Rev. Rul. 72-171

Advice has been requested (1) whether interest received under the circumstances described below will qualify as interest on obligations secured by mortgages on real property within the meaning of section 856(c)(3)(B) of the Internal Revenue Code of 1954, and (2) whether investments in "banker's acceptances" will qualify as "cash items" within the meaning of section 856(c)(5)(A) of the Code. The issues will be discussed in the order presented.

Issue (1): An unincorporated trust, otherwise qualifying as a real estate investment trust under section 856 of the Code, invested in obligations of the Federal National Mortgage Association, the Federal Home Loan Banks, the Federal Land Banks and in "banker's acceptances."

Section 856(c) of the Code provides, in part, that for a trust to qualify as a real estate investment trust, for Federal income tax purposes, certain percentages of its gross income must be derived from specified sources.

Section 856(c)(3) of the Code provides that a trust must derive at least 75 percent of its gross income from, among other items, interest on obligations secured by mortgages on real property or on interests in real property.

In the instant case the notes and debentures of the Federal National Mortgage Association, the Federal Home Loan Banks, and the Federal Land Banks are general obligations, not secured by any specific assets of these entities.

Accordingly, it is held that since the obligations of the Federal National Mortgage Association, the Federal Home Loan Banks, and the Federal Land Banks are not secured mortgages on real property or on interests in real property, the interest received by the trust on these obligations does not qualify as interest on obligations secured by mortgages on real property within the meaning of section 856(c)(3)(B) of the Code.

Issue (2): The trust also purchased "banker's acceptances." A "banker's acceptance" is principally used in foreign trade and is a draft or bill of exchange the acceptor of which is usually a bank or trust company engaged in the business of granting banker's acceptance credits, arrangement having been made with the bank or other party to accept, thus lending its credit. Prior to the maturity date of the "banker's acceptance" (almost always less than one year), it may be sold for cash in the acceptance or bill market or to the accepting bank which may discount its own acceptance.

Section 856(c)(5)(A) and section 1.856-2(d)(1) of the Income Tax Regulations do not define the term "cash items." However, a definition of the word "cash" appears elsewhere in regulations. See temporary regulation section 402.1-2(e)(1) promulgated November 9, 1970, by T.D. 7070 C.B. 1970-2, 297, which states that the term "cash" means cash on hand, and time or demand deposits with, or withdrawable accounts in, other financial institutions.

In the instant case a "banker's acceptance" is not cash as that term is defined in section 402.1-2(e)(1) of the temporary regulations. Nor would it appear to be identical to cash.

Accordingly, it is held that "banker's acceptances" do not qualify as "cash items" within the meaning of section 856(c)(5)(A) of the Code.