able to shareholders on March 31, 1955, as a dividend paid by it during the taxable year 1954. On March 31, 1955, the Y Company distributed the entire amount of the dividend of $65,000 declared on March 5, 1955. The election under section 855 (a) is valid only to the extent of $15,000, the amount of the undistributed earnings and profits for 1954 ($100,000 earnings and profits less $85,000 distributed during 1954). The remainder ($50,000) of the $65,000 dividend paid on March 31, 1955, could not be the subject of an election, and such amount will be regarded as a distribution by the Y Company out of earnings and profits for the taxable year 1955. Assuming that the only other distribution by the Y Company during 1955 was a distribution of $75,000 paid as a dividend on October 31, 1955, the total amount of the distribution of $65,000 paid on March 31, 1955, is to be treated by the shareholders as taxable dividends for the taxable year in which such dividend is received. The Y Company will treat the amount of $15,000 as a distribution of the earnings or profits of the company for the taxable year 1954, and the remaining $50,000 as a distribution of the earnings or profits for the year 1955. The distribution of $75,000 on October 31, 1955, is, of course, a taxable dividend out of the earnings and profits for the year 1955.

(e) Notice to shareholders. Section 855 (c) provides that in the case of dividends, with respect to which a regulated investment company has

made an election under section 855 (a), any notice to shareholders required under subchapter M, chapter 1 of the Code, with respect to such amounts, shall be made not later than 30 days after the close of the taxable year in which the distribution is made. Thus, the notice requirements of section 852 (b) (3) (C) and paragraph (c) of § 1.852-4 with respect to capital gain dividends, section 853 (c) and § 1.853-3 with respect to allowance to shareholder of foreign tax credit, and section 854 (b) (2) and § 1.854-2 with respect to the amount of a distribution which may be treated as a dividend, may be satisfied with respect to amounts to which section 855 (a) and this section apply if the notice relating to such amounts is mailed to the shareholders not later than 30 days after the close of the taxable year in which the distribution is made. If the notice under section 855 (c) relates to an election with respect to any capital gain dividends, such capital gain dividends shall be aggregated by the investment company with the designated capital gain dividends actually paid during the taxable year to which the election applies (not including such dividends with respect to

which an election has been made for a prior year under section 855) for the purpose of determining whether the aggregate of the designated capital gain dividends with respect to such taxable year of the company is greater than the excess of the net long-term capital gain over the net short-term capital loss of the company. See section 852 (b) (3) (C) and paragraph (c) of § 1.852-4.

(f) Foreign tax election. Section 855 (d) provides that in the case of an election made under section 853 (relating to foreign taxes), the shareholder of the investment company shall consider the foreign income received, and the foreign tax paid, as received and paid, respectively, in the shareholder's taxable year in which distribution is made.

REAL ESTATE INVESTMENT TRUSTS

§ 1.856 Statutory provisions; definition

of real estate investment trust. SEC. 856. Definition of real estate investment trust (a) In general. For purposes of this subtitle, the term "real estate investment trust" means an unincorporated trust or an unincorporated association

(1) Which is managed by one or more trustees;

(2) The beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

(3) Which (but for the provisions of this part) would be taxable as a domestic corporation;

(4) Which does not hold any property primarily for sale to customers in the ordinary course of its trade or business;

(5) The beneficial ownership of which is held by 100 or more persons;

(6) Which would not be a personal holding company (as defined in section 542) if all of its gross income constituted personal holding company income (as defined in section 543); and

(7) Which meets the requirements of subsection (c).

(b) Determination of status. The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

(c) Limitations. A trust or association shall not be considered a real estate investment trust for any taxable year unless

(1) It files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year which began after December 31, 1960;

(2) At least 90 percent of its gross income is derived from

(A) Dividends;

(B) Interest;

(C) Rents from real property;

(D) Gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property); and

(E) Abatements and refunds of taxes on real property;

(3) At least 75 percent of its gross income is derived from

(A) Rents from real property;

(B) Interest on obligations secured by mortgages on real property or on interests in real property;

(C) Gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property);

(D) Dividends or other distributions on, and gain from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part; and

(E) Abatements and refunds of taxes on real property;

(4) Less than 30 percent of its gross income is derived from the sale or other disposition of

(A) Stock or securities held for less than 6 months; and

(B) Real property (including interests in real property) not compulsorily or involuntarily converted within the meaning of section 1033, held for less than 4 years; and

(5) At the close of each quarter of the taxable year

(A) At least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and

(B) Not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer.

A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisi

tion of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence.

(6) For purposes of this part

(A) The term "value" means, with respect to securities for which market quotations are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the trustees, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, whichever is higher.

(B) The term "real estate assets" means real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part.

(C) The term "interests in real property" includes fee ownership and co-ownership of land or improvements thereon and leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests.

(D) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended.

