2003 HTML Instructions for Form 1120-REIT,

This is archived information that pertains only to the 2003 Tax Year. If you
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Table of Contents

Period Covered

File the 2003 return for calendar year 2003 and fiscal years that begin in 2003 and end in 2004. For a fiscal year return, fill in the tax year space at the top of the form.

Note:

The 2003 Form 1120-REIT may also be used if:

The REIT has a tax year of less than 12 months that begins and ends in 2004 and
The 2004 Form 1120-REIT is not available at the time the REIT is required to file its return. The REIT must show its 2004 tax year on the 2003 Form 1120-REIT and take into account any tax law changes that are effective for tax years beginning after December 31, 2003.

Name and Address

Type or print the REIT's true name (as set forth in the charter or other legal document creating it) and address on the appropriate lines. Include the suite, room, or other unit number after the street address. If the Post Office does not deliver mail to the street address and the REIT has a P.O. box, show the box number instead.

Item B. 100%-owned Subsidiaries and Personal Holding Companies

REITs with 100%-owned Subsidiaries

Check this box if this return is filed for a REIT with 100%-owned REIT subsidiaries under section 856(i). These subsidiaries are not treated as separate corporations.

Note:

Do not check this box for a taxable REIT subsidiary. See Taxable REIT Subsidiaries on page 2.

Personal Holding Companies

Personal holding companies must attach to Form 1120-REIT a Schedule PH (Form 1120). See the Instructions for Schedule PH (Form 1120) for details.

Item C. Employer Identification Number (EIN)

Enter the REIT's EIN. If the REIT does not have an EIN, it must apply for one. An EIN may be applied for:

Online—Click on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated.
By telephone at 1-800-829-4933 from 7:30 a.m. to 5:30 p.m. in the REIT's local time zone.
By mailing or faxing Form SS-4, Application for Employer Identification Number.

If the REIT has not received its EIN by the time the return is due, write “Applied for” in the space for the EIN. See Pub. 583 for details.

Note:

The online application process is not yet available for REITs with addresses in foreign countries or Puerto Rico.

Item D. Date REIT Established

If the REIT is a corporation under state or local law, enter the date incorporated. If it is a trust or association, enter the date organized.

Item E. Total Assets

Enter the REIT's total assets (as determined by the accounting method regularly used in keeping its books and records) at the end of the tax year. If there are no assets at the end of the tax year, enter the total assets as of the beginning of the tax year.

Item F. Final Return, Name Change, Address Change, or Amended Return

Note:

If a change in address occurs after the return is filed, use Form 8822, Change of Address, to notify the IRS of the new address.

If the REIT ceases to exist, file Form 1120-REIT and check the “Final return” box. See Termination of Election on page 2.
If the REIT changed its name since it last filed a return, check the box for “Name change.” Generally, a REIT also must have amended its articles of incorporation and filed the amendment with the state in which it was incorporated.
If the REIT has changed its address since it last filed a return, check the box for “Address change.”
If the REIT is amending its return, check the box for “Amended Return,” complete the entire return, correct the appropriate lines with the new information, and refigure the REIT's tax liability. Attach a statement that explains the reason for the amendments and identifies the lines being changed on the amended return.

Part I—Real Estate Investment Trust Taxable Income

Include in Part I the REIT's share of gross income from partnerships in which the REIT is a partner, and the deductions attributable to the gross income items. See Regulations section 1.856-3(g).

Do not include the following in
Part I:

Gross income, gains, losses, and deductions from foreclosure property (defined in section 856(e)) if the aggregate of such amounts results in net income. Report these amounts in Part II.
Income or deductions from any prohibited transaction (defined in section 857(b)(6)) resulting in a gain. Report these amounts in Part IV.

Income

Line 1. Dividends. Enter the total amount of dividends received during the tax year.

Line 2. Interest. Enter taxable interest on U.S. obligations and on loans, notes, mortgages, bonds, bank deposits, corporate bonds, tax refunds, etc. Do not offset interest expense against interest income. Special rules apply to interest income from certain below-market rate loans. See section 7872 for more information.

Line 3. Gross rents. Include the following:

Charges for services customarily furnished or rendered in connection with renting real property.
Rent from personal property leased under or with a lease of real property (but only if the rent from the personal property does not exceed 15% of the total rent for the tax year charged for both the real and personal property under such lease). Figure the percentage of rents from personal property by comparing the fair market value of the personal rental property to the fair market value of the total rental property. See section 856(d)(1) for details.
Rent from a taxable REIT subsidiary (TRS) either (a) where at least 90% of the space at issue is leased to third parties at rents comparable to the rent paid by the other tenants of the REIT for comparable space or (b) for certain lodging facilities operated by an eligible independent contractor. For more information, including definitions and additional requirements, see sections 856(d)(8) and 856(d)(9). Also, see Rev. Proc. 2003–66 for the special rules on rents paid to a REIT by certain joint ventures that include a TRS.

See section 856(d)(2) for amounts excluded from “rents from real property.”

Line 4. Other gross rents. Enter the gross amount received for renting property not included on line 3.

Line 5. Capital gain net income. Every sale or exchange of a capital asset must be reported in detail on Schedule D (Form 1120), Capital Gains and Losses, even if there is no gain or loss.

Line 7. Other income. Enter any other taxable income not reported on lines 1 through 6, except amounts that must be reported in Part II or IV. List the type and amount of income on an attached schedule. If the REIT has only one item of other income, describe it in parentheses on line 7. Examples of other income to report on line 7 are:

Amounts received or accrued as consideration for entering into agreements to make real property loans or to purchase or lease real property.
Recoveries of bad debts deducted in prior years under the specific charge-off method.
The amount of the credit for alcohol used as fuel (determined without regard to the limitation based on tax) that was entered on Form 6478, Credit for Alcohol Used as Fuel.
Refunds of taxes deducted in prior years if they reduced income subject to tax in the year deducted (see section 111). Do not offset current year taxes against tax refunds.
Any deduction previously taken under section 179A that is subject to recapture. The REIT must recapture the benefit of any allowable deduction for clean-fuel vehicle property (or clean-fuel vehicle refueling property), if the property later ceases to qualify. See Regulations section 1.179A-1 for details.

Deductions

Limitations on Deductions

Direct and indirect costs (including taxes) allocable to real or tangible personal property constructed or improved by the taxpayer. These costs must be capitalized according to section 263A.

