Attached files
Exhibit 99.1
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material U.S. federal income tax
considerations relating to the purchase, ownership and disposition of Brandywines
common shares, preferred shares and debt securities and debt securities of
Brandywine Operating Partnership, and the qualification and taxation of Brandywine
Realty Trust as a REIT.
Because this is a summary that is intended to address only material U.S. federal
income tax considerations relating to the ownership and disposition of Brandywines
common shares, preferred shares or debt securities that will apply to all holders,
this summary may not contain all the information that may be important to you. As
you review this discussion, you should keep in mind that:
| the tax consequences to you may vary depending on your particular tax situation; | ||
| special rules that are not discussed below may apply to you if, for example, you are a tax-exempt organization, a broker-dealer, a non-U.S. person, a trust, an estate, a regulated investment company, a REIT, a financial institution, an insurance company, a holder of debt securities or shares through a partnership or other pass-through entity, or otherwise subject to special tax treatment under the Code; | ||
| this summary does not address state, local or non-U.S. tax considerations; | ||
| this summary deals only with our shareholders and debt holders that hold common shares, preferred shares or debt securities as capital assets within the meaning of Section 1221 of the Code; and | ||
| this discussion is not intended to be, and should not be construed as, tax advice. |
You are urged both to review the following discussion and to consult with your own
tax advisor to determine the effect of ownership and disposition of our common
shares, preferred shares or debt securities on your individual tax situation,
including any state, local or non-U.S. tax consequences.
The information in this summary is based on the Code, current, temporary and
proposed Treasury regulations, the legislative history of the Code, current
administrative interpretations and practices of the Internal Revenue Service,
including its practices and policies as endorsed in private letter rulings, which
are not binding on the Internal Revenue Service, and existing court decisions.
Future legislation, regulations, administrative interpretations and court decisions
could change current law or adversely affect existing interpretations of current
law. Any change could apply retroactively. We have not obtained any rulings from
the Internal Revenue Service concerning the tax treatment of the matters discussed
in this summary. Therefore, it is possible that the Internal Revenue Service could
challenge the statements in this summary, which do not bind the Internal Revenue
Service or the courts, and that a court could agree with the Internal Revenue
Service.
Taxation of the Company
Qualification of Brandywine as a REIT
Brandywine first elected to be taxed as a REIT for the taxable year ended December
31, 1986. A REIT generally is not subject to federal income tax on the income that
it distributes to its shareholders if it meets the applicable REIT distribution
requirements and other requirements for qualification.
We believe that we are organized and have operated in such a manner so as to qualify
as a REIT, but there can be no assurance that we have qualified or will remain
quailed as a REIT.
Qualification and taxation as a REIT depends on our ability to meet, on a continuing
basis, through actual operating results, distribution levels, and diversity of stock
ownership, various qualification requirements imposed upon REITs by the Code. Our
ability to qualify as a REIT also requires that we satisfy certain asset tests, some
of which depend upon the fair market values of assets directly or indirectly owned
by us. Such values may not be susceptible to a precise determination. While we
intend to continue to operate in a manner that will allow us to qualify as a REIT,
no assurance can be given that the actual results of our operations for any taxable
year will satisfy such requirements for qualification and taxation as a REIT.
Taxation of Brandywine as a REIT
If we qualify for taxation as a REIT, we generally will not be subject to federal
corporate income taxes on that portion of our ordinary income or capital gain that
we distribute currently to our shareholders, because the REIT provisions of the Code
generally allow a REIT a deduction for distributions paid to its shareholders. This
deduction substantially eliminates the double taxation on earnings (taxation at
both the corporate level and shareholder level) that generally results from
investment in a corporation. However, even if we qualify for taxation as a REIT, we
will be subject to federal income tax as follows:
| We will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains; | ||
| Under certain circumstances, we may be subject to the alternative minimum tax on our items of tax preference, if any; | ||
| If we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business) such income will be subject to a 100% tax. See Sale of Partnership Property; | ||
| If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or leasehold as foreclosure property, we may thereby avoid the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the property (and any other nonqualifying income from foreclosure property) may be subject to corporate income tax at the highest applicable rate (currently 35%); | ||
| If we should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and nonetheless have maintained our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on the net income attributable to the greater of the amount by which we fail the 75% or 95% test, multiplied by a fraction intended to reflect our profitability; |
| If we fail to satisfy any of the REIT asset tests, as described below, by larger than a de minimis amount, but our failure is due to reasonable cause and not due to willful negligence and we nonetheless maintain our REIT qualification because of specified cure provisions, we will be required to pay a tax equal to the greater of $50,000 or 35% of the net income generated by the nonqualifying assets during the period in which we failed to satisfy the asset tests; | ||
| If we fail to satisfy any provision of the Code that would result in our failure to qualify as a REIT (other than a gross income or asset test requirement) and that violation is due to reasonable cause and not due to willful negligence, we may retain our REIT qualification, but we will be required to pay a penalty of $50,000 for each such failure; | ||
| We may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to meet record-keeping requirements intended to monitor our compliance with rules relating to the composition of our shareholders, as described below in Requirements for Qualification as a REIT; | ||
| If we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior years, we would be subject to a 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed plus (ii) retained amounts on which corporate level tax is paid by us; | ||
| We may elect to retain and pay income tax on our net long-term capital gain. In that case, a shareholder would include its proportionate share of our undistributed long-term capital gain in its income and would be allowed a credit for its proportionate share of the tax we paid; | ||
| A 100% excise tax may be imposed on some items of income and expense that are directly or constructively paid between us, our tenants and/or our taxable REIT subsidiaries if and to the extent that the IRS successfully adjusts the reported amounts of these items; | ||
| If we acquire appreciated assets from a C corporation (a corporation generally subject to corporate level tax) in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of the C corporation, we may be subject to tax on such appreciation at the highest corporate income tax rate then applicable if we subsequently recognize gain on a disposition of such assets during the ten-year period following their acquisition from the C corporation, unless the C corporation elects to treat the assets as if they were sold for their fair market value at the time of our acquisition; and | ||
| Income earned by any of our taxable REIT subsidiaries will be subject to tax at regular corporate rates. |
Requirements for Qualification as a REIT
We elected to be taxable as a REIT for U.S. federal income tax purposes for our
taxable year ended December 31, 1986. In order to have so qualified, we must have
met and continue to meet the requirements discussed below, relating to our
organization, sources of income, nature of assets and distributions of income to
shareholders.