(d) Rents from real property defined. For purposes of paragraphs (2) and (3) of subsection (c), the term "rents from real property" includes rents from interests in real property but does not include

(1) Any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales);

(2) Any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly

(A) In the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or

(B) In the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and

(3) Any amount received or accrued, directly or indirectly, with respect to any real

property, if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. For purposes of this paragraph, the term "independent contractor" means

(A) A person who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust, or

(B) A person, if a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust.

For purposes of paragraphs (2) and (3), the rules prescribed by section 318 (a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that "10 percent" shall be substituted for "50 percent" in subparagraph (C) of section 318(a)(2).

[Sec. 856 as added by sec. 10(a), Act of Sept. 14, 1960 (Pub. Law 86-779, 74 Stat. 1004 through 1006)]

[T.D. 6598, 27 F.R. 4081, Apr. 28, 1962]

§ 1.856-1

Definition of real estate investment trust.

(a) In general. The term “real estate investment trust" means an unincorporated trust or unincorporated association which (1) meets the status conditions in section 856 (a) and paragraph (b) of this section, and (2) satisfies the gross income and asset diversification requirements under the limitations of section 856 (c) and § 1.856-2.

(b) Qualifying conditions. To qualify as a "real estate investment trust”, an unincorporated organization must be

one

(1) Which is managed by one or more trustees,

(2) The beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest,

(3) Which would be taxable as a domestic corporation but for the provisions of part II, subchapter M, chapter 1 of the Code,

(4) Which does not hold any property primarily for sale to customers in the ordinary course of its trade or business, (5) The beneficial ownership of which is held by 100 or more persons, and

(6) Which would not be a personal holding company (as defined in section 542) if all of its gross income constituted personal holding company income (as defined in section 543).

The

(c) Determination of status. conditions described in subparagraphs (1) through (4) of paragraph (b) of this section must be met during the entire taxable year and the condition described in subparagraph (5) of paragraph (b) of this section must exist during at least 335 days of a taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months. The days during which the latter condition must exist need not be consecutive. In determining the minimum number of days during which the condition described in paragraph (b) (5) of this section is required to exist in a taxable year of less than 12 months, fractional days shall be disregarded. For example, in a taxable year of 310 days, the actual number of days prescribed would be 284383 days (310365 Of 335). The fractional day is disregarded so that the required condition in such taxable year need exist for only 284 days.

(d) Rules applicable to status requirements. For purposes of determining whether an unincorporated organization meets the conditions and requirements in section 856 (a), the following rules shall apply.

(1) Trustee. The term "trustee❞ means a person who holds legal title to the property of the real estate investment trust, and has such rights and powers as will meet the requirement of "centralization of management" under paragraph (c) of § 301.7701-2 of this chapter (Regulations on Procedure and Administration). Thus, the trustee must have continuing exclusive authority over the management of the trust, the conduct of its affairs, and (except as limited by section 856(d) (3) and § 1.856-4) the management and disposition of the trust property. For example, such authority will be considered to exist even though the trust instrument grants to the shareholders any or all of the following rights and powers: To elect or remove trustees; to terminate the trust; and to ratify amendments to the trust instrument proposed by the trustee. The existence of a mere fiduciary relationship does not, in itself, make one a trustee for purposes of section 856 (a) (1). The trustee will be considered to hold legal title to the property of the trust, for purposes

of this subparagraph, whether the title is held in the name of the trust itself, in the name of one or more of the trustees, or in the name of a nominee for the exclusive benefit of the trust. Furthermore, a trustee of a real estate investment trust may not be an officer or employee of, or have any direct or indirect proprietary interest in, any independent contractor which furnishes or renders services pertaining to the trust property, or manages or operates such property. See section 856(d)(3) and § 1.856-4 for definition of independent contractor.

Beneficial

(2) Beneficial ownership. ownership shall be evidenced by transferable shares, or by transferable certificates of beneficial interest, and (subject to the provisions of paragraph (c) of this section) must be held by 100 or more persons, determined without reference to any rules of attribution. Provisions in the trust instrument which permit the trustee to redeem shares or to refuse to transfer shares in any case where the trustee, in good faith, believes that a failure to redeem shares or that a transfer of shares would result in the loss of status as a real estate investment trust will not render the shares "nontransferable." For purposes of the regulations under part II of subchapter M, the terms "stockholder," "stockholders," "shareholder," and "shareholders" include holders of beneficial interest in a real estate investment trust and the terms "stock," "shares," and "shares of stock" include certificates of beneficial interest.

(3) Unincorporated organization taxable as a domestic corporation. The determination of whether an unincorporated organization would be taxable as a domestic corporation, in the absence of the provisions of part II of subchapter M, shall be made in accordance with the provisions of section 7701 (a) (3) and (4) and the regulations thereunder and for such purposes an otherwise qualified real estate investment trust is deemed to satisfy the "objective to carry on business" requirement of paragraph (a) of § 301.7701-2 of this chapter (Regulations on Procedure and

Administration).

(4) Property held for sale to customers. A real estate investment trust may not hold any property primarily for sale to customers in the ordinary course of its trade or business. Whether prop

erty is held for sale to customers in the ordinary course of the trade or business of a real estate investment trust depends upon the facts and circumstances in each case.