Transactions between related taxpayers. Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year the payment is included in the income of the related party. See sections 163(e)(3), 163(j), and 267 for limitations on deductions for unpaid interest and expenses.

Golden parachute payments. A portion of the payments made by a REIT to key personnel that exceeds their usual compensation may not be deductible. This occurs when the REIT has an agreement (golden parachute) with these key employees to pay them these excessive amounts if control of the REIT changes. See section 280G.

Business startup expenses. These expenses must be capitalized unless an election is made to amortize them over a period of 60 months. See section 195 and Regulations section 1.195-1.

Passive activity limitations. Limitations on passive activity losses and credits under section 469 apply to REITs that are closely held (as defined in section 856(h)). REITs subject to the passive activity limitations must complete Form 8810 to compute their allowable passive activity loss and credit. Before completing Form 8810, see Temporary Regulations section 1.163-8T, for rules on allocating interest expense among activities.

Reducing certain expenses for which credits are allowable. For each credit listed below, the REIT must reduce the otherwise allowable deductions for expenses used to figure the credit by the amount of the current year credit.

Work opportunity credit.
Research credit.
Enhanced oil recovery credit.
Disabled access credit.
Empowerment zone and renewal community employment credit.
Indian employment credit.
Employer credit for social security and Medicare taxes paid on certain employee tips.
Orphan drug credit.
Welfare-to-work credit.
New York Liberty Zone business employee credit.

If the REIT has any of these credits, figure each current year credit before figuring the deduction for expenses on which the credit is based.

Line 9. Compensation of officers. Do not include compensation deductible elsewhere on the return, such as elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

Disallowance of deduction for employee compensation in excess of $1 million. Publicly held corporations may not deduct compensation to a “covered employee” to the extent that the compensation exceeds $1 million. Generally, a covered employee is:

The chief executive officer of the corporation (or an individual acting in that capacity) as of the end of the tax year or
An employee whose total compensation must be reported to shareholders under the Securities Exchange Act of 1934 because the employee is among the four highest compensated officers for that tax year (other than the chief executive officer).

For this purpose, compensation does not include the following:

Income from certain employee trusts, annuity plans, or pensions and
Any benefit paid to an employee that is excluded from the employee's income.

The deduction limit does not apply to:

Commissions based on individual performance,
Qualified performance-based compensation, and
Income payable under a written, binding contract in effect on February 17, 1993.

The $1-million limit is reduced by amounts disallowed as excess parachute payments under section 280G.

For details, see section 162(m) and Regulations section 1.162-27.

Line 10. Salaries and wages. Enter the amount of salaries and wages paid or incurred for the tax year reduced by any work opportunity credit from Form 5884, any empowerment zone and renewal community employment credit from Form 8844, any Indian employment credit from Form 8845, any welfare-to-work credit from Form 8861, and any New York Liberty Zone business employee credit from Form 8884. See the instructions for these forms for more information. Do not include salaries and wages deductible elsewhere on the return, such as elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

If the REIT provided taxable fringe benefits to its employees, such as personal use of a car, do not deduct as wages the amounts allocated for depreciation and other expenses claimed on lines 16 and 18.

Line 11. Repairs and maintenance. Enter the cost of incidental repairs and maintenance, such as labor and supplies, that do not add to the value of the property or appreciably prolong its life. New buildings, machinery, or permanent improvements that increase the value of the property are not deductible. They must be depreciated or amortized.

Line 12. Bad debts. Enter the total debts that became worthless in whole or in part during the tax year. A cash basis taxpayer may not claim a bad debt deduction unless the amount was previously included in income.

Line 13. Rents. If the REIT rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred during the year. Also complete Part V of Form 4562, Depreciation and Amortization. If the REIT leased a vehicle for a term of 30 days or more, the deduction for the vehicle lease expense may have to be reduced by an amount called the inclusion amount.

The REIT may have an inclusion amount if:

The lease term began:	And the vehicle's FMV on the first day of the lease exceeded:
After 12/31/02 but before 1/1/04		$18,000
After 12/31/98 but before 1/1/03		$15,500
After 12/31/96 but before 1/1/99		$15,800
After 12/31/94 but before 1/1/97		$15,500
After 12/31/93 but before 1/1/95		$14,600
If the lease term began before January 1, 1994, see Pub. 463, Travel, Entertainment, Gift, and Car Expenses, to find out if the REIT has an inclusion amount. The inclusion amount for lease terms beginning in 2004 will be published in the Internal Revenue Bulletin in early 2004.

See Pub. 463 for instructions on figuring the inclusion amount.

Line 14. Taxes and licenses. Enter taxes paid or incurred during the tax year, but do not include the following:

Federal income taxes (except for the tax imposed on net recognized built-in gain allocable to ordinary income).
Foreign income taxes if a tax credit is claimed.
Taxes not imposed on the REIT.
Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition).
Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).
Taxes deducted elsewhere on the return.
Excise taxes imposed under section 4981 on undistributed REIT income.

See section 164(d) for apportionment of taxes on real property between seller and purchaser.

Line 15. Interest.

Note:

The deduction for interest is limited when the REIT is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity contract issued after June 8, 1997. For details, see section 264(f). Attach a statement showing the computation of the deduction.

The REIT must make an interest allocation if the proceeds of a loan were used for more than one purpose (e.g., to purchase a portfolio investment and to acquire an interest in a passive activity). See Temporary Regulations section 1.163-8T for the interest allocation rules.

Do not deduct the following interest:

Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. For exceptions, see section 265(b).
For cash basis taxpayers, prepaid interest allocable to years following the current tax year (e.g., a cash basis calendar year taxpayer who in 2003 prepaid interest allocable to any period after 2003 can deduct only the amount allocable to 2003).
Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).

Special rules apply to:

Interest on which no tax is imposed (see section 163(j));
Foregone interest on certain below-market-rate loans (see section 7872); and
Original issue discount on certain high-yield discount obligations. (See section 163(e) to figure the disqualified portion.)

Line 16. Depreciation. Besides depreciation, include on line 16 the part of the cost that the REIT elected to expense under section 179 for certain property placed in service during tax year 2003 or carried over from 2002. See Form 4562 and its instructions.

Line 18. Other deductions.

