On June 18, 2012, the IRS issued Revenue Ruling 2012-17, which addressed whether shares in a money market fund are categorized as “cash and cash items” for purposes of the 75 percent value test of Section 856. According to the ruling, money market shares qualify as “cash and cash items” for REIT purposes.
There is no definition of “cash and cash items” contained in Section 856. Noting that Section 856(c)(5)(F) provides that any term not defined in Section 856 shall have the same meaning as when used in the Investment Company Act of 1940 (“the 1940 Act”), the IRS analyzed whether money market fund shares were defined within the meaning of the 1940 Act.
Although the term “cash item” is not defined in the 1940 Act or the regulations promulgated thereunder, the IRS noted that there was a No-Action Letter issued by the SEC’s Division of Investment Management that was directly on point. In the No-Action Letter, the issue was whether money market fund shares were “cash items” or investments for purposes of determining whether the issuer of the shares was an investment company within the meaning of the 1940 Act. The No-Action Letter held that money market fund shares may be treated as “cash items,” finding that the “essential qualities” of cash items are “high degree of liquidity and relative safety of principal” and that money market fund shares possess these same qualities.
The IRS noted that this analysis is not inconsistent with Section 856 or its legislative history and concluded that money market fund shares may be treated as cash items for REIT asset test purposes. The ruling concludes by pointing readers to Revenue Procedure 89-14, which cautions against relying on a revenue ruling that is based on an interpretation of nontax law without first checking to see whether the relevant nontax law has changed materially.