Statements

Stock ownership in foreign corporations.   Attach the statement required by section 551(c) if (a) the REIT owned 5% or more in value of the outstanding stock of a foreign personal holding company and (b) the REIT was required to include in its gross income any undistributed foreign personal holding company income from a foreign personal holding company.

Transfers to a corporation controlled by the transferor.   If a person receives stock of a corporation in exchange for property, and no gain or loss is recognized under section 351, the person (transferor) and the transferee must each attach to their tax returns the information required by Regulations section 1.351-3.

Assembling the Return

To ensure that the REIT's tax return is correctly processed, attach all schedules and other forms after page 4, Form 1120-REIT, and in the following order.

1. Schedule N (Form 1120).
2. Form 4136 and Form 4626.
3. Additional schedules in alphabetical order.
4. Additional forms in numerical order.

Complete every applicable entry space on Form 1120-REIT. Do not write See attached instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Also, be sure to enter the REIT's name and EIN on each supporting statement or attachment.

Accounting Methods

An accounting method is a set of rules used to determine when and how income and expenses are reported.

Figure taxable income using the method of accounting regularly used in keeping the REIT's books and records. Generally, permissible methods include cash, accrual, or any other method authorized by the Internal Revenue Code.

In all cases, the method used must clearly show taxable income. If inventories are required, the accrual method must be used for sales and purchases of merchandise.

Accrual method.   Generally, a REIT must use the accrual method of accounting if its average annual gross receipts exceed $5 million. See section 448(c).

Under the accrual method, an amount is includible in income when:

• All the events have occurred that fix the right to receive the income, which is the earliest of the date: (a) the required performance takes place, (b) payment is due, or (c) payment is received, and
• The amount can be determined with reasonable accuracy.

See Regulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when:

• All events that determine the liability have occurred,
• The amount of the liability can be figured with reasonable accuracy, and
• Economic performance takes place with respect to the expense.

  There are exceptions to the economic performance rule for certain items, including recurring expenses. See section 461(h) and the related regulations for the rules for determining when economic performance takes place.

Change in accounting method.   Generally, the REIT must get IRS consent to change the method of accounting used to report taxable income (for income as a whole or for any material item). To do so, it must file Form 3115, Application for Change in Accounting Method. For more information, get Pub. 538, Accounting Periods and Methods. However, there are new procedures under which a REIT may obtain automatic consent to certain changes in accounting method. See Rev. Proc. 2002-9, 2002-3 I.R.B. 327 as modified by Rev. Proc. 2002-19, 2002-13 I.R.B. 696 and Rev. Proc. 2002-54, 2002-35 I.R.B. 432.

Section 481(a) adjustment.   The REIT may have to make an adjustment to prevent amounts of income or expenses from being duplicated. This is called a section 481(a) adjustment. The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However, a REIT may elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The REIT must complete the appropriate lines of Form 3115 to make the election. For more details on the section 481(a) adjustment, see Rev. Proc. 2002-19 as amplified and clarified by Rev. Proc. 2002-54.

Include any net positive section 481(a) adjustment on Form 1120-REIT, line 7. If the net section 481(a) adjustment is negative, report it on Form 1120-REIT, line 18.

Accounting Periods

A REIT must figure its taxable income on the basis of a tax year. The tax year is the annual accounting period the REIT uses to keep its records and report its income and expenses. A REIT adopts a tax year when it files its first income tax return. It must adopt a tax year by the due date (not including extensions) of its first income tax return.

A REIT must adopt a calendar year unless it first qualified for REIT status before October 5, 1976.

Change of tax year.   A REIT may not change its tax year to any tax year other than the calendar year. Generally, a REIT must get the consent of the IRS before changing its tax year by filing Form 1128, Application To Adopt, Change, or Retain a Tax Year. However, upon electing to be taxed as a REIT, an entity that has not engaged in any active trade or business may change its tax year to a calendar year without getting the consent.

For more information on change in tax year, see Form 1128, Regulations section 1.442-1, and Pub. 538.

