Rev. Rul. 69-94

Advice has been requested whether, for purposes of qualifying a trust as a real estate investment trust, certain properties are "real estate assets" within the meaning of section 856(c)(6)(B) of the Internal Revenue Code of 1954.

Under a plan of reorganization an unincorporated trust acquired the properties of a domestic railroad which, prior to the reorganization, had been leased to another corporation. The properties covered by the lease include all of the railroad's land with improvements or other inherently permanent structures situated thereon which may be under, along, or adjacent to certain lines of the railroad, and include the trackage, roadbed, buildings, bridges, and tunnels of the railroad.

To qualify as a real estate investment trust for Federal income tax purposes, a certain percentage of the trust's assets must be represented by specified items including "real estate assets."

The term "real estate assets" is defined in section 856(c)(6)(B) of the Internal Revenue Code of 1954 to mean "real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part [Part II of Subchapter M, Chapter 1, Subtitle A of the Code]." The term "interests in real property" is defined in section 856(c)(6)(C) of the Code to include "fee ownership and coownership of land or improvements thereon and leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests."

Section 1.856-3(d), of the Income Tax Regulations defines the term "real property" as follows:

"The term 'real property' means land or improvements thereon, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). In addition, the term 'real property' includes interests in real property. Local law definition will not be controlling for purposes of determining the meaning of the term 'real property' as used in section 856 and the regulations thereunder. The term includes, for example, the wiring in a building, plumbing systems, central heating or central airconditioning machinery, pipes or ducts, elevators or escalators installed in the building, or other items which are structural components of a building or other permanent structure. The term does not include assets accessory to the operation of a business, such as machinery, printing press, transportation equipment which is not a structural component of the building, office equipment, refrigerators, individual airconditioning units, grocery counters, furnishings of a motel, hotel, or office building, etc. even though such items may be termed fixtures under local laws."

Under the facts of the instant case, the described railroad properties owned by the trust that are leased to another corporation are not "assets accessory to the operation of a business" within the meaning of section 1.856-3(d) of the regulations, but are "real property" as that term is defined therein.

Accordingly, for purposes of determining whether the trust qualifies as a real estate investment trust, the described railroad properties owned by the trust in the instant case are "real estate assets" within the meaning of section 856(c)(6)(B) of the Code.