Note:

Do not deduct fines or penalties paid to a government for violating any law.

Attach a schedule, listing by type and amount, all allowable deductions that are not deductible elsewhere on the return. Enter the total on line 18. Include amortization and organization expenses. Generally, a deduction may not be taken for any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.

Charitable contributions. Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations described in section 170(c) and any unused contributions carried over from prior years.

REITs reporting taxable income on the accrual method may elect to treat as paid during the tax year any deductible contributions paid by the 15th day of the 3rd month after the end of the tax year if the contributions were authorized by the board of directors during the tax year. Attach a declaration to the return, signed by an officer, stating that the resolution authorizing the contributions was adopted by the board of directors during the tax year. Also attach a copy of the resolution.

Limitation on deduction. The total amount claimed may not be more than 10% of taxable income computed without regard to the following:

Any deduction for contributions,
The special deductions on line 21b,
The deduction allowed under section 249,
Any net operating loss (NOL) carryback to the tax year under section 172, and
Any capital loss carryback to the tax year under section 1212(a)(1).

Charitable contributions over the 10% limitation may not be deducted for the tax year but may be carried over to the next 5 tax years.

Special rules apply if the REIT has an NOL carryover to the tax year. In figuring the charitable contributions deduction for the tax year, the 10% limit is applied using the taxable income after taking into account any deduction for the NOL.

To figure the amount of any remaining NOL carryover to later years, taxable income must be modified (see section 172(b)). To the extent that contributions are used to reduce taxable income for this purpose and increase an NOL carryover, a contributions carryover is not allowed. See section 170(d)(2)(B).

Substantiation requirements. Generally, no deduction is allowed for any contributions of $250 or more unless the REIT gets a written acknowledgment from the donee organization that shows the amount of cash contributed, describes any property contributed, and gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the REIT's return, or if earlier, the date the return is filed. Do not attach the acknowledgment to the tax return, but keep it with the REIT's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions, described below.

For more information on substantiation and recordkeeping requirements, see the regulations under section 170 and Pub. 526, Charitable Contributions.

Contributions to organizations conducting lobbying activities. Contributions made to an organization that conducts lobbying activities are not deductible if:

The lobbying activities relate to matters of direct financial interest to the donor's trade or business and
The principal purpose of the contribution was to avoid Federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor.

Contributions of property other than cash. If a REIT (other than a closely held REIT see below) contributes property other than cash and claims over a $500 deduction for the property, it must attach a schedule to the return describing the kind of property contributed and the method used to determine its fair market value (FMV). A closely held REIT must complete Form 8283 and attach it to its return. All other REITs generally must complete and attach Form 8283 to their returns for contributions of property (other than money) if the total claimed deduction for all property contributed was more than $5,000.

If the REIT made a “qualified conservation contribution” under section 170(h), also include the FMV of the underlying property before and after the donation, as well as the type of legal interest contributed, and describe the conservation purpose benefited by the donation. If a contribution carryover is included, show the amount and how it was determined.

Reduced deduction for contributions of certain property. For a charitable contribution of property, the REIT must reduce the contribution by the sum of:

The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and
For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV.

The reduction for the long-term capital gain applies to:

Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption and
Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available (section 170(e)(5)).

Larger deduction. A larger deduction is allowed for certain contributions of:

Inventory and other property to certain organizations for use in the care of the ill, needy, or infants (see section 170(e)(3) and Regulations section 1.170A-4A);
Scientific equipment used for research to institutions of higher learning or to certain scientific research organizations (other than by personal holding companies and service organizations) (see section 170(e)(4)); and
Computer technology and equipment for educational purposes.

Contributions of computer technology and equipment for educational purposes. A REIT may take an increased deduction under section 170(e)(6) for qualified contributions of computer technology or equipment for educational purposes. Computer technology or equipment means computer software, computer or peripheral equipment, and fiber optic cable related to computer use.

A contribution is a qualified contribution if:

It is made to an eligible donee (see below);
Substantially all of the donee property's use is:
1. Related to the purpose or function of the donee,
2. For use within the United States, and
3. For educational purposes.
The contribution is made not later than 3 years after the date the taxpayer acquired or substantially completed the construction of the property;
The original use of the property is by the donor or the donee;
The property is not transferred by the donee for money, service, or other property, except for shipping, transfer, and installation costs;
The property fits productively into the donee's education plan; and
The property meets standards, if any, that may be prescribed by future regulations to assure it meets minimum functionality and suitability for educational purposes.

Eligible donee. The term “eligible donee” means:

An educational organization that normally maintains a regular faculty and curriculum and has a regularly enrolled body of pupils in attendance at the place where its educational activities are regularly conducted,
A section 501(c)(3) entity organized primarily for purposes of supporting elementary and secondary education, or
A public library (as described in section 170(e)(6)(B)(i)(III)).

Exceptions. The following exceptions apply to the above rules for computer technology and equipment:

Contributions to private foundations may qualify if the foundation contributes the property to an eligible donee within 30 days after the contribution and notifies the donor of the contribution. For more details, see section 170(e)(6)(C).
For contributions of property reacquired by the manufacturer of the property, the 3-year period begins on the date that the original construction of the property was substantially completed. Also, the original use of the property may be by someone other than the donor or the donee.

Pension, profit-sharing, etc., plans. Include the deduction for contributions to qualified pension, profit-sharing, or other funded deferred compensation plans. Employers who maintain such a plan generally must file one of the forms listed below, even if the plan is not a qualified plan under the Internal Revenue Code. The filing requirement applies even if the REIT does not claim a deduction for the current tax year. There are penalties for failure to file these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).

Form 5500, Annual Return/Report of Employee Benefit Plan. File this form for a plan that is not a one-participant plan (see below).

Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. File this form for a plan that only covers the owner (or the owner and his or her spouse) but only if the owner (or the owner and his or her spouse) owns the entire business.

Travel, meals, and entertainment. Subject to limitations and restrictions discussed below, a REIT can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463 for details.

Travel. The REIT cannot deduct travel expenses of any individual accompanying a corporate officer or employee, including a spouse or dependent of the officer or employee, unless that individual is an employee of the corporation, and his or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment. Generally, the REIT can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)), meals must not be lavish or extravagant; a bona fide business discussion must occur during, immediately before, or immediately after the meal; and an employee of the REIT must be present at the meal.

