and appliances) to offset nor- shall cease to be foreclosure property mal wear and tear or obsolescence, and

on the first day (occurring more than the restoration of property required be- 90 days after the day on which the cause of damage from fire, storm, van- trust acquired the property) on which dalism or other casualty,

the property is used in a trade or busi(ii) The preparation of leased space ness conducted by the trust, other than for a new tenant which does not sub- a trade or business conducted by the stantially extend the useful life of the trust through an independent conbuilding or other improvement or sig- tractor from whom the trust itself does nificantly increase its value, even not derive or receive any income. (See though, in the case of commercial section 856(d)(3) for the definition of space, this preparation includes adapt- independent contractor.) ing the property to the conduct of a (2) Property held primarily for sale to different business, or

customers. For the purposes of section

856(e)(4)(C), foreclosure property held by the trust primarily for sale to customers in the ordinary course of a trade or business is considered to be property used in a trade or business conducted by the trust. Thus, if a trust holds foreclosure property (whether real property or personal property incident to real property) for sale to customers in the ordinary course of a trade or business more than 90 days after the day on which the trust acquired the real property, the trade or business of selling the property must be conducted by the trust through an independent contractor from whom the trust does not derive or receive any income. Otherwise, after such 90th day the property will cease to be foreclosure property.

(3) Change in use. Foreclosure property will not cease to be foreclosure property solely because the use of the property in a trade or business by the trust differs from the use to which the property was put by the person from whom it was acquired. Thus, for example, if a trust acquires a rental apartment building on foreclosure, the property will not cease to be foreclosure property solely because the trust converts the building to a condominium apartment building and, through an independent contractor from whom the trust derives no income, engages in the trade or business of selling the individual condominium units.

(g) Extension of 2-year grace period—(1) In general. A real estate investment trust may apply to the district director of the internal revenue district in which is located the principal place of business (or principal office or agency) of the trust for an extension of the 2year grace period. If the trust establishes to the satisfaction of the district director that an extension of the grace period is necessary for the orderly liquidation of the trust's interest in foreclosure property, or for an orderly renegotiation of a lease or leases of the property, the district director may extend the 2-year grace period. See section 856(e)(3) (as in effect with respect to the particular extension) for rules relating to the maximum length of an extension, and the number of extensions which may be granted. An extension of the grace period may be granted

by the district director either before or after the date on which the grace period, but for the extension, would expire. The extension shall be effective as of the date on which the grace period, but for the extension, would expire.

(2) Showing required. Generally, in order to establish the necessity of an extension, the trust must demonstrate that it has made good faith efforts to renegotiate leases with respect to, or dispose of, the foreclosure property. In certain cases, however, the trust may establish the necessity of an extension even though it has not made such efforts. For example, if the trust demonstrates that, for valid business reasons, construction of the foreclosure property could not be completed before the expiration of the grace period, the necessity of the extension could be established even though the trust had made no effort to sell the property. For another example, if the trust demonstrates that due to a depressed real estate market, it could not sell the foreclosure property before the expiration of the grace period except at a distress price, the necessity of an extension could be established even though the trust had made no effort to sell the property. The fact that property was acquired as foreclosure property prior to January 3, 1975 (the date of enactment of section 856(e)), generally will be considered as a factor (but not a controlling factor) which tends to establish that an extension of the grace period is necessary.

(3) Time for requesting an extension of the grace period. A request for an extension of the grace period must be filed with the appropriate district director more than 60 days before the day on which the grace period would otherwise expire. In the case of a grace period which would otherwise expire before August 6, 1976, a request for an extension will be considered to be timely filed if filed on or before June 7, 1976.