(5) Personal holding company. An unincorporated organization, even though it may otherwise meet the requirements of part II of subchapter M, will not be a real estate investment trust if, by considering all of its gross income as personal holding company income under section 543, it would be a personal holding company as defined in section 542. Thus, if at any time during the last half of the trust's taxable year more than 50 percent in value of its outstanding stock is owned (directly or indirectly under the provisions of section 544) by or for not more than 5 individuals, the stock ownership requirement in section 542(a) (2) will be met and the trust would be a personal holding company. See § 1.857-6, relating to record requirements for purposes of determining whether the trust is a personal holding company.

(e) Other rules applicable. To the extent that other provisions of chapter 1 of the Code are not inconsistent with those under part II of subchapter M thereof and the regulations thereunder, such provisions will apply with respect to both the real estate investment trust and its shareholders in the same manner that they would apply to any other unincorporated trust which would be taxable as a domestic corporation. For example:

(1) Taxable income of a real estate investment trust is computed in the same manner as that of a domestic corporation;

(2) Section 301, relating to distributions of property, applies to distributions by a real estate investment trust in the same manner as it would apply to a domestic corporation;

(3) Sections 302, 303, 304, and 331 are applicable in determining whether distributions by a real estate investment trust are to be treated as in exchange for stock;

(4) Section 305 applies to distributions by a real estate investment trust of its own stock;

(5) Section 311 applies to distributions by a real estate investment trust;

(6) Except as provided in section 857 (d), earnings and profits of a real estate investment trust are computed

in the same manner as in the case of a domestic corporation;

(7) Section 316, relating to the definition of a dividend, applies to distributions by a real estate investment trust; and

(8) Section 341, relating to collapsible corporations, applies to gain on the sale or exchange of, or a distribution which is in exchange for, stock in a real estate investment trust in the same manner that it would apply to a domestic corporation.

[T.D. 6598, 27 F.R. 4082, Apr. 28, 1962] § 1.856-2

Limitations.

(a) Effective date. The provisions of part II, subchapter M, chapter 1 of the Code, and the regulations thereunder apply only to taxable years of a real estate investment trust beginning after December 31, 1960.

(b) Election. Under the provisions of section 856 (c) (1), a trust, even though it satisfies the other requirements of part II of subchapter M for the taxable year, will not be considered a "real estate investment trust" for such year, within the meaning of such part II, unless it elects to be a real estate investment trust for such taxable year, or has made such an election for a previous taxable year which began after December 31, 1960. The election shall be made by the trust by computing taxable income as a real estate investment trust in its return for the first taxable year for which it desires the election to apply, even though it may have otherwise qualified as a real estate investment trust for a prior year. No other method of making such election is permitted. An election once made is irrevocable for such taxable year and all succeeding taxable years.

(c) Gross income requirements. (1) Section 856(c) (2), (3), and (4) further provides that a trust shall not be considered a "real estate investment trust" for a taxable year unless for such year: (i) At least 90 percent of its gross income is derived from

(a) Dividends;

(b) Interest;

(c) Rents from real property;

(d) Gain from the sale or other disposition of stock, securities, real property, and interests in mortgages on real property; and

(e) Abatements and refunds of taxes on real property;

(ii) At least 75 percent of its gross income is derived from

(a) Rents from real property; (b) Interest on obligations secured by mortgages on real property;

(c) Gain from the sale or other disposition of real property and interests in mortgages on real property;

(d) Dividends or other distributions on, and gain from the sale or other disposition of, transferable shares in another qualified real estate investment trust which is so qualified for its taxable year to which the dividends or other distributions relate or during which the gain was realized; and

(e) Abatements and refunds of taxes on real property; and

(iii) Less than 30 percent of its gross income is derived from the sale or other disposition of

(a) Stock or securities held for less than 6 months; and

(b) Real property, not compulsorily or involuntarily converted within the meaning of section 1033, held for less than 4 years.

All three of the gross income requirements in section 856 (c) and this subparagraph must be met for the taxable year. Thus, at least 75 percent of gross income must be derived from the sources described in section 856(c) (3) . and another 15 percent of gross income must likewise be derived from such sources or from the sources described in section 856(c) (2), or from a combination of such sources. A maximum of 10 percent of gross income is not restricted as to source.

(2) In determining whether the gross income of a real estate investment trust satisfies the percentage requirements in section 856(c) and subparagraph (1) of this paragraph, the term "gross income" has the same meaning as that term has under section 61 and the regulations thereunder for purposes of the denominator in the computation of the specified percentages, but for purposes of the various numerators in such computations the following rules shall apply:

(1) Dividends. The 90-percent requirement in section 856(c)(2)(A) permits the inclusion of dividends generally, while the 75-percent requirement in section 856(c) (3) (D) includes dividends only to the extent that they represent dividends or other distributions transferable shares in other qualified real estate investment trusts.

on

(ii) Interest. In computing the percentage requirements in section 856(c)