See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.

Membership dues. The REIT may deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. In addition, REITs may not deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities. The REIT cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity that is usually considered entertainment, amusement, or recreation.

Note:

The REIT may be able to deduct otherwise nondeductible meals, travel, and entertainment expenses if the amounts are treated as compensation and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.

Deduction for clean-fuel vehicles and certain refueling property. Section 179A allows a deduction for part of the cost of qualified clean-fuel vehicle property and qualified clean-fuel vehicle refueling property placed in service during the year. For more information, see Pub. 535, Business Expenses.

Lobbying expenses. Generally, lobbying expenses are not deductible. These expenses include amounts paid or incurred in connection with influencing Federal or state legislation (but not local legislation) or amounts paid or incurred in connection with any communication with certain Federal executive branch officials in an attempt to influence the official actions or positions of the officials. See Regulations section 1.162-29 for the definition of “influencing legislation.”

Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. See section 162(e)(3). If certain in-house lobbying expenditures do not exceed $2,000, they are deductible. For information on contributions to charitable organizations that conduct lobbying activities, see section 170(f)(9). For more information on lobbying expenses, see section 162(e).

Line 20. Taxable income before NOL deduction, total deduction for dividends paid, and section 857(b)(2)(E) deduction.
At-risk rules. Generally, special at-risk rules under section 465 apply to closely held corporations engaged in any activity as a trade or business or for the production of income. These REITs that are closely held may have to adjust the amount on line 20.

The at-risk rules do not apply to:

Holding real property placed in service by the taxpayer before 1987;
Equipment leasing under sections 465(c)(4), (5), and (6); or
Any qualifying business of a qualified corporation under section 465(c)(7).

However, the at-risk rules do apply to the holding of mineral property.

For more information, see section 465 and Form 6198, At-Risk Limitations.

Line 21a. Net operating loss deduction. A REIT may use the net operating loss (NOL) incurred in one tax year to reduce its taxable income in another tax year.

Generally, a REIT may carry an NOL over to each of the 20 years (15 years for NOLs incurred in tax years beginning before August 6, 1997) following the year of loss. REITs are not permitted to carry back an NOL to any year preceding the year of the loss. In addition, an NOL from a year that is not a REIT year may not be carried back to any year that is a REIT year.

Enter on line 21a the total NOL carryovers from other tax years, but do not enter more than the REIT's taxable income. The REIT's taxable income for purposes of the NOL deduction is taxable income (line 20) reduced by the dividends paid deduction (line 21b) and the section 857(b)(2)(E) deduction (line 21c). If this amount is less than zero, an NOL deduction cannot be taken for the tax year. Attach a schedule showing the computation of the NOL deduction. Also complete item 9 on Schedule K.

If capital gain dividends are paid during any tax year, the amount of the net capital gain for such tax year (to the extent of the capital gain dividends) is excluded in determining:

The NOL for the tax year and
The amount of the NOL of any prior tax year that may be carried over to any succeeding tax year.

Carryover rules. The NOL for the current year is computed using the REIT's taxable income before it is reduced by the dividends paid deduction. After the REIT applies the NOL to the first tax year to which it may be carried, the taxable income of that year must be modified (as described by section 172(b) and the modified rules for REITs in section 172(d)(6)) to determine how much of the remaining loss may be carried to other years. Although the current year NOL is computed without regard to the dividends paid deduction, an NOL carryover from a prior year is applied to the current year using taxable income after it is reduced by the dividends paid deduction. The NOL amounts carried forward by the REIT are not reduced by subsequent year dividends paid deductions. See Example 1 in Regulations section 1.172-5(a)(4).

Special NOL rules apply when:

An ownership change occurs, the amount of the taxable income of a loss corporation that may be offset by the pre-change NOL carryovers is limited (see section 382 and the related regulations). A loss corporation must file an information statement with its income tax return for each tax year that certain ownership shifts occur (see Temporary Regulations section 1.382-2T(a)(2)(ii) for details). See Regulations section 1.382-6(b) for details on how to make the closing-of-the-books election.
A REIT acquires control of another REIT (or acquires its assets in a reorganization), the amount of pre-acquisition losses that may offset recognized built-in gains is limited (see section 384).

Tax and Payments

Line 24b. Estimated tax payments. Enter any estimated tax payments the REIT made for the tax year.

Line 24f. Enter the credit (from Form 2439) for the REIT's share of the tax paid by a regulated investment company or another REIT on undistributed long-term capital gains included in the REIT's income. Attach Form 2439 to Form 1120-REIT.

Line 24g. Enter the credit from Form 4136, Credit for Federal Tax Paid on Fuels, if the REIT qualifies to take this credit. Attach Form 4136 to Form 1120-REIT.

Line 24h. Add the amounts on lines 24d through 24g and enter the total on line 24h.

Backup withholding. If the REIT had income tax withheld from any payments it received because, for example, it failed to give the payer its correct EIN, include the amount withheld in the total for line 24h. This type of withholding is called “Backup Withholding.” Show the amount withheld in the blank space in the right-hand column between lines 23 and 24h, and write “Backup Withholding.”

Line 25. Estimated tax penalty. A REIT that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. Generally, a REIT is subject to the penalty if its tax liability is $500 or more and it did not timely pay the smaller of:

Its alternative minimum tax minus the credit for Federal tax paid on fuels for 2003 as shown on the return or
Its prior year's tax (computed in the same manner). See section 6655 for details and exceptions, including special rules for large corporations.

Use Form 2220, Underpayment of Estimated Tax by Corporations, to see if the REIT owes a penalty and to figure the amount of the penalty. Generally, the REIT does not have to file this form because the IRS can figure the amount of any penalty and bill the REIT for it. However, even if it does not owe the penalty, the REIT must complete and attach Form 2220 if the annualized income or adjusted seasonal installment method is used, or the REIT is a large corporation computing its first required installment based on the prior year's tax. See the Instructions for Form 2220 for the definition of a large corporation.

If Form 2220 is attached, check the box on line 25, page 1, Form 1120-REIT, and enter the amount of any penalty on this line.

Part II—Tax on Net Income From Foreclosure Property

Complete Part II only if the gross income, gains, losses, and deductions from foreclosure property (defined in section 856(e)) result in net income. If an overall net loss results, report the gross income, gains, losses, and deductions from foreclosure property on the appropriate lines of Part I.