The Code defines a REIT as a corporation, trust or association:
1. that is managed by one or more trustees or directors;
2. the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest;
3. that would be taxable as a domestic corporation but for the special Code
provisions applicable to REITs;
4. that is neither a financial institution nor an insurance company subject to
certain provisions of the Code;
5. the beneficial ownership of which is held by 100 or more persons;
6. in which, during the last half of each taxable year, not more than 50% in value
of the outstanding shares is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include specified entities), after applying
certain attribution rules;
7. that makes an election to be taxable as a REIT, or has made this election for a
previous taxable year which has not been revoked or terminated, and satisfies all
relevant filing and other administrative requirements established by the Internal
Revenue Service that must be met to elect and maintain REIT status;
8. that uses a calendar year for federal income tax purposes and complies with the
record keeping requirements of the Code and the Treasury Regulations; and
9. that meets other applicable tests, described below, regarding the nature of its
income and assets and the amount of its distributions.
Conditions (1) through (4) must be satisfied during the entire taxable year, and
condition (5) must be satisfied during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
We have previously issued common shares in sufficient proportions to allow us to
satisfy requirements (5) and (6) (the 100 Shareholder and five-or-fewer
requirements). In addition, our Declaration of Trust provides restrictions
regarding the transfer of our shares that are intended to assist us in continuing to
satisfy the requirements described in conditions (5) and (6) above However, these
restrictions may not ensure that we will, in all cases, be able to satisfy the
requirements described in conditions (5) and (6) above. In addition, we have not
obtained a ruling from the Internal Revenue Service as to whether the provisions of
our Declaration of Trust concerning restrictions on transfer and conversion of
common shares to Excess Shares will allow us to satisfy conditions (5) and (6).
If we fail to satisfy such share ownership requirements, our status as a REIT will
terminate. However, for taxable years beginning on or after January 1, 2005, if the
failure to meet the share ownership requirements is due to reasonable cause and not
due to willful neglect, we may avoid termination of our REIT status by paying a
penalty of $50,000.
To monitor compliance with the share ownership requirements, we are required to
maintain records regarding the actual ownership of our shares. To do so, we must
demand written statements each year from the record holders of certain percentages
of our shares in which the record holders are to disclose the actual owners of the
shares (the persons required to include in gross income the dividends paid by us). A
list of those persons failing or refusing to comply with this demand must be
maintained as part of our records. Failure by us to comply with these record-keeping
requirements could subject us to monetary penalties. If we satisfy these
requirements and have no reason to know that condition (6) is not satisfied, we will
be deemed to have satisfied such condition. A shareholder that fails or refuses to
comply with the demand is required by Treasury Regulations to submit a statement
with its tax return disclosing the actual ownership of the shares and other
information.
Qualified REIT Subsidiaries
The Code provides that a corporation that is a qualified REIT subsidiary shall not
be treated as a separate corporation, and all assets, liabilities and items of
income, deduction and credit of a qualified REIT subsidiary shall be treated as
assets, liabilities and items of income, deduction and credit of the REIT. A
qualified REIT subsidiary is a corporation, all of the capital stock of which is
owned by the REIT, that has not elected to be a taxable REIT subsidiary (discussed
below). In applying the requirements described herein, all of our qualified REIT
subsidiaries will be ignored, and all assets, liabilities and items of income,
deduction and credit of such subsidiaries will be treated as our assets, liabilities
and items of income, deduction and credit. These subsidiaries,
therefore, will not be subject to federal corporate income taxation, although they
may be subject to state and local taxation.
Taxable REIT Subsidiaries
A REIT may generally jointly elect with a subsidiary corporation, whether or not
wholly owned, to treat the subsidiary as a taxable REIT subsidiary. In addition,
if a taxable REIT subsidiary owns, directly or indirectly, securities representing
35% or more of the vote or value of a subsidiary corporation, that subsidiary will
also be treated as a taxable REIT subsidiary. A taxable REIT subsidiary is a
corporation subject to U.S. federal income tax, and state and local income tax where
applicable, as a regular C corporation.
Generally, a taxable REIT subsidiary of ours can perform some impermissible tenant
services without causing us to receive impermissible tenant services income under
the REIT income tests. However, several provisions regarding the arrangements
between a REIT and its taxable REIT subsidiaries ensure that a taxable REIT
subsidiary will be subject to an appropriate level of United States federal income
taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct
interest payments in excess of a certain amount made to us. In addition, we will be
obligated to pay a 100% penalty tax on some payments that we receive or on certain
expenses deducted by the taxable REIT subsidiary if the economic arrangements among
us, our tenants, and/or the taxable REIT subsidiary are not comparable to similar
arrangements among unrelated parties. A taxable REIT subsidiary may also engage in
other activities that, if conducted by us other than through a taxable REIT
subsidiary, could result in the receipt of non-qualified income or the ownership of
non-qualified assets.