(4) Information required. The request for an extension of the grace period shall identify the property with respect to which the request is being made and shall also include the following information:

(i) The name, address, and taxpayer identification number of the trust,

(ii) The date the property was ac- tence is more than 30 days before the quired as foreclosure property by the date that the grace period (determined trust,

without regard to this subparagraph) (iii) The taxable year of the trust in expires. Moreover, this subparagraph which the property was acquired,

shall not operate to allow any period of (iv) If the trust has been previously

extension that is prohibited by the last granted an extension of the grace pe

sentence of section 856(e)(3) (as in efriod with respect to the property, a statement to that effect (which shall

fect with respect to the particular ex

tension). include the date on which the grace pe

(6) Extension of time for filing. If a real riod, as extended, expires) and a copy of the information which accompanied

estate investment trust fails to file the the request for the previous extension,

request for an extension of the grace (v) A statement of the reasons why period within the time provided in the grace period should be extended, paragraph (g)(3) of this section, then (vi) A description of any efforts made

the district director shall grant a reaby the trust after the acquisition of the

sonable extension of time for filing property to dispose of the property or such request, provided (i) it is estabto renegotiate any lease with respect lished to the satisfaction of the district to the property, and

director that there was reasonable (vii) A description of any other fac- cause for failure to file the request tors which tend to establish that an ex- within the prescribed time and (ii) a retension of the grace period is necessary quest for such extension is filed within for the orderly liquidation of the

such time as the district director contrust's interest in the property, or for siders reasonable under the ciran orderly renegotiation of a lease or

cumstances. leases of the property.

(7) Status of taxpayer. The reference The trust shall also furnish any addi

to "real estate investment trust" or tional information requested by the “trust” in this paragraph (g) shall be district director after the request for

considered to include a taxpayer that extension is filed.

is not a qualified real estate invest(5) Automatic ertension. If a real es

ment trust, if the taxpayer establishes tate investment trust files a request

to the satisfaction of the district direcfor an extension with the district director more than 60 days before the expi

tor that its failure to be a qualified

real estate investment trust for the ration of the grace period, the grace period shall be considered to be extended

taxable year was due to reasonable until the end of the 30th day after the

cause and not due to willful neglect. date on which the district director no

The principles of $1.856–7(c) and $1.856tifies the trust by certified mail sent to

8(d) (including the principles relating its last known address that the period to expert advice) shall apply for deterof extension requested by the trust is mining reasonable cause (and absence not granted. For further guidance re

of willful neglect) for this purpose. garding the definition of last known

(Sec. 856(d)(4) (90 Stat. 1750; 26 U.S.C. address, see $ 301.6212-2 of this chapter.

856(d)(4)); sec. 856(e)(5) (88 Stat. 2113; 26 In no event, however, shall the rule in

U.S.C. 856(e)(5)); sec. 856(f)(2) (90 Stat. 1751; 26 the preceding sentence extend the

U.S.C. (856(1)(2)); sec. 856(g)(2) (90 Stat. 1753; grace period beyond the expiration of 26 U.S.C. 856(g)(2)); sec. 858(a) (74 Stat. 1008; (i) the period of extension requested by 26 U.S.C. 858(a)); sec. 859(c) (90 Stat. 1743; 26 the trust, or (ii) the 1-year period fol- U.S.C. 859(c)); sec. 859(e) (90 Stat. 1744; 26 lowing the date that the grace period U.S.C. 859(e)); sec. 6001 (68A Stat. 731; 26 (but for the automatic extension) U.S.C. 6001); sec. 6011 (68A Stat. 732; 26 U.S.C. would expire. The date of the postmark

6011); sec. 6071 (68A Stat. 749, 26 U.S.C. 6071); on the sender's receipt is considered to

sec. 6091 (68A Stat. 752; 26 U.S.C. 6091); sec. be the date of the certified mail for

