On June 18, 2012, the IRS issued Revenue Ruling 2012-17, which holds that shares in a money market mutual fund qualify as “cash items” for purposes of Section 856(c)(4)(A) of the Internal Revenue Code (the “Code”).
Section 856(c)(4)(A) of the Code provides that, at the close of each calendar quarter, at least 75% of the value of a REIT’s total assets must be represented by real estate assets, cash and cash items (including receivables), and government securities (the “75% value test”). Securities included in the 75% value test are exempt from the other REIT asset tests, which require that not more than 25% of the value of the REIT’s total assets may be represented by securities generally; not more than 5% of the REIT’s total assets may be represented by securities of any one issuer; and not more than 10% of the total voting power or value of the outstanding securities of any one issuer may be held by the REIT.
The term “cash items” is not specifically defined in the Code or in the Investment Company Act of 1940 (the “1940 Act”), the definitions of which are incorporated by cross reference into the REIT provisions of the Code, and the IRS has provided only limited guidance as to which of the numerous available liquid investments qualify as cash items for REIT purposes. In the absence of guidance from the IRS, many REITs carefully limit their investments in money market mutual funds to holdings that do not exceed the 25%, 5% and 10% asset tests, and restrict their excess cash holdings to demand deposit or other similar bank accounts.
Revenue Ruling 2012-17 eliminates any uncertainty that money market mutual funds are not “cash items” for REIT purposes, and REITs now may hold their excess cash in qualifying money market mutual funds without risk of an asset test failure. However, this ruling is limited to money market mutual funds complying with the applicable requirements of the 1940 Act, and does not apply to other types of accounts or investments.