Ownership of Partnership Interests by a REIT
A REIT that is a partner in a partnership is deemed to own its proportionate share
of the assets of the partnership and is deemed to receive the income of the
partnership attributable to such share. In addition, the character of the assets
and gross income of the partnership retains the same character in the hands of the
REIT. Accordingly, our proportionate share of the assets, liabilities and items of
income of the Operating Partnership are treated as assets, liabilities and items of
income of ours for purposes of applying the requirements described herein.
Brandywine has control over the Operating Partnership and most of the partnership
and limited liability company subsidiaries of the Operating Partnership and intends
to operate them in a manner that is consistent with the requirements for
qualification of Brandywine as a REIT.
Income Tests
In order to qualify as a REIT, Brandywine must generally satisfy two gross income
requirements on an annual basis. First, at least 75% of our gross income (excluding
gross income from prohibited transactions) for each taxable year must be derived
directly or indirectly from investments relating to real property or mortgages on
real property, including rents from real property, dividends
received from other REITs, interest income derived from mortgage loans secured by
real property (including certain types of mortgage-backed securities), and gains
form the sale of real estate assets, as well as income from certain kinds of
temporary investments. Second, at least 95% of our gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from the
same items which qualify under the 75% gross income test, and from dividends,
interest and gain from the sale or disposition of securities, which need not have
any relation to real property.
Rents received by a REIT will qualify as rents from real property in satisfying
the gross income requirements described above only if several conditions are met.
| The amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term rents from real property solely by reason of being based on a fixed percentage or percentages of gross receipts or sales. |
| Rents received from a tenant will not qualify as rents from real property in satisfying the gross income tests if the REIT, or a direct or indirect owner of 10% or more of the REIT, directly or constructively, owns 10% or more of such tenant (a Related Party Tenant). However, rental payments from a taxable REIT subsidiary will qualify as rents from real property even if we own more than 10% of the total value or combined voting power of the taxable REIT subsidiary if at least 90% of the property is leased to unrelated tenants and the rent paid by the taxable REIT subsidiary is substantially comparable to the rent paid by the unrelated tenants for comparable space. | ||
| Rent attributable to personal property leased in connection with a lease of real property will not qualify as rents from real property if such rent exceeds 15% of the total rent received under the lease. | ||
| the REIT generally must not operate or manage the property or furnish or render services to tenants, except through an independent contractor who is adequately compensated and from whom the REIT derives no income, or through a taxable REIT subsidiary. The independent contractor requirement, however, does not apply to the extent the services provided by the REIT are usually or customarily rendered in connection with the rental of space for occupancy only, and are not otherwise considered rendered to the occupant. In addition, a de minimis rule applies with respect to non-customary services. Specifically, if the value of the non-customary service income with respect to a property (valued at no less than 150% of the direct costs of performing such services) is 1% or less of the total income derived from the property, then all rental income except the non-customary service income will qualify as rents from real property. A taxable REIT subsidiary may provide services (including noncustomary services) to a REITs tenants without tainting any of the rental income received by the REIT, and will be able to manage or operate properties for third parties and generally engage in other activities unrelated to real estate. |
We do not anticipate receiving rent that is based in whole or in part on the income
or profits of any person (except by reason of being based on a fixed percentage or
percentages of gross receipts or sales consistent with the rules described above).
We also do not anticipate receiving more than a de minimis amount of rents from any
Related Party Tenant or rents attributable to personal property leased in connection
with real property that will exceed 15% of the total rents received with respect to
such real property.
We provide services to our properties that we own through the Operating Partnership,
and we believe that all of such services will be considered usually or customarily
rendered in connection with the rental of space for occupancy only so that the
provision of such services will not jeopardize the qualification of rent from the
properties as rents from real property. In the case of any services that are not
usual and customary under the foregoing rules, we intend to employ an independent
contractor or a taxable REIT subsidiary to provide such services.
The Operating Partnership may receive certain types of income that will not qualify
under the 75% or 95% gross income tests. In particular, dividends received from a
taxable REIT subsidiary will not qualify under the 75% test. We believe, however,
that the aggregate amount of such items and other non-qualifying income in any
taxable year will not cause Brandywine to exceed the limits on non-qualifying income
under either the 75% or 95% gross income tests.
If Brandywine fails to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, Brandywine may nevertheless qualify as a REIT for such year if it
is entitled to relief under certain provisions of the Code. These relief provisions
will be generally available if (1) the failure to meet such tests was due to
reasonable cause and not due to willful neglect, (2) we have attached a schedule of
the sources of our income to our return, and (3) any incorrect information on the
schedule was not due to fraud with intent to evade tax. In addition, for taxable
years beginning on or after January 1, 2005, we must also file a disclosure schedule
with the IRS after we determine that we have not satisfied one of the gross income
tests. It is not possible, however, to state whether in all circumstances
Brandywine would be entitled to the benefit of these relief provisions. As
discussed above in Taxation of Brandywine as a REIT, even if these relief
provisions apply, a tax would be imposed based on the nonqualifying income.
Asset Tests
At the close of each quarter of each taxable year, Brandywine must satisfy the
following four tests relating to the nature of our assets:
First, at least 75% of the value of our total assets must be represented by some
combination of real estate assets, cash or cash items, U.S. government securities,
and, under some circumstances, stock or debt instruments purchased with new capital.
For this purpose, real estate assets include interests in real property, such as
land, buildings, leasehold interests in real property, stock of
other REITs, and certain kinds of mortgage-backed securities and mortgage loans.
Assets that do not qualify for purposes of the 75% test are subject to the
additional asset tests described below, while securities that do qualify for
purposes of the 75% test are generally not subject to the additional asset tests.
Second, the value of any one issuers securities we own may not exceed 5% of the
value of our total assets.
