Internal Revenue Bulletin:  2012-25 

June 18, 2012 

Rev. Rul. 2012-17


Interest in a money market fund as a cash item for REITs. This ruling provides guidance to real estate investment trusts (REITs) on the treatment of income derived from an investment in a money market fund for purposes of the REIT asset tests under section 856(c)(4) of the Code. The ruling holds that a REIT’s investment in a money market fund is an investment in “cash or cash items” for purposes of section 856(c)(4)(A).

ISSUE

If a real estate investment trust (REIT) holds shares in a money market fund, are those shares “cash items” for purposes of section 856(c)(4)(A) of the Internal Revenue Code?

FACTS

R has elected to be taxed as a REIT under subchapter M of Chapter 1 of the Code. During the first quarter of its 2011 taxable year, R purchased shares of F, a money market fund. F is subject to regulation under the Investment Company Act of 1940, 15 U.S.C. 80a-1, et seq. (1940 Act), and complies with the requirements of Rule 2a-7 under the 1940 Act, as amended in 2010. At the close of the first quarter of its 2011 taxable year, 20 percent of the value of R’s total assets for purposes of section 856(c)(4) was represented by securities that are neither Government securities, real estate assets within the meaning of section 856(c)(5)(B), nor cash or cash items; 7 percent was represented by the shares in F; and 73 percent was represented by assets that are real estate assets.

LAW AND ANALYSIS

Section 856(c)(4)(A) provides that at the close of each quarter of its taxable year, at least 75 percent of the value of a REIT’s total assets must be represented by real estate assets, cash and cash items (including receivables), and Government securities (the “75 percent value test”). Section 856(c)(4)(B) provides, in relevant part, that at the end of each quarter of a taxable year, not more than 25 percent of the value of a REIT’s total assets may be represented by securities (other than those includible under section 856(c)(4)(A)). Section 856(c)(4)(B) further provides (with certain exceptions) that not more than 5 percent of the REIT’s total assets may be represented by securities of any one issuer, and that a REIT may not hold securities possessing more than 10 percent of the total voting power or value of the outstanding securities of a single issuer. The term “cash and cash items” is not defined in the Code. Section 856(c)(5)(F) provides that all terms that are not defined in section 856(c)(5) shall have the same meaning as when used in the 1940 Act.

The term “cash item” is not defined in either the 1940 Act or the regulations under the 1940 Act. However, with respect to the issue addressed by this revenue ruling, the staff of the Division of Investment Management at the Securities and Exchange Commission (SEC) has issued a no-action letter that is directly on point. See Willkie Farr & Gallagher, SEC No-Action Letter, IM Ref. No. 2000 10 24 1124, File No. 132-3 (October 23, 2000), viewable at http://www.sec.gov/divisions/investment/noaction/2000/willkiefarrgallagher102300.pdf (hereinafter, “the SEC No-Action Letter”). The Division of Investment Management generally permits a third party to rely on no-action letters issued to other persons to the extent that the third party’s facts and circumstances are substantially similar to those described in the underlying request for the letter.[1]

At issue in the SEC No-Action Letter was whether an issuer:

... may treat money market fund shares as “cash items,” and not as investment securities and adjusted investment securities ..., for purposes of determining whether the issuer is an investment company as defined in section 3(a)(1)(C) of the Investment Company Act of 1940 ... and rule 3a-l thereunder, respectively.

SEC No-Action Letter at 1. Section 3(a)(1)(C) of the 1940 Act defines the term “investment company” to mean any issuer which is engaged generally in the business of investing in securities and “owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis” (emphasis added). Investment Company Act Rule 3a-1, which was adopted by the SEC in 1981, generally provides that notwithstanding section 3(a)(1)(C) of the 1940 Act, an issuer will be deemed not to be an investment company if, among other things, no more than 45 percent of the value of the issuer’s total assets (exclusive of Government securities and cash items) consists of certain specified classes of securities.

The SEC No-Action Letter concluded that the SEC Division of Investment Management would not object if an issuer calculated the amount of its investment securities without including the money market fund shares. The SEC staff stated in the letter,

[T]he essential qualities of a cash item for purposes of section 3(a)(1)(C) and rule 3a-1...[are] a high degree of liquidity and a relative safety of principal. In our view, money market fund shares have these same qualities because of the specific regulatory requirements with which money market funds must comply.

SEC No-Action Letter at 6. The SEC No-Action Letter further noted that “treating money market fund shares [as a cash item] provides operating companies with appropriate flexibility in managing their cash holdings.” SEC No-Action Letter at 7.

The conclusion reached in the SEC No-Action Letter is not inconsistent with the language of section 856(c)(4)(A) or its underlying legislative history.

HOLDINGS

R’s shares in F are described in section 856(c)(4)(A), which includes “cash and cash items (including receivables).” R, therefore, satisfies the 75 percent value test under section 856(c)(4)(A). In addition, as an investment that is includible under subparagraph (A) of section 856(c)(4), R’s shares in F are not treated as investments in securities for purposes of section 856(c)(4)(B).

The conclusions in this revenue ruling are predicated on provisions of nontax law applicable to money market funds. See Rev. Proc. 89-14, § 7.01(6), 1989-1 C.B. 814, 815.

DRAFTING INFORMATION

The principal author of this revenue ruling is Jonathan D. Silver of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Jonathan D. Silver at (202) 622-3930 (not a toll-free call).



[1] An SEC Policy Statement provides that “[i]n general, only the party or parties requesting a no-action letter or interpretive position may rely on the no-action or interpretive letter, and they may rely on the position with regard only to the specific facts addressed in the letter.” The Policy Statement further states, however, that “[t]he Division of Investment Management generally permits third parties to rely on no-action and interpretive letters to the extent that the third party’s facts and circumstances are substantially similar to those described in the underlying request for a no-action or interpretive letter.” Informal Guidance Program for Small Entities, Investment Company Act, Release No. IC-22587, 62 Fed. Reg. 15604, 15606 (SEC, April 12, 1997) at n.20.


More Internal Revenue Bulletins