Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-23

1977-1 C.B. 197

Section 856

IRS Headnote

Real estate investment trust; management company; independent contractor. A management corporation, the sole stockholder of which is both a trustee owning less than 10 percent of the shares of beneficial interest in a real estate investment trust and a salaried employee of the trust, is not precluded by the relationship of its sole stockholder to the trust from qualifying as an independent contractor managing the trust's property.

Full Text

Rev. Rul. 77-23

Advice has been requested whether a corporation, the stock of which is owned by a trustee of a real estate investment trust, can serve as an independent contractor to manage the trust's property as required by section 856(d) of the Internal Revenue Code of 1954.

A, an individual, is a trustee of a real estate investment trust and is also employed by the trust as the salaried administrator of the trust. As administrator, A is responsible for administrative functions, such as maintaining the books and records of the trust, handling correspondence for the trust, and preparing routine reports and annual statements of the trust. A owns, directly or indirectly, less than 10 percent of the shares of beneficial interest in the trust, and no trustee is related to A.

The trust owns several properties that are managed by X, an independent contractor, which is paid reasonable fees for its management services. All the stock of X is owned by A, who is a director of X. A is not employed by X, performs no services for X other than as a director, and receives no remuneration from X. No other individual or entity is related to both the trust and X. X's only direct relationship with the trust is in its capacity as an independent contractor to the trust. X does not own any shares of beneficial interest in the trust.

Section 1.856-4(b)(3)(i)(b) of the Income Tax Regulations provides, in part, that, under section 856(d) of the Code, the trust, through its trustees or its own employees, may not directly furnish or render any services to the tenants of its property and may not directly manage or operate the property.

Rev. Rul. 75-136, 1975-1 C.B. 195, states that it is the relationship of the entity or individual (such as an employee or trustee) to the trust itself that precludes the entity from qualifying as an independent contractor for the management of the property. A relationship between the entity or individual and the trustee, employee, or investment adviser of the trust would not in itself disqualify the entity, assuming the other requirements for qualification as an independent contractor are met.

In the instant case, X is not directly related to the trust, although it is directly related to A, who is a trustee and an employee of the trust. The fact that X is directly related to A does not preclude X from qualifying as an independent contractor for the management of the trust's property.

Accordingly, in the instant case, X qualifies as an independent contractor to manage the trust's property as required by section 856(d) of the Code.