Third, we may not own more than 10% of the vote or value of any one issuers
outstanding securities. The 5% and 10% tests do not apply to our interests in the
Operating Partnership, noncorporate subsidiaries, taxable REIT subsidiaries and any
qualified REIT subsidiaries, and the 10% value test does not apply with respect to
certain straight debt securities.
Effective for taxable years beginning after December 31, 2000, the safe harbor under
which certain types of securities are disregarded for purposes of the 10% value
limitation includes (1) straight debt securities (including straight debt securities
that provides for certain contingent payments); (2) any loan to an individual or an
estate; (3) any rental agreement described in Section 467 of the Code, other than
with a related person; (4) any obligation to pay rents from real property; (5)
certain securities issued by a State or any political subdivision thereof, or the
Commonwealth of Puerto Rico; (6) any security issued by a REIT; and (7) any other
arrangement that, as determined by the Secretary of the Treasury, is excepted from
the definition of a security. In addition, for purposes of applying the 10% value
limitation, (a) a REITs interest as a partner in a partnership is not considered a
security; (b) any debt instrument issued by a partnership is not treated as a
security if at least 75% of the partnerships gross income is from sources that
would qualify for the 75% REIT gross income test, and (c) any debt instrument issued
by a partnership is not treated as a security to the extent of the REITs interest
as a partner in the partnership.
Fourth, not more than 25% (20% for taxable years ending on or before December 31,
2008) of the value of our assets may be represented by securities of one or more
taxable REIT subsidiaries.
We own, directly or indirectly, common shares of certain entities that have elected
or will elect to be treated as a real estate investment trusts (Captive REITs).
Provided that each of the Captive REITs continues to qualify as a REIT (including
satisfaction of the ownership, income, asset and distribution tests discussed
herein) the common shares of the Captive REITs will qualify as real estate assets
under the 75% test. However, if any Captive REIT fails to qualify as a REIT in any
year, then the common shares of such Captive REIT will not qualify as real estate
assets under the 75% test. In addition, because we own, directly or indirectly,
more than 10% of the common shares of each Captive REIT, Brandywine would not
satisfy the 10% test if any Captive REIT were to fail to qualify as a REIT.
Accordingly, Brandywines qualification as a REIT depends upon the ability of each
Captive REIT to continue to qualify as a REIT.
After initially meeting the asset tests at the close of any quarter, Brandywine will
not lose its status as a REIT for failure to satisfy the asset tests at the end of a
later quarter solely by reason of changes in asset values. If the failure to
satisfy the asset tests results from an acquisition of securities or other property
during a quarter, the failure can be cured by disposition of sufficient
nonqualifying assets within 30 days after the close of that quarter. We intend to
maintain adequate records of the value of our assets to ensure compliance with the
asset tests, and to take such other action within 30 days after the close of any
quarter as may be required to cure any noncompliance. However, there can be no
assurance that such other action will always be successful. If we fail to cure any
noncompliance with the asset tests within such time period, our status as a REIT
would be lost.
For taxable years beginning on or after January 1, 2005, the Code provides relief
from certain failures to satisfy the REIT asset tests. If the failure relates to
the 5% test or 10% test, and if the failure is de minimis (does not exceed the
lesser of $10 million or 1% of our assets as of the end of the quarter), we may
avoid the loss of our REIT status by disposing of sufficient assets to cure the
failure within 6 months after the end of the quarter in which the failure was
identified. For failures to meet the asset tests that are more than a de minimis
amount, we may avoid the loss of our REIT status if: the failure was due to
reasonable cause, we file a disclosure schedule at the end of the quarter in which
the failure was identified, we dispose of sufficient assets to cure the failure
within 6 months after the end of the quarter, and we pay a tax equal to the greater
of $50,000 or the highest corporate tax rate multiplied by the net income generated
by the non-qualifying assets.
Annual Distribution Requirements
In order to qualify as a REIT, Brandywine is required to distribute dividends (other than
capital gain dividends) to our shareholders in an amount at least equal to (1) the sum of (a) 90%
of its REIT taxable income (computed without regard to the dividends paid deduction and the
REITs net capital gain or loss) and (b) 90% of the net income (after tax), if any, from
foreclosure property, minus (2) certain excess non-cash income as defined in the Code. These
distributions must be paid in the taxable year to which they relate, or in the following taxable
year if such distributions are declared in October, November or December of the taxable year, are
payable to shareholders of record on a specified date in any such month, and are actually paid
before the end of January of the following year. Such distributions are treated as both paid by us
and received by our shareholders on December 31 of the year in which they are declared.
In addition, at our election, a distribution for a taxable year may be declared before we
timely file our tax return for the year provided we pay such distribution with or before our first
regular dividend payment after such declaration, and such payment is made during the 12-month
period following the close of such taxable year. Such distributions are taxable to our
shareholders in the year in which paid, even though the distributions relate to our prior taxable
year for purposes of the 90% distribution requirement.
In order for distributions to be counted towards our distribution requirement, and to provide
a tax deduction to us, they must not be preferential dividends. A dividend is not a preferential
dividend if it is pro rata among all outstanding shares within a particular class, and is in
accordance with the preferences among our different classes of shares as set forth in our
organizational documents.
To the extent that we distribute at least 90%, but less than 100%, of our net taxable income,
we will be subject to tax at ordinary corporate tax rates on the retained portion. In addition, we
may elect to retain, rather than distribute, our net long-term capital gains and pay tax on such
gains. In this case, we would elect to have our shareholders include their proportionate share of
such undistributed long-term capital gains in their income and receive a corresponding credit for
their proportionate share of the tax paid by us. Our shareholders would then increase their
adjusted basis in our shares by the difference between the amount included in their long-term
capital gains and the tax deemed paid with respect to their shares.