7805 (68A Stat. 917; 26 U.S.C. 7805), Internal

Revenue Code of 1954)) purposes of this subparagraph. This subparagraph does not apply, however, [T.D. 7767, 46 FR 11269, Feb. 6, 1981; 46 FR if the date of the notification by cer- 15263, Mar. 5, 1981, as amended by T.D. 8939, tified mail described in the first sen- 66 FR 2819, Jan. 12, 2001)

a

$ 1.856–7 Certain corporations, etc.,

that are considered to meet the

gross income requirements. (a) In general. A corporation, trust, or association which fails to meet the requirements of paragraph (2) or (3) of section 856(c), or of both such paragraphs, for any taxable year nevertheless is considered to have satisfied these requirements if the corporation, trust, or association meets the requirements of subparagraphs (A), (B), and (C) of section 856(c)(7) (relating to a schedule attached to the return, the absence of fraud, and reasonable cause).

(b) Contents of the schedule. The schedule required by subparagraph (A) of section 856(C)(7) must contain a breakdown, or listing of the total amount of gross income falling under each of the separate subparagraphs of section 856(c) (2) and (3). Thus, for example, the real estate investment trust, for purposes of listing its income from the sources described in section 856(c)(2), would list separately the total amount of dividends, the total amount of interest, the total amount of rents from real property, etc. The listing is not required to be on a lease-by-lease, loan-by-loan, or project-by-project basis, but the real estate investment trust must maintain adequate records on such a basis with which to substantiate each total amount listed in the schedule.

(c) Reasonable cause—(1) In general. The failure to meet the requirements of paragraph (2) or (3) of section 856(c) (or of both paragraphs) will be considered due to reasonable cause and not due to willful neglect if the real estate investment trust exercised ordinary business care and prudence in attempting to satisfy the requirements. Such care and prudence must be exercised at the time each transaction is entered into by the trust. However, even if the trust exercised ordinary business care and prudence in entering into a transaction, if the trust later determines that the transaction results in the receipt or accrual of nonqualified income and that the amounts of such nonqualified income, in the context of the trust's overall portfolio, reasonably can be expected to cause a source-of-income requirement to be failed, the

trust must use ordinary business care and prudence in an effort to renegotiate the terms of the transaction, dispose of property acquired or leased in the transaction, or alter other elements of its portfolio. In any case, failure to meet an income source requirement will be considered due to willful neglect and not due to reasonable cause if the failure is willful and the trust could have avoided such failure by taking actions not inconsistent with ordinary business care and prudence. For example, if the trust enters into

a lease knowing that it will produce nonqualified income which reasonably can be expected to cause a source-of-income requirement to be failed, the failure is due to willful neglect even if the trust has a legitimate business purpose for entering into the lease.

(2) Expert advice-(i) In general. The reasonable reliance on a reasoned, written opinion as to the characterization for purposes of section 856 of gross income to be derived (or being derived) from transaction generally constitutes “reasonable cause" if income from that transaction causes the trust to fail to meet the requirements of paragraph (2) or (3) of section 856(C) (or of both paragraphs). The absence of such a reasoned, written opinion with respect to a transaction does not, by itself, give rise to any inference that the failure to meet a percentage of income requirement was without reasonable cause. An opinion as to the character of income from a transaction includes an opinion pertaining to the use of a standard form of transaction or standard operating procedure in a case where such standard form or procedure is in fact used or followed.

(ii) If the opinion indicates that a portion of the income from a transaction will be nonqualifed income, the trust must still exercise ordinary business care and prudence with respect to the nonqualified income and determine that the amount of that income, in the context of its overall portfolio, reasonably cannot be expected to cause source-of-income requirement to be failed. Reliance on an opinion is not reasonable if the trust has reason to believe that the opinion is incorrect

а

(for example, because the trust withholds facts from the person rendering the opinion).

(iii) Reasoned written opinion. For purposes of this subparagraph (2), a written opinion means an opinion, in writing, rendered by a tax advisor (including house counsel) whose opinion would be relied on by a person exercising ordinary business care and prudence in the circumstances of the particular transaction. A written opinion is considered “reasoned" even if it reaches a conclusion which is subsequently determined to be incorrect, so long as the opinion is based on a full disclosure of the factual situation by the real estate investment trust and is addressed to the facts and law which the person rendering the opinion believes to be applicable. However, an opinion is not considered “reasoned" if it does nothing more than recite the facts and express a conclusion.