Property may be treated as foreclosure property only if it meets the requirements of section 856(e) and the REIT elects to treat the property as foreclosure property in the year it was acquired. The property continues to be foreclosure property until the close of the 3rd tax year following the tax year in which the REIT acquired it. For more information, see section 856(e). However, if the foreclosure property is qualified health care property, it will cease to be foreclosure property as of the close of the 2nd year following the tax year the REIT acquired it (although the REIT may request one or more extensions to this two-year grace period not to extend beyond the 6th year). See section 856(e)(6) for details.

This election must be made by the due date for filing Form 1120-REIT (including extensions). To make the election, attach a statement that:

Indicates that the election under section 856(e) is being made;
Identifies the property to which the election applies;
Includes the name, address, and EIN of the REIT, the date the property was acquired, and a brief description of how the property was acquired (including the name of the person from whom the property was acquired); and
Gives a description of the lease or debt with respect to which default occurred or was imminent.

The REIT can revoke the election by filing a revocation on or before the due date (including extensions) for filing Form 1120-REIT. See section 856(e) for more details.

Line 2. Gross income from foreclosure property. Do not include income that qualifies under the REIT's 75% gross income test under section 856(c)(3)(A), (B), (C), (D), (E), or (G). These amounts must be reported in Part I.

Line 4. Deductions. Deduct only those expenses that have a proximate and primary relationship to earning the income shown on line 3. This includes:

Depreciation on foreclosure property,
Interest paid or accrued on debt of the REIT that is attributable to the carrying of the property,
Real estate taxes, and
Fees charged by an independent contractor to manage such property.

Do not deduct general overhead and administrative expenses in Part II.

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

All REITs must complete lines 1a through 8 of Part III. In certain cases, the amounts shown on lines 1a and 12a of Part III might differ from the total income entered on line 8 of Part I. For example, the income items are different for a REIT that is a partner in a partnership due to the application of section 704 and Regulations section 1.856-3(g).

If line 8 is zero, do not complete the rest of Part III. The tax imposed under section 857(b)(5) does not apply.

If line 8 is greater than zero, complete the rest of Part III. Enter the tax from line 16 on Schedule J, line 3c. Also, the REIT must:

Attach a schedule listing the nature and amount of each item of its gross income described in section 856(c)(2) and (3);
Not have fraudulently included any incorrect information in the attached schedule; and
Have reasonable cause for not meeting the requirements of section 856(c)(2) and (3).

Important:

Failure to meet the three conditions above will terminate the election to be treated as a REIT effective for this tax year and all succeeding tax years.

Part IV—Tax on Net Income From Prohibited Transactions

Section 857(b)(6) imposes a tax equal to 100% of the net income derived from prohibited transactions. The 100% tax is imposed to prevent a REIT from retaining any profit from ordinary retailing activities such as sales to customers of condominium units or subdivided lots in a development tract.

Line 1. Gain from sale or other disposition of property. Include only gain from the sale or other disposition of property described in section 1221(a)(1) that is not foreclosure property and that does not qualify as an exception. See section 857(b)(6)(C) for information on certain sales that do not qualify as prohibited transactions. See section 856(j) for a special rule regarding a shared appreciation mortgage.

Do not net losses from prohibited transactions against gains in determining the amount to enter on line 1. Enter losses from prohibited transactions on the appropriate line in Part I.

Line 2. Deductions. Deduct only those expenses that have a proximate and primary relationship to the earning of the income shown on line 1. Do not deduct general overhead and administrative expenses in Part IV.

Schedule A—Deduction for Dividends Paid

Lines 1 through 5. Section 561 (taking into account sections 857(b)(8), 857(d)(3)(B), and 858(a)) determines the deduction for dividends paid.

Line 3. Dividends declared in October, November, or December and payable to shareholders of record in October, November, or December are treated by the REIT as paid on December 31 of that calendar year. The REIT is then eligible for the deduction for dividends paid for the year the dividends are declared even though they are not actually paid until January of the following calendar year.

If the REIT declared dividends in any of those months and actually paid them in January, as discussed above, enter on line 3 those dividends not already included on lines 1, 2, and 4 of Schedule A.

Line 6. If, for any tax year the REIT has net income from foreclosure property (as defined in section 857(b)(4)(B)), the deduction for dividends paid to be entered on line 6 (and on line 21b, page 1) is determined by multiplying the amount on line 5 by the following fraction:

	REIT taxable income (determined without regard to the deduction for dividends paid)
	REIT taxable income (determined without regard to the deduction for dividends paid) + (Net income from foreclosure property minus the tax on net income from foreclosure property)

Schedule J—Tax Computation

Note:

Members of a controlled group must attach to Form 1120-REIT a statement showing the computation of the tax entered on line 3a. You may use the Tax Computation Worksheet for Members of a Controlled Group below for this purpose.

Lines 1 and 2

Members of a controlled group. A member of a controlled group, as defined in section 1563, must check the box on line 1 and complete lines 2a and 2b of Schedule J.

Line 2a. Members of a controlled group are entitled to one $50,000, one $25,000, and one $9,925,000 taxable income bracket amount (in that order) on line 2a.

When a controlled group adopts or later amends an apportionment plan, each member must attach to its tax return a copy of its consent to this plan. The copy (or an attached statement) must show the part of the amount in each taxable income bracket apportioned to that member. See Regulations section 1.1561-3(b) for other requirements and for the time and manner of making the consent.

Unequal apportionment plan. Members of a controlled group may elect an unequal apportionment plan and divide the taxable income brackets as they want. There is no need for consistency between taxable income brackets. Any member may be entitled to all, some, or none of the taxable income brackets. However, the total amount for all members cannot be more than the total amount in each taxable income bracket.

Equal apportionment plan. If no apportionment plan is adopted, the members of the controlled group must divide the amount in each taxable income bracket equally among themselves. For example, Controlled Group AB consists of Corporation A and Corporation B. They do not elect an apportionment plan. Therefore, each corporation is entitled to:

$25,000 (one-half of $50,000) on line 2a(1);
$12,500 (one-half of $25,000) on line 2a(2); and
$4,962,500 (one-half of $9,925,000) on line 2a(3).

