Rev. Rul. 67-353

Advice has been requested whether, under the circumstances described below, trustees of an unincorporated trust can contract for the construction of an office building on land owned by the trust without adversely affecting its qualification as a real estate investment trust.

The trustees propose to proceed with the construction of an office building on land owned by the trust by hiring independent contractors to prepare architectural and engineering plans and, on the basis of bidding on such plans, execute construction contracts with independent contractors. When completed this building will be held by the trust as an investment asset for the production of rental income.

Under section 856(d)(3) of the Internal Revenue Code of 1954 a real estate investment trust, through its trustees, may not directly manage or operate the trust's property without adversely affecting the trust's status as a real estate investment trust. However, section 1.856-4(b)(3)(i)(d) of the Income Tax Regulations provides, in part, that the trustees are not required to delegate or contract out their fiduciary duty to manage the trust itself, as distinguished from rendering or furnishing services to the tenants of its property or managing or operating the property. Thus the trustees, in their fiduciary capacities, may do those things necessary to manage and conduct the affairs of the trust itself. Hence, they may make capital expenditures with respect to the trust's property (as defined in section 263), the cost of which may be borne by the trust.

Under section 263 of the Code capital expenditures include amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.

Accordingly, the trustees may make decisions and negotiate contracts, under the circumstances described above, with respect to the construction of the office building to be held as an investment asset for the production of rental income without adversely affecting the trust's qualification as a real estate investment trust under section 856 of the Code.