Part III—Tax for Failure To Meet Certain Source-of-Income Requirements

Section 856(c)(6) provides REITs with a relief provision if they have failed to satisfy the source-of-income requirements of sections 856(c)(2) and 856(c)(3). If section 856(c)(6) applies to a REIT for any tax year, a tax is imposed on the REIT under section 857(b)(5).

All REITs must complete lines 1a through 8 of Part III to determine whether they are subject to the tax imposed under section 857(b)(5). If line 8 is zero, the tax does not apply, and the REIT does not have to complete the rest of Part III. However, if line 8 is greater than zero, the REIT is subject to this tax, and must complete the rest of Part III to determine the amount of tax.

If a REIT reports passive foreign exchange gain on line 2b or real estate foreign exchange gain on line 5b, and any part of such gain is characterized as such by a determination of the Secretary under section 856(n)(3)(C) or 856(n)(2)(C), the REIT must attach a copy of this determination to its return. Similarly, if a REIT reports income that is excluded from section 856(c)(2) pursuant to a determination of the Secretary under section 856(c)(5)(J)(i) on line 2c or excluded from section 856(c)(3) pursuant to a determination of the Secretary under section 856(c)(5)(J)(i) on line 5c, the REIT must attach a copy of this determination allowing for such exclusion to its return. Additionally, if a REIT reports income on line 7 in Part I that is excluded from sections 856(c)(2) and 856(c)(3) pursuant to section 965(m)(1), report that amount on lines 2d and 5d of Part III. The REIT must attach Forms 965 and 965-B, as applicable, to its return.

A REIT that has failed the source-of-income requirements of sections 856(c)(2) and 856(c)(3) may avoid loss of its REIT status as a result of the failure if, following identification of its failure to meet the source-of-income requirements, the REIT sets forth a description of each item of its gross income described in sections 856(c)(2) and 856(c)(3) on an attached schedule. In addition, its failure to meet the source-of-income requirements must be due to reasonable cause and not due to willful neglect.

For information on the relief provisions under sections 856(c) (7) and 856(g)(5), see the instructions for Schedule J, lines 1f and 1g.