If we should fail to distribute during each calendar year (or, in the case of distributions
with declaration and record dates falling in the last three months of the calendar year, by the end
of January following such calendar year) at least the sum of (1) 85% of our REIT ordinary income
for such year, (2) 95% of our REIT net capital gain income for such year and (3) any undistributed
taxable income from prior periods, we would be subject to a 4% excise tax on the excess of such
required distribution over the sum of (a) the amounts actually distributed plus (b) retained
amounts on which corporate level tax is paid by us.
Brandywine intends to make timely distributions sufficient to satisfy the annual distribution
requirements. In this regard, the limited partnership agreement of the Operating Partnership
authorizes Brandywine, as general partner, to operate the partnership in a manner that will enable
it to satisfy the REIT requirements and avoid the imposition of any federal income or excise tax
liability. It is possible that we, from time to time, may not have sufficient cash or other liquid
assets to meet the 90% distribution requirement. This could arise, for example, when there is an
expenditure of cash for nondeductible items such as principal amortization or capital expenditures.
In addition, because we may deduct capital losses only to the extent of our capital gains, our
REIT taxable income may exceed our economic income. In order to meet the 90% distribution
requirement, we may borrow or may cause the Operating Partnership to arrange for short-term or
possibly long-term borrowing to permit the payment of required distributions, or we may pay
dividends in the form of taxable in-kind distributions of property, including potentially, our
shares.
Under certain circumstances, Brandywine may be able to rectify a failure to meet the
distribution requirement for a given year by paying deficiency dividends to shareholders in a
later year that may be included in Brandywines deduction for distributions paid for the earlier
year. Thus, Brandywine may be able to avoid losing our REIT qualification or being taxed on
amounts distributed as deficiency dividends. However, Brandywine will be required to pay to the
Internal Revenue Service interest and a penalty based upon the amount of any deduction taken for
deficiency dividends.
Failure to Qualify
For taxable years beginning on or after January 1, 2005, the Code provides relief
for many failures to satisfy the REIT requirements. In addition to the relief
provisions for failures to satisfy the income and asset tests (discussed above), the
Code provides additional relief for other failures to satisfy REIT requirements. If
the failure is due to reasonable cause and not due to willful neglect, and we elect
to pay a penalty of $50,000 for each failure, we can avoid the loss of our REIT
status.
If Brandywine fails to qualify for taxation as a REIT in any taxable year and the
relief provisions do not apply, it will be subject to tax (including any applicable
corporate alternative minimum tax) on its taxable income at regular corporate rates.
Distributions to shareholders in any year in which Brandywine fails to qualify will
not be deductible to us. In such event, to the extent of Brandywines current and
accumulated earnings and profits, all distributions to shareholders will be taxable
to them as dividends, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Under current
law (in effect through 2010), such dividends will generally be taxable to individual
shareholders at the 15% rate for qualified dividends provided that applicable
holding period requirements are met. Unless entitled to relief under specific
statutory provisions, Brandywine also will be disqualified from taxation as a REIT
for the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances Brandywine would be
entitled to such statutory relief.
Prohibited Transactions
Net income derived from a prohibited transaction is subject to a 100% tax. The term
prohibited transaction generally includes a sale or other disposition of property (other than
foreclosure property) that is held primarily for sale to customers in the ordinary course of a
trade or business. Under existing law, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a trade or business is a question of fact that depends on
all the facts and circumstances of a particular transaction. We intend to hold properties for
investment with a view to long-term appreciation, to engage in the business of acquiring,
developing, owning and operating properties, and to make occasional sales of properties as are
consistent with our investment objectives. No assurance can be given that any property that we
sell will not be treated as property held for sale to customers, or that we can comply with certain
safe-harbor provisions of the Code that would prevent the imposition of the 100% tax. The 100% tax
does not apply to gains from the sale of property that is held through a taxable REIT subsidiary or
other taxable corporation, although such income will be subject to tax in the hands of that
corporation at regular corporate tax rates.
Foreclosure Property
Foreclosure property is real property (including interests in real property) and any
personal property incident to such real property (1) that is acquired by a REIT as a
result of the REIT having bid in the property at foreclosure, or having otherwise
reduced the property to ownership or possession by agreement or process of law,
after there was a default (or default was imminent) on a lease of the property or a
mortgage loan held by the REIT and secured by the property, (2) for which the
related loan or lease was made, entered into or acquired by the REIT at a time when
default was not imminent or anticipated and (3) for which such REIT makes
an election to treat the property as foreclosure property. REITs generally are
subject to tax at the maximum corporate rate (currently 35%) on any net income from
foreclosure property, including any gain from the disposition of the foreclosure
property, other than income that would otherwise be qualifying income for purposes
of the 75% gross income test. Any gain from the sale of property for which a
foreclosure property election has been made will not be subject to the 100% tax on
gains from prohibited transactions described above, even if the property is held
primarily for sale to customers in the ordinary course of a trade or business.
Hedging
We may enter into hedging transactions with respect to one or more of our assets or
liabilities. Hedging transactions could take a variety of forms, including interest
rate swaps or cap agreements, options, futures contracts, forward rate agreements or
similar financial instruments. Except to the extent provided by Treasury
Regulations, any income from a hedging transaction (i) made in the normal course of
our business primarily to manage risk of interest rate or price changes or currency
fluctuations with respect to borrowings made or to be made, or ordinary obligations
incurred or to be incurred by us to acquire or own real estate assets or
(ii) entered into after July 30, 2008 primarily to manage the risk of currency
fluctuations with respect to any item of income or gain that would be qualifying
income under the 75% or 95% income tests (or any property which generates such
income or gain), which is clearly identified as such before the close of the day on
which it was acquired, originated or entered into, including gain from the
disposition of such a transaction, will not constitute gross income for purposes of
the 95% gross income test and, in respect of hedges entered into after July 30,
2008, the 75% gross income test. To the extent we enter into other types of hedging
transactions, the income from those transactions is likely to be treated as
non-qualifying income for purposes of both the 75% and 95% gross income tests. We
intend to structure any hedging transactions in a manner that does not jeopardize
our ability to qualify as a REIT.