(d) Application of section 856(c)(7) to tarable years beginning before October 5, 1976. Pursuant to section 1608(b) of the Tax Reform Act of 1976, paragraph (7) of section 856(c) and this section apply to a taxable year of a real estate investment trust which begins before October 5, 1976, only if as the result of a determination occurring after October 4, 1976, the trust does not meet the requirements of paragraph (2) or (3) of section 856(c), or both paragraphs, as in effect for the taxable year. The requirement that the schedule described in subparagraph (A) of section 856(c)(7) be attached to the income tax return of a real estate investment trust in order for section 856(c)(7) to apply is not applicable to taxable years beginning before October 5, 1976. For purposes of section 1608(b) of the Tax Reform Act of 1976 and this paragraph, the rules relating to determinations prescribed in section 860(e) and $1.860–2(b)(1) (other than the second, third, and last sentences of $1.860–2(b)(1)(ii)) shall apply. However, a determination consisting of an agreement between the taxpayer and the district director (or other official to whom authority to sign the agreement is delegated) shall set forth the amount of gross income for the taxable year to which the determination applies, the amount of the 90 percent and 75 percent source-of-income

requirements for the taxable year to which the determination applies, and the amount by which the real estate investment trust failed to meet either or both of the requirements. The agreement shall also set forth the amount of tax for which the trust is liable pursuant to section 857(b)(5). The agreement shall also contain a finding as to whether the failure to meet the requirements of paragraph (2) or (3) of section 856(c) (or of both paragraphs) was due to reasonable cause and not due to willful neglect. (Sec. 856(d)(4) (90 Stat. 1750; 26 U.S.C. 856(d)(4)); sec. 856(e)(5) (88 Stat. 2113; 26 U.S.C. 856(e)(5)); sec. 856(f)(2) (90 Stat. 1751; 26 U.S.C. (856(1)(2)); sec. 856(g)(2) (90 Stat. 1753; 26 U.S.C. 856(g)(2)); sec. 858(a) (74 Stat. 1008; 26 U.S.C. 858(a)); sec. 859(C) (90 Stat. 1743; 26 U.S.C. 859(c)); sec. 859(e) (90 Stat. 1744; 26 U.S.C. 859(e)); sec. 6001 (68A Stat. 731; 26 U.S.C. 6001); sec. 6011 (68A Stat. 732; 26 U.S.C. 6011); sec. 6071 (68A Stat. 749, 26 U.S.C. 6071); sec. 6091 (68A Stat. 752; 26 U.S.C. 6091); sec. 7805 (68A Stat. 917; 26 U.S.C. 7805), Internal Revenue Code of 1954); sec. 860(e) (92 Stat. 2849, 26 U.S.C. 860(e)); sec. 860(g) (92 Stat. 2850, 26 U.S.C. 860(g))) (T.D. 7767, 46 FR 11274, Feb. 6, 1981, as amended by T.D. 7936, 49 FR 2106, Jan. 18, 1984)

$ 1.856-8 Revocation or termination of

election. (a) Revocation of an election to be a real estate investment trust. A corporation, trust, or association that has made an election under section 856(c)(1) to be a real estate investment trust may revoke the election for any taxable year after the first taxable year for which the election is effective. The revocation must be made by filing a statement with the district director for the internal revenue district in which the taxpayer maintains its principal place of business or principal office or agency. The statement must be filed on or before the 90th day after the first day of the first taxable year for which the revocation is to be effective. The statement must be signed by an official authorized to sign the income tax return of the taxpayer and must

(1) Contain the name, address, and taxpayer identification number of the taxpayer,

(2) Specify the taxable year for which the election was made, and

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