Line 2b. Members of a controlled group are treated as one corporation to figure the applicability of the additional 5% tax and the additional 3% tax. If an additional tax applies, each member will pay that tax based on the part of the amount used in each taxable income bracket to reduce that member's tax. See section 1561(a). If an additional tax applies, attach a schedule showing the taxable income of the entire group and how the corporation figured its share of the additional tax.

Line 2b(1). Enter the corporation's share of the additional 5% tax on line 2b(1).

Line 2b(2). Enter the corporation's share of the additional 3% tax on line 2b(2).

Line 3a–Tax on REIT Taxable Income

Most REITs figure their tax by using the Tax Rate Schedule below. An exception applies to members of a controlled group (see worksheet below).

Tax Rate Schedule

If taxable income (line 22, page 1) is:
Over—	But not over—	Tax is:	Of the amount over—
$0	$50,000	15%	$0
50,000	75,000	$ 7,500 + 25%	50,000
75,000	100,000	13,750 + 34%	75,000
100,000	335,000	22,250 + 39%	100,000
335,000	10,000,000	113,900 + 34%	335,000
10,000,000	15,000,000	3,400,000 + 35%	10,000,000
15,000,000	18,333,333	5,150,000 + 38%	15,000,000
18,333,333	- - - - -	35%	0

Tax Computation Worksheet for Members of a Controlled Group <emphasis>(keep for your records)</emphasis>

Note: Each member of a controlled group must compute the tax using this worksheet.
1.	Enter REIT taxable income (line 22, page 1)
2.	Enter line 1 or the REIT's share of the $50,000 taxable income bracket, whichever is less
3.	Subtract line 2 from line 1
4.	Enter line 3 or the REIT's share of the $25,000 taxable income bracket, whichever is less
5.	Subtract line 4 from line 3
6.	Enter line 5 or the REIT's share of the $9,925,000 taxable income bracket, whichever is less
7.	Subtract line 6 from line 5
8.	Multiply line 2 by 15%
9.	Multiply line 4 by 25%
10.	Multiply line 6 by 34%
11.	Multiply line 7 by 35%
12.	If the taxable income of the controlled group exceeds $100,000, enter this member's share of the smaller of: 5% of the taxable income in excess of $100,000, or $11,750. (see the instructions for line 2b above)
13.	If the taxable income of the controlled group exceeds $15 million, enter this member's share of the smaller of 3% of the taxable income in excess of $15 million, or $100,000. (see the instructions for line 2b above)
14.	Total. Add lines 8 through 13. Enter here and on line 3a, Schedule J

Line 3e

Enter the amount of the 100% excise tax imposed on the following:

Income of a taxable REIT subsidiary (TRS) for services provided to the REIT's tenants that is improperly included in rents from real property reported by the REIT instead of being reported by the TRS.
Deductions that are improperly allocated between the REIT to its TRS.
Interest deductions of a TRS to the extent that interest payments to its REIT are in excess of a rate that is commercially reasonable.

See section 857(b)(7) for details and exceptions.

Line 3f–Alternative Minimum Tax (AMT)

Unless the REIT is treated as a small corporation exempt from the AMT, it may owe the AMT if it has any of the adjustments and tax preference items listed on Form 4626, Alternative Minimum Tax—Corporations. The REIT must file Form 4626 if its taxable income (loss) combined with these adjustments and tax preference items is more than the smaller of:

$40,000 or
The REIT's allowable exemption amount (from Form 4626).

For this purpose, taxable income does not include the NOL deduction. See Form 4626 for details.

Exemption for small corporations. A REIT is treated as a small corporation exempt from the AMT for its tax year beginning in 2003 if that year is the REIT's first tax year in existence (regardless of its gross receipts) or:

It was treated as a small corporation exempt from the AMT for all prior tax years beginning after 1997 and
Its average annual gross receipts for the 3-tax-year period (or portion thereof during which the REIT was in existence) ending before its tax year beginning in 2003 did not exceed $7.5 million ($5 million if the REIT had only 1 prior tax year).

For more details, see the Instructions for Form 4626.

Line 3g–Income Tax

Deferred tax under section 1291. If the REIT was a shareholder in a passive foreign investment company (PFIC) and received an excess distribution or disposed of its investment in the PFIC during the year, it must include the increase in taxes due under section 1291(c)(2) in the total for line 3g. On the dotted line to the left of line 3g, write “Section 1291” and the amount.

Do not include on line 3g any interest due under section 1291(c)(3). Instead, show the amount of interest owed in the bottom margin of page 1, Form 1120-REIT, and write “Section 1291 interest.” For details, see Form 8621.

Additional tax under section 197(f). A corporation that elects to pay tax on the gain from the sale of an intangible under the related person exception to the anti-churning rules should include any additional tax due under section 197(f)(9)(B) in the total for line 3g. On the dotted line next to line 3g, write “Section 197” and the amount. For more information, see Pub. 535.

Line 4a–Foreign Tax Credit

To find out when a REIT can take the foreign tax credit for payment of income tax to a foreign country or U.S. possession, see Form 1118, Foreign Tax Credit—Corporations.

Line 4b

If the REIT can take either of the following credits, check the appropriate box(es) and include the amount of the credits in the total for line 4b.

Nonconventional source fuel credit. A credit is allowed for the sale of qualified fuels produced from a nonconventional source. Section 29 contains a definition of qualified fuels, provisions for figuring the credit, and other special rules. Attach a separate schedule to the return showing the computation of the credit.

Qualified electric vehicle credit. Use Form 8834, Qualified Electric Vehicle Credit, if the corporation can claim a credit for the purchase of a new qualified electric vehicle. Vehicles that qualify for this credit are not eligible for the deduction for clean-fuel vehicles under section 179A.

Line 4c–General Business Credit

Enter on line 4c the REIT's total general business credit.

If the REIT is filing Form 8844, Empowerment Zone and Renewal Community Employment Credit, or Form 8884, New York Liberty Zone Business Employee Credit, check the “Form(s)” box, write the form number in the space provided, and include the allowable credit on line 4c.

If the REIT is required to file Form 3800, General Business Credit, check the “Form 3800” box and include the allowable credit on line 4c. If the REIT is not required to file Form 3800, check the “Form(s)” box, write the form number in the space provided, and include on line 4c the allowable credit from the applicable form listed below.