Tax Aspect of Investments in the Operating Partnership and Subsidiary Partnerships
The following discussion summarizes certain Federal income tax considerations
applicable to Brandywines investment in the Operating Partnership and the Operating
Partnerships subsidiary partnerships and limited liability companies (referred to
as the Subsidiary Partnerships).
General
We may hold investments through entities that are classified as partnerships for
U.S. federal income tax purposes, including our interest in the Operating
Partnership and the equity interests in Subsidiary Partnerships. In general,
partnerships are pass-through entities that are not subject to U.S. federal income
tax. Rather, partners are allocated their proportionate shares of the items of
income, gain, loss, deduction and credit of a partnership, and are subject to tax on
these items without regard to whether the partners receive a distribution from the
partnership. We will include in our income our proportionate share of these
partnership items for purposes of the various REIT income tests and in the
computation of our REIT taxable income. Moreover, for purposes of the REIT asset
tests, we will include our proportionate share of assets held by subsidiary
partnerships. Consequently, to the extent that we hold an equity interest in a
partnership, the partnerships assets and operations may affect our ability to
qualify as a REIT.
Classification of the Operating Partnership and Subsidiary Partnerships as Partnerships
The investment by us in partnerships involves special tax considerations, including
the possibility of a challenge by the Internal Revenue Service to the status of the
Operating Partnership or any if our Subsidiary Partnerships as a partnership, as
opposed to an association taxable as a corporation, for U.S. federal income tax
purposes. If any of these entities were treated as an association for U.S. federal
income tax purposes, it would be taxable as a corporation and, therefore, could be
subject to an entity-level tax on its income. In such a situation, the character of
our assets and items of our gross income would change and could preclude us from
satisfying the REIT asset tests or the REIT income tests as discussed in
Taxation of the Company Asset Tests and Income Tests above, and in turn
could prevent us from qualifying as a REIT. See Taxation of the Company
Failure to Qualify, above, for a discussion of the effect of our failure to meet
these tests for a taxable year. In addition, any change in the status of any of our
subsidiary partnerships for tax purposes might be treated as a taxable event, in
which case we could have taxable income that is subject to the REIT distribution
requirements without receiving any cash.
Treasury Regulations that apply for tax periods beginning on or after January 1,
1997 provide that a domestic business entity not otherwise organized as a
corporation (an Eligible Entity) may elect to be treated as a partnership or
disregarded entity for federal income tax purposes. Unless it elects otherwise, an
Eligible Entity in existence prior to January 1, 1997, will have the same
classification for federal income tax purposes that it claimed under the entity
classification Treasury Regulations in effect prior to this date. In addition, an
Eligible Entity that did not exist or did not claim a classification prior to
January 1, 1997 will be classified as a partnership or disregarded entity for
federal income tax purposes unless it elects otherwise. The Operating Partnership
and the Subsidiary Partnerships (other than those Subsidiary Partnerships that have
elected to be treated as taxable REIT subsidiaries) intend to claim classification
as partnerships or disregarded entities under these Treasury Regulations. As a
result, we believe that the Operating Partnership and such Subsidiary Partnerships
(other than those Subsidiary Partnerships that have elected to be treated as taxable
REIT subsidiaries) will be classified as partnerships or disregarded entities for
federal income tax purposes. We have not requested and do not intend to request a
ruling from the Internal Revenue Service that the Operating Partnership or
Subsidiary Partnerships will be classified as partnerships for federal income tax
purposes.
Partnership Allocations
Although a partnership agreement will generally determine the allocation of income
and losses among partners, such allocations will be disregarded for tax purposes if
they do not comply with the provisions of Section 704(b) of the Code and the
Treasury Regulations promulgated thereunder, which require that partnership
allocations respect the economic arrangement of the partners. If an allocation is
not recognized for Federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners interests in the partnership,
which will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item. The
Operating Partnerships allocations of taxable income and loss are intended to
comply with the requirements of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties
Pursuant to Section 704(c) of the Code, items of income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership must be allocated for
federal income tax purposes in a manner such that the contributor is charged with or
benefits from the unrealized gain or unrealized loss associated with the property at
the time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of such
property at the time of contribution. Such allocations are solely for federal
income tax purposes and do not affect other economic or legal arrangements among the
partners.
Our Operating Partnership has entered into transactions involving the contribution to the
Operating Partnership of appreciated property, and the Operating Partnership may enter into such
transactions in the future. The partnership agreement of the Operating Partnership requires
allocations of income, gain, loss and deduction attributable to contributed property to be made in
a manner that is consistent with Section 704(c) of the Code. Treasury Regulations issued under
Section 704(c) give partnerships a choice of several methods of allocating taxable income with
respect to contributed properties. Depending upon the method chosen, (1) our tax depreciation
deductions attributable to those properties may be lower than they would have been if our Operating
Partnership had acquired those properties for cash and (2) in the event of a sale of such
properties, we could be allocated gain in excess of our corresponding economic or book gain. These
allocations may cause us to recognize taxable income in excess of cash proceeds received by us,
which might adversely affect our ability to comply with the REIT distribution requirements or
result in our shareholders recognizing additional dividend income without an increase in
distributions.
Depreciation
The Operating Partnerships assets include a substantial amount of appreciated
property contributed by its partners. Assets contributed to a partnership in a tax-
free transaction generally retain the same depreciation method and recovery period
as they had in the hands of the partner who contributed them to the partnership.
