REVENUE RULE 94-40A

1994-1 C.B. 276, 1994-26 I.R.B. 9.

Internal Revenue Service
Revenue Ruling

REIT OR RIC PARTNER

June 21, 1994

Section 4982.--Excise Tax on Undistributed Income of Regulated Investment Companies, 26 C.F.R. 55.4982-1: Imposition of excise tax on undistributed income of regulated investment companies.
(See Also §§ 702, 706, 852, 855, 857, 858, 4981; 1.702-1, 1.706-1, 1.852-11, 55.4981-2.)

REIT or RIC partner. Modification of Rev. Rul. 94-40.

Rev. Rul. 94-40, page this Bulletin, clarifies the application of §§ 4981 and 4982 of the Internal Revenue Code to a Real Estate Investment Trust (REIT) or Regulated Investment Company (RIC) that holds an interest in a partnership. Rev. Rul. 94-40 was made public by the Service on June 10, 1994. It has come to the attention of the Service that taxpayers are interpreting the ruling to mean that, for purposes of §§ 4981 and 4982, all methods of accounting of a REIT or RIC override the methods of accounting of a partnership in which the REIT or RIC is a partner. The ruling was not intended to require this result. Accordingly, Rev. Rul. 94-40 is modified as follows.

The FACTS section of the ruling is revised to read:

Situation 1. REIT X holds a partnership interest in partnership P1. P1's taxable year is not the calendar year. X's share of partnership items of income, gain, loss, and deduction that were taken into account by P1 during calendar year 1995 consists of $20,000,000 of rents from real property and $1,000,000 of capital gain from the sale of securities.

Situation 2. RIC Y holds a partnership interest in partnership P2. For purposes of s 4982, Y uses the one-year period ending on October 31 of the calendar year to determine its capital gain net income and foreign currency gains and losses attributable to s 988 transactions. P2's taxable year is neither the calendar year nor the year ending October 31. Y's share of partnership items of gain and loss that were taken into account by P2 during November and December 1994 consists of $800,000 of net capital gain from the sale of securities. Y's share of partnership items of income, gain, loss, and deduction that were taken into account by P2 during calendar year 1995 consists of $30,000,000 of dividends and interest income and $5,000,000 of net capital gain from the sale of securities. Of that $5,000,000 of net capital gain, $700,000 was taken into account by P2 during November and December 1995.

In addition, in the next to last paragraph of the LAW AND ANALYSIS section of the ruling, the sentences beginning "For example," and "By contrast," are deleted.

In the HOLDINGS section of the ruling, the first sentence of Situation 1 is revised to read:

Regardless of the taxable years of a REIT and any partnership in which the REIT is a partner, for purposes of determining the REIT's required distribution for a calendar year under s 4981(a)(1), the REIT must take into account its share of partnership items of income, gain, loss, and deduction as they are taken into account by the partnership.

Also in the HOLDINGS section of the ruling, the first sentence of Situation 2 is revised to read:

Regardless of the taxable years of a RIC and any partnership in which the RIC is a partner, for purposes of determining the RIC's required distribution for a calendar year under s 4982(a)(1), the RIC must take into account its share of partnership items of income, gain, loss, and deduction as they are taken into account by the partnership.

Rev. Rul. 94-40, as printed in this Bulletin, incorporates these changes.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 94-40 is modified.

Rev. Rul. 94-40A, 1994-1 C.B. 276, 1994-26 I.R.B. 9.