Investment Credit (Form 3468).
Work Opportunity Credit (Form 5884).
Credit for Alcohol Used as Fuel (Form 6478).
Credit for Increasing Research Activities (Form 6765).
Low-Income Housing Credit (Form 8586).
Orphan Drug Credit (Form 8820).
Disabled Access Credit (Form 8826).
Enhanced Oil Recovery Credit (Form 8830).
Renewable Electricity Production Credit (Form 8835).
Indian Employment Credit (Form 8845).
Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846).
Credit for Contributions to Selected Community Development Corporations (Form 8847).
Welfare-to-Work Credit (Form 8861).
New Markets Credit (Form 8874).
Credit for Small Employer Pension Plan Startup Costs (Form 8881).
Credit for Employer-Provided Child Care Facilities and Services (Form 8882).

Line 4d–Credit for Prior Year Minimum Tax

To figure the minimum tax credit and any carryforward of that credit, use Form 8827, Credit for Prior Year Minimum Tax—Corporations. Also see Form 8827 if any of the 2002 nonconventional source fuel credit or qualified electric vehicle credit was disallowed solely because of the tentative minimum tax limitation. Also see section 53(d).

Line 6–Personal Holding Company Tax

A REIT is taxed as a personal holding company under section 542 if:

At least 60% of its adjusted ordinary gross income for the tax year is personal holding company income, and
At any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly, by five or fewer individuals.

See Schedule PH (Form 1120), U.S. Personal Holding Company (PHC) Tax, for definitions and details on how to figure the tax.

Line 7–Other Taxes

Include any of the following taxes and interest in the total on line 7. Check the appropriate box(es) for the form, if any, used to compute the total.

Recapture of Investment Credit

If the REIT disposed of investment credit property or changed its use before the end of its useful life or recovery period, it may owe a tax. See Form 4255, Recapture of Investment Credit.

Recapture of Low-Income Housing Credit

If the REIT disposed of property (or there was a reduction in the qualified basis of the property) for which it took the low-income housing credit, it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit.

Other

Additional taxes and interest amounts may be included in the total entered on line 7. Check the box for “Other” if the REIT includes any of the taxes and interest discussed below. See How to report, on page 12, for details on reporting these amounts on an attached schedule.

Recapture of qualified electric vehicle (QEV) credit. The REIT must recapture part of the QEV credit it claimed in a prior year, if within 3 years of the date the vehicle was placed in service, it ceases to qualify for the credit. See Regulations section 1.30-1 for details on how to figure the recapture.

Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than 1 year after the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred to that employee must be recaptured. For details, see Form 8845 and section 45A.

Recapture of New Markets Credit (see Form 8874).

Interest due on:

Deferred tax attributable to (a) installment sales of certain timeshares and residential lots (section 453(l)(3)) and (b) certain nondealer installment obligations (section 453A(c))
Deferred gain (section 1260(b)).

Built-in gains tax. If, on or after January 2, 2002, property of a C corporation becomes property of a REIT by either (a) the qualification of the C corporation as a REIT or (b) the transfer of such property to a REIT, then the REIT will be subject to the built-in gain tax under section 1374 unless the C corporation elects deemed sale treatment on the transferred property. If the C corporation does not make this election, the REIT must pay tax on the net recognized built-in gain during the 10-year period beginning on its first day as a REIT or the day it acquired the property. Recognized built-in gains and losses generally retain their character (e.g., ordinary income or capital gain) and are treated the same as other gains or losses of the REIT. The REIT's tax on net recognized built-in gain is treated as a loss incurred by the REIT during the same tax year (see the instructions for line i of the Built-in Gains Tax Worksheet. See Regulations sections 1.337(d)-7 for details.

Different rules apply to elections to be a REIT and transfers of property in a carryover basis transaction that occurred prior to January 2, 2002. For REIT elections and property transfers before this date, the C corporation is subject to deemed sale treatment on the transferred property unless the REIT elects section 1374 treatment. See Regulations section 1.337(d)-6 for information on how to make the election and figure the tax for REIT elections and property transfers before this date. The REIT may also rely on Regulations section 1.337(d)-5 for REIT elections and property transfers that occurred before January 2, 2002.

Worksheet instructions. Complete the worksheet on this page to figure the built-in gains tax under Regulations section 1.337(d)-7 or 1.337(d)-6.

Line a. Enter the amount that would be the taxable income of the REIT for the tax year if only recognized built-in gain, recognized built-in loss, and recognized built-in gain carryover were taken into account, reduced by any portion of the REIT's recognized built-in gain from:

Net income from foreclosure property,
Amounts subject to tax for failure to meet certain source-of-income requirements under section 857(b)(5) computed in accordance with Regulations section 1.337(d)-6(c)(2),
Net income from prohibited transactions under section 857(b)(6), and
Amounts subject to tax under section 857(b)(7).

Line b. Add the amounts shown on Form 1120-REIT, page 1, line 20; Form 1120-REIT, Part II, line 5; and Form 2438, line 11. Subtract from the total the amount on Form 1120-REIT, line 21c. Enter the result on line b of the worksheet on this page.

Line c. The REIT's net unrealized built-in gain is the amount, if any, by which the fair market value of the assets of the REIT at the beginning of its first REIT year (or as of the date the assets were acquired, for any asset with a basis determined by reference to its basis (or the basis of any other property) in the hands of a C corporation) exceeds the aggregate adjusted basis of such assets at that time.

Enter on line c the REIT's net unrealized built-in gain reduced by the net recognized built-in gain for prior years. See sections 1374(c)(2) and (d)(1).

Line d. If the amount on line b exceeds the amount on line a, the excess is treated as a recognized built-in gain in the succeeding tax year.

Line e. Enter the section 1374(b)(2) deduction. Generally, this is any net operating loss carryforward or capital loss carryforward (to the extent of net capital gain included in recognized built-in gain for the tax year) arising in tax years for which the REIT was a C corporation. These loss carryforwards must be used to reduce recognized built-in gain for the tax year to the greatest extent possible before they can be used to reduce real estate investment trust taxable income.

Line h. Credit carryforwards arising in tax years for which the REIT was a C corporation must be used to reduce the tax on net built-in gain for the tax year to the greatest extent possible before the credit carryforwards can be used to reduce the tax on real estate investment trust taxable income.