Accordingly, a substantial amount of the Operating Partnerships depreciation
deductions for its real property are based on the historic tax
depreciation
schedules for the properties prior to their contribution to the Operating
Partnership. The properties are being depreciated over a range of 15 to 40 years
using various methods of depreciation which were determined at the time that each
item of depreciable property was placed in service. Any depreciable real property
purchased by the Partnerships is currently depreciated over 40 years. In certain
instances where a partnership interest rather than real property is contributed to
the Partnership, the real property may not carry over its recovery period but rather
may, similarly, be subject to the lengthier recovery period.
Basis in Operating Partnership Interest
Our adjusted tax basis in each of the partnerships in which we have an interest
generally (1) will be equal to the amount of cash and the basis of any other
property contributed to such partnership by us, (2) will be increased by (a) our
allocable share of such partnerships income and (b) our allocable share of any
indebtedness of such partnership, and (3) will be reduced, but not below zero, by
our allocable share of (a) such partnerships loss and (b) the amount of cash and
the tax basis of any property distributed to us and by constructive distributions
resulting from a reduction in our share of indebtedness of such partnership.
If our allocable share of the loss (or portion thereof) of any partnership in which
we have an interest would reduce the adjusted tax basis of our partnership interest
in such partnership below zero, the recognition of such loss will be deferred until
such time as the recognition of such loss (or portion thereof) would not reduce our
adjusted tax basis below zero. To the extent that distributions to us from a
partnership, or any decrease in our share of the nonrecourse indebtedness of a
partnership (each such decrease being considered a constructive cash distribution to
the partners), would reduce our adjusted tax basis below zero, such distributions
(including such constructive distributions) would constitute taxable income to us.
Such distributions and constructive distributions normally would be characterized as
long-term capital gain if our interest in such partnership has been held for longer
than the long-term capital gain holding period (currently 12 months).
Sale of Partnership Property
Generally, any gain realized by a partnership on the sale of property held by the
partnership for more than 12 months will be long-term capital gain, except for any
portion of such gain that is treated as depreciation or cost recovery recapture.
However, under requirements applicable to REITs under the Code, our share as a
partner of any gain realized by the Operating Partnership on the sale of any
property held as inventory or other property held primarily for sale to customers in
the ordinary course of a trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See Taxation of the
Company Prohibited Transactions.
Taxation of Shareholders
As used herein, a U.S. Shareholder means a beneficial owner of our common shares
or preferred shares, who is, for U.S. federal income tax purposes:
| a citizen or resident of the U.S. as defined in section 7701(b) of the Code, | ||
| a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S. or any state thereof or the District of Columbia, |
| an estate the income of which is subject to U.S. federal income taxation regardless of its source or | ||
| a trust if it (a) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
As used herein, a non-U.S. Shareholder means a beneficial owner of our common
shares or preferred shares that is not a U.S. Shareholder, and that is not a
partnership (or other entity treated as a partnership for U.S. federal income tax
purposes).
If a partnership holds common shares or preferred shares, the tax treatment of a
partner will generally depend upon the status of the partner and the activities of
the partnership. If you are a partner of a partnership holding common shares or
preferred shares, you should consult your tax advisors.
Taxation of Taxable U.S. Shareholders
Taxation of Ordinary Dividends on Shares
As long as Brandywine qualifies as a REIT, distributions made to Brandywines
taxable U.S. Shareholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) (Ordinary Dividends) will be dividends
taxable to such U.S. Shareholders as ordinary income and will not be eligible for
the dividends received deduction for corporations. Dividends received from REITs
are generally not eligible for taxation at the preferential rates for qualified
dividends received by individual shareholders. We may designate a distribution as
qualified dividend income to the extent of (1) qualified dividend income we receive
during the current year (for example, dividends received from our taxable REIT
subsidiaries), plus (2) income on which we have been subject to corporate level tax
during the prior year (for example, undistributed REIT taxable income), plus (3) any
income attributable to the sale of a built in gain asset that was acquired from a C
corporation in a carry-over basis transaction less the tax
paid on that income. To the extent that we designate a dividend as qualified
dividend income, an individual will be taxable at preferential rates (15% maximum
federal rate through the end of 2010) on such qualified dividend income provided
certain holding period requirements are met. However, we expect that ordinary
dividends paid by Brandywine generally will not be eligible for treatment as
qualified dividend income to any significant extent.
Capital Gain Distributions
Distributions that are designated as long-term capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed our actual net capital
gain for the taxable year) without regard to the period for which the U.S.
Shareholder has held its shares of beneficial interest. In general, U.S.
Shareholders will be taxable on long term capital gains at a maximum rate of 15%
(through 2010), except that the portion of such gain that is attributable to
depreciation recapture will be taxable at the maximum rate of 25%. However,
corporate shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income.
We may elect under the applicable provisions of the Code to retain and pay tax on
our net capital gains. In such event U.S. Shareholders will be taxable on their
proportionate share of such undistributed capital gains. Each U.S. Shareholder
would then receive a credit, for use on their return, in the amount of their
proportionate share of the capital gains tax paid by us. If the credit results in
an amount owed to a U.S. Shareholder, such U.S. Shareholder would receive a refund.
A U.S. Shareholders basis in our shares will be increased by the amount of the
shareholders allocable share of any retained capital gains less the shareholders
allocable share of the tax paid by us on such capital gains.