Rounding Off to Whole Dollars

The REIT may show amounts on the return and accompanying schedules as whole dollars. To do so, drop amounts less than 50 cents and increase amounts from 50 cents through 99 cents to the next higher dollar.

Recordkeeping

Keep the REIT's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the REIT's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The REIT should also keep copies of all filed returns. They help in preparing future and amended returns.

Depository Method of Tax Payment

A REIT must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The two methods of depositing REIT income taxes, including the capital gains tax, are discussed below.

Electronic Deposit Requirement

The REIT must make electronic deposits of all depository taxes (such as employment tax, excise tax, and REIT income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2003 if:

• The total deposits of such taxes in 2001 were more than $200,000 or
• The REIT was required to use EFTPS in 2002.

If the REIT is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the REIT is not required to use EFTPS, it may participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477 or 1-800-945-8400. To enroll online, visit www.eftps.gov.

Depositing on time.   For EFTPS deposits to be made timely, the REIT must initiate the transaction at least 1 business day before the date the deposit is due.

Deposits With Form 8109

If the REIT does not use EFTPS, deposit REIT income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon Book. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933. Be sure to have your EIN ready when you call.

Do not send deposits directly to an IRS office; otherwise, the REIT may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depositary, i.e., a commercial bank or other financial institution authorized to accept Federal tax deposits. Make checks or money orders payable to the depositary.

To help ensure proper crediting, write the REIT's EIN, the tax period to which the deposit applies, and Form 1120-REIT on the check or money order. Be sure to darken the 1120 box on the coupon. Records of these deposits will be sent to the IRS.

If you prefer, you may mail your coupon and payment to Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make check or money order payable to Financial Agent.

For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business and Keeping Records.

If the REIT owes tax when it files Form 1120-REIT, do not include the payment with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary or use EFTPS, if applicable.

Estimated Tax Payments

Generally, the REIT must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more. The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day. Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax. If the REIT does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of estimated tax.

For more information, including penalties that apply if the REIT fails to make required payments, see the instructions for line 25 on page 11.

Overpaid estimated tax.   If the REIT overpaid estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. The overpayment must be at least 10% of the REIT's expected income tax liability and at least $500. File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the REIT files its income tax return. Do not file Form 4466 before the end of the REIT's tax year.

Interest and Penalties

Interest.   Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, gross valuation overstatements, and substantial understatements of tax from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Penalty for late filing of return.   A REIT that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the REIT can show that the failure to file on time was due to reasonable cause. Attach a statement explaining the reasonable cause.

Penalty for late payment of tax.   A REIT that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the REIT can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty.   This penalty may apply if certain income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on Forms 941, 943, or 945. See Other Forms, Returns, Schedules, and Statements That May Be Required on page 3. The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See Pub. 15 (Circular E), Employer's Tax Guide, or Pub. 51 (Circular A), Agricultural Employer's Tax Guide, for details, including the definition of responsible persons.

Penalty for failure to ascertain ownership.   If a REIT fails to comply with Regulations section 1.857-8 for ascertaining ownership and maintaining factual ownership records for a tax year, it must pay a $25,000 penalty ($50,000 for intentional disregard) upon notice and demand by the IRS. If the REIT can show that the failure was due to reasonable cause, the penalty may not be imposed. For more information, see section 857(f).

Other penalties.   Other penalties can be imposed for negligence, substantial understatement of tax, and fraud. See sections 6662 and 6663.

Specific Instructions

Period Covered

File the 2002 return for calendar year 2002 and fiscal years that begin in 2002 and end in 2003. For a fiscal year return, fill in the tax year space at the top of the form.

Note:   The 2002 Form 1120-REIT may also be used if:

• The REIT has a tax year of less than 12 months that begins and ends in 2003 and
• The 2003 Form 1120-REIT is not available at the time the REIT is required to file its return. The REIT must show its 2003 tax year on the 2002 Form 1120-REIT and take into account any tax law changes that are effective for tax years beginning after December 31, 2002.

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 (Form1120). 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 on 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.

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

• 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.

  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 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.

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