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 2001 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 14, 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 a C corporation elected to be taxed as a REIT for a tax year beginning after January 1, 2002, or transferred property in a carryover basis transaction to a REIT on or after January 2, 2002, the REIT is subject to the built-in gains 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 any built-in gain during the 10-year period beginning on its first day as a REIT or the day it acquired the assets in a carryover basis transaction. Recognized built-in gains and losses on which a REIT pays tax 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 sustained by the REIT during the same tax year (see the instructions for line i of the Built-in Gains Tax Worksheet. See Temporary Regulations section 1.337(d)-7T 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 to pay tax on the built-in gain during the 10-year period. See Temporary Regulations section 1.337(d)-6T 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 Temporary Regulations section 1.337(d)-5T for REIT elections and property transfers that occurred before January 2, 2002.

Worksheet instructions. Complete the worksheet on page 14 to figure the built-in gains tax under Temporary Regulations section 1.337(d)-7T or 1.337(d)-6T.

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 Temporary regulations section 1.337(d)-6T(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 page 14.

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:

1. 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
2. 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 corporation entitled to vote or (b) the total value of all classes of stock of the corporation.

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 2002. 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.

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.

Paperwork Reduction Act Notice.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is:

Recordkeeping	58 hr., 35 min.
Learning about the law or the form	24 hr., 7 min.
Preparing the form	42 hr., 51 min.
Copying, assembling, and sending the form to the IRS	4 hr., 49 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the tax form to this office. Instead, see the instructions for Where To File on page 3.

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