REITs may treat money market funds as a cash item.

• Author: Vander Baan, Sheryl
• Position: Real estate investment trust

Rev. Rul. 2012-17, which was released on June 18, 2012, confirms that a real estate investment trust (REIT) may treat shares it holds in a money market fund as cash for purposes of meeting the qualifying asset tests of Sec. 856(c)(4)(A). This is welcome news for REITs and confirms what some practitioners had either assumed or hoped would be the case since the SEC's Division of Investment Management issued a no-action letter on Oct. 23, 2000, on the treatment of money market fund shares. (The no-action letter is available at tinyurl.com/6vtxqsm.) This revenue ruling relies on that SEC no-action letter.

A REIT is not taxed on income distributed to its shareholders as long as it meets certain qualifying tests relating primarily to the composition of its assets, income, and shareholders and distributes most of its taxable income annually. Among these tests is the requirement that, at the close of each quarter of its tax 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 arising in the ordinary course of business), and government securities.

The term "cash and cash items" is not defined in Sec. 856(c)(5), which supplies definitions for other terms in Sec. 856. Sec. 856(c)(5)(F) provides that all other terms not defined in Sec. 865(c)(5) have the same meaning as when used in the Investment Company Act of 1940, P.L. 76-768 (the 1940 Act). However, the term "cash item" is not defined in either the 1940 Act or in regulations under that Act.

In 1995, the IRS ruled in Technical Advice Memorandum (TAM) 9544002 that a thrift, for purposes of qualifying as a domestic building and loan association, could not treat as cash its investment in a no-load, open-ended money market investment fund that was qualified as a regulated investment company under Sec. 851(a). The TAM relied on a definition of cash found in Regs. Sec. 301.7701-13A(e)(1), under which "cash" means cash on hand, and time or demand deposits with, or withdrawable accounts in, financial institutions. It also cited...