8. If we fail to satisfy one of the REIT asset tests (other than certain de minimis
failures), but nonetheless maintain our qualification as a REIT because other requirements are met, we will be subject to a tax equal to the greater of $50,000 or the amount determined by multiplying the net income generated by the non-qualifying assets during the period of time that the assets were held as non-qualifying assets by the highest rate of tax applicable to
corporations.
9. If we fail to satisfy certain of the requirements under the Code the failure of which would result in the loss of our
REIT status, and the failure is due to reasonable cause and not willful neglect, we may be required to pay a penalty of $50,000 for each such failure in order to maintain our qualification as a REIT.
10. If we fail to comply with the requirements to send annual letters to our shareholders requesting information regarding the actual
ownership of our shares and the failure was not due to reasonable cause or was due to willful neglect, we will be subject to a $25,000 penalty or, if the failure is intentional, a $50,000 penalty.
Furthermore, notwithstanding our status as a REIT, we also may have to pay certain state and local income taxes, because not all states and
localities treat REITs the same as they are treated for U.S. federal income tax purposes. Moreover, each of our taxable REIT subsidiaries (as further described below) is subject to U.S. federal, state and local corporate income taxes on its net
income.
If we are subject to taxation on our REIT taxable income or subject to tax due to the sale of
a built-in gain asset that was acquired in a carry-over basis from a non-REIT C corporation, some of the dividends we pay to our
shareholders during the following year may be subject to tax at the reduced capital gains rates, rather than taxed at ordinary income rates. See Taxation of U.S. ShareholdersQualified Dividend Income.
Requirements for Qualification as a REIT. The Code defines a REIT as a corporation, trust or association:
1. that is managed by one or more trustees or directors;
2. that issues transferable shares or transferable certificates to evidence its beneficial ownership;
3. that would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code;
4. that is neither a financial institution nor an insurance company within the meaning of certain provisions of the Code;
5. that is beneficially owned by 100 or more persons;
6. not more than 50% in value of the outstanding shares or other beneficial interest of which is owned, actually or constructively, by five or
fewer individuals (as defined in the Code to include certain entities and as determined by applying certain attribution rules) during the last half of each taxable year;
7. that makes an election to be a REIT for the current taxable year, or has made such an election for a previous taxable year that has not
been revoked or terminated, and satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status;
8. that uses a calendar year for U.S. federal income tax purposes and complies with the recordkeeping requirements of the Code and the
Treasury regulations promulgated thereunder; and
9. that meets other applicable tests, described below, regarding the nature of its
income and assets and the amount of its distributions.
The Code provides that conditions (1), (2), (3) and (4) above must be
met during the entire taxable year and condition (5) above must be met during at least 335 days of a taxable year of 12 months, or during a
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