Line i. The REIT's tax on net recognized built-in gain is treated as a loss sustained by the REIT during the same tax year. Deduct the tax attributable to:

Ordinary gain as a deduction for taxes on Form 1120-REIT, line 14.
Short-term capital gain as a short-term capital loss on Schedule D (Form 1120), line 1.
Long-term capital gain as a long-term capital loss on Schedule D (Form 1120), line 6.

How to report. If the REIT checked the “Other” box, attach a schedule showing the computation of each item included in the total for line 7, Schedule J. In addition, identify (a) the applicable Code section, (b) the type of taxes or interest, and (c) enter the amount of tax or interest.

Built-in Gains Tax Worksheet(keep for your records)

a.	Excess of recognized built-in gains over recognized built-in losses	a.
b.	Taxable income	b.
c.	Enter the net unrealized built-in gain reduced by any net recognized built-in gain for all prior years	c.
d.	Net recognized built-in gain (enter the smallest of lines a, b, or c)	d.
e.	Section 1374(b)(2) deduction	e.
f.	Subtract line e from line d. If zero, enter -0- here and on line i	f.
g.	Enter 35% of line f	g.
h.	Business credit and minimum tax credit carryforwards under section 1374(b)(3) from C corporation years	h.
i.	Tax. Subtract line h from line g ( if zero or less, enter -0-). Enter here and include on line 7 of Schedule J (see instructions)	i.

Line 8–Total Tax

Include any deferred tax on the termination of a section 1294 election applicable to shareholders in a qualified electing fund in the amount entered on line 8. See Form 8621, Part V, and How to report, below.

Subtract. Amounts to subtract from the total for line 8 are the deferred tax on the REIT's share of the undistributed earnings of a qualified electing fund (see Form 8621, Part II).

How to report. Attach a schedule showing the computation of each item included in, or subtracted from, the total for line 8. On the dotted line next to line 8, enter the amount of tax or interest, identify it as tax or interest, and specify the Code section that applies.

Schedule K—Other Information

Be sure to answer all the lines that apply to the REIT.

Question 3

Check the “Yes” box for question 3 if the REIT is a subsidiary in a parent-subsidiary controlled group (defined below), even if the REIT is a subsidiary member of one group and the parent corporation of another.

Note:

If the REIT is an “excluded member” of a controlled group (see section 1563(b)(2)), it is still considered a member of a controlled group for this purpose.

Parent-subsidiary controlled group. The term “parent-subsidiary controlled group” means one or more chains of corporations connected through stock ownership (section 1563(a)(1)). Both of the following requirements must be met:

At least 80% of the total combined voting power of all classes of voting stock entitled to vote or at least 80% of the total value of all classes of stock of each corporation in the group (except the parent) must be owned by one or more of the other corporations in the group and
The common parent must own at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of all classes of stock of one or more of the other corporations in the group. Stock owned directly by other members of the group is not counted when computing the voting power or value.

See section 1563(d)(1) for the definition of “stock” for purposes of determining stock ownership above.

Question 5

Check the “Yes” box if one foreign person owned at least 25% of (a) the total voting power of all classes of stock of the REIT entitled to vote or (b) the total value of all classes of stock of the REIT.

The constructive ownership rules of section 318 apply in determining if a REIT is foreign owned. See section 6038A(c)(5) and the related regulations.

Enter on line 5a the percentage owned by the foreign person specified in line 5. On line 5b, write the name of the owner's country.

Note:

If there is more than one 25%-or-more foreign owner, complete lines 5a and 5b for the foreign person with the highest percentage of ownership.

Foreign person. The term “foreign person” means:

A foreign citizen or nonresident alien.
An individual who is a citizen of a U.S. possession (but who is not a U.S. citizen or resident).
A foreign partnership.
A foreign corporation.
Any foreign estate or trust within the meaning of section 7701(a)(31).
A foreign government (or one of its agencies or instrumentalities) if it is engaged in the conduct of a commercial activity as described in section 892.

Owner's country. For individuals, the term “owner's country” means the country of residence. For all others, it is the country where incorporated, organized, created, or administered.

Requirement to file Form 5472. If the REIT checked “Yes” to line 5, it may have to file Form 5472. Generally, a 25% foreign-owned corporation that had a reportable transaction with a foreign or domestic related party during the tax year must file Form 5472.

See Form 5472 for filing instructions and penalties for failure to file.

Item 8

Tax-exempt interest. Show any tax-exempt interest received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or other RIC.

Item 9

Enter the amount of the net operating loss (NOL) carryover to the tax year from prior years, even if some of the loss is used to offset income on this return. The amount to enter is the total of all NOLs generated in prior years but not used to offset income in a tax year prior to 2003. Do not reduce the amount by any NOL deduction reported on line 21a.

Schedule L—Balance Sheets per Books

The balance sheet should agree with the REIT's books and records. Include certificates of deposits as cash on line 1.

Line 4. Tax-exempt securities. Include on this line:

State and local government obligations, the interest on which is excludable from gross income under section 103(a) and
Stock in a mutual fund or other RIC that distributed exempt-interest dividends during the tax year of the REIT.

Line 24. Adjustments to shareholders' equity. Examples of adjustments to report on this line include:

Unrealized gains and losses on securities held “available for sale.”
Foreign currency translation adjustments.
The excess of additional pension liability over unrecognized prior service cost.
Guarantees of employee stock (ESOP) debt.
Compensation related to employee stock award plans.

If the total adjustment to be entered on line 24 is a negative number, enter the amount in parentheses.

Schedule M–1
Reconciliation of Income (Loss) per Books With Income per Return

Line 5c. Travel and entertainment. Include on line 5c any of the following:

Meals and entertainment not deductible under section 274(n).
Expenses for the use of an entertainment facility.
The part of business gifts over $25.
Expenses of an individual over $2,000, which are allocable to conventions on cruise ships.
Employee achievement awards over $400.
The cost of entertainment tickets over face value (also subject to 50% limit under section 274(n)).
The cost of skyboxes over the face value of nonluxury box seat tickets.
The part of luxury water travel not deductible under section 274(m).
Expenses for travel as a form of education.
Other nondeductible travel and entertainment expenses.

For more information, see Pub. 542, Corporations.

Line 7. Tax-exempt interest. Include as interest on line 7 any exempt-interest dividends received by the REIT as a shareholder in a mutual fund or other RIC.

Specific Instructions