Non-Dividend Distributions
Distributions in excess of current and accumulated earnings and profits
(Non-Dividend Distributions) will not be taxable to a U.S. Shareholder to the
extent that they do not exceed the adjusted basis of the shareholders shares, but
rather will reduce the adjusted basis of such shares. To the extent that
Non-Dividend exceed the adjusted basis of a U.S. Shareholders shares, such
distributions will be included in income as long-term capital gain (or short-term
capital gain if the shares have been held for 12 months or less) assuming the shares
are a capital asset in the hands of the shareholder. In determining the extent to
which a distribution on our shares constitutes a dividend for tax purposes, the
earnings and profits of Brandywine will be allocated first to distributions with
respect to the preferred shares and second to distributions with respect to common
shares. Therefore, depending on our earnings and profits, distributions with respect
to the preferred shares (as compared to distributions with respect to our common
shares) are more likely to be treated as dividends than as a return of capital or a
distribution in excess of basis.
Dividends Paid in Common Shares
A recent Internal Revenue Service revenue procedure allows us to satisfy the REIT
distribution requirements with respect to certain taxable years by distributing up
to 90% of our dividends in the form of common shares rather than cash. In the event
that we pay a portion of a dividend in common shares, taxable U.S. Shareholders
would be required to pay tax on the full amount of the dividend (including the fair
market value of any common shares received) and the amount of the tax may exceed the
amount of cash received.
Timing of Distributions
Any distribution declared by us in October, November or December of any year payable
to a shareholder of record on a specified date in any such month shall be treated as
both paid by Brandywine and received by the shareholder on December 31 of such year,
provided that the distribution is actually paid by Brandywine not later than the end
of January of the following calendar year. Shareholders may not include in their
individual income tax returns any of Brandywines losses.
Sale or Exchange of Common and Preferred Shares
In general, a U.S. Shareholder will recognize capital gain or loss on the
disposition of common or preferred shares equal to the difference between the sales
price for such shares and the adjusted tax basis for such shares. In general, a
U.S. Shareholders adjusted tax basis will equal the U.S. Shareholders acquisition
cost, increased by the U.S. Shareholders allocable share of any retained capital
gains, less the U.S. Shareholders allocable share of the tax paid by us on such
retained capital gains, and reduced by Non-Dividend Distributions.
In general, capital gains recognized by individuals and other non-corporate U.S.
Shareholders upon the sale or disposition of shares of our shares will be subject to
a maximum U.S. federal income tax rate of 15% for taxable years through 2010, if our
shares are held for more than 12 months, and will be taxed at ordinary income rates
(of up to 35% through 2010) if our shares are held for 12 months or less. Gains
recognized by U.S. Shareholders that are corporations are subject to U.S. federal
income tax at a maximum rate of 35%, whether or not classified as long-term capital
gains.
Capital losses recognized by a U.S. Shareholder upon the disposition of our shares
held for more than one year at the time of disposition will be considered long-term
capital losses, and are generally available only to offset capital gain income of
the U.S. Shareholder but not ordinary income (except in the case of individuals, who
may offset up to $3,000 of ordinary income each year). However, any loss upon a sale
or exchange of shares by a U.S. Shareholder who has held such shares for six months
or less (after applying certain holding period rules) will be treated as a long-term
capital loss to the extent such shareholder has received distributions from us
required to be treated as long-term capital gain.
If a U.S. Shareholder recognizes a loss upon a subsequent disposition of our shares
in an amount that exceeds a prescribed threshold, it is possible that the
provisions of Treasury Regulations involving reportable transactions could apply,
with a resulting requirement to separately disclose the loss generating transactions
to the IRS. While these regulations are directed towards tax shelters, they are
written broadly, and apply to transactions that would not typically be considered
tax shelters. Significant penalties apply for failure to comply with these
requirements. You should consult your tax advisors concerning any possible
disclosure obligation with respect to the receipt or disposition of our shares, or
transactions that might be undertaken directly or indirectly by us. Moreover, you
should be aware that we and other participants in transactions involving us
(including our advisors) might be subject to disclosure or other requirements
pursuant to these regulations.
Passive Activity Losses and Investment Interest Limitations
Distributions from us and gain from the disposition of shares will not be treated as
passive activity income and, therefore, U.S. Shareholders will not be able to apply
any passive losses against such income. Distributions from us (to the extent they
do not constitute a return of capital or capital gain dividends) will generally be
treated as investment income for purposes of the investment income limitation. A
shareholder may elect to treat capital gain dividends and capital gains from the
disposition of shares as investment income for purposes of the investment income
limitation, but in such event a shareholder will be taxed at ordinary income rates
on such amounts.
Redemption of Preferred Shares
Our preferred shares are redeemable by us under certain circumstances. A redemption
of preferred shares will be treated under Section 302 of the Internal Revenue Code
as a distribution taxable as a dividend (to the extent of our current and
accumulated earnings and profits) at ordinary income rates, unless the redemption
satisfies one of the tests set forth in Section 302(b) of the Internal Revenue Code
and is therefore treated as a sale or exchange of the redeemed shares. The
redemption will be treated as a sale or exchange if it (i) is substantially
disproportionate with respect to the holder, (ii) results in a complete
termination of the holders share interest in our company, or (iii) is not
essentially equivalent to a dividend with respect to the holder, all within the
meaning of Section 302(b) of the Internal Revenue Code.
In determining whether any of these tests has been met, there must be taken into
account not only any preferred shares owned by the holder, but also such holders
ownership of the our common shares, other series of preferred shares and any options
to acquire any of the foregoing. The holder also must take into account any such
securities (including options) which are considered to be owned by such holder by
reason of the constructive ownership rules set forth in Sections 318 and 302(c) of
the Internal Revenue Code. If a particular holder owns (actually or constructively)
no common shares or an insubstantial percentage of common shares or preferred
shares, based upon current law, it is probable that the redemption of the preferred
shares from such holder would be considered not
essentially equivalent to a dividend. However, because the determination as to
whether any of the alternative tests of Section 302(b) of the Internal Revenue Code
will be satisfied with respect to any particular holder of preferred shares depends
upon the facts and circumstances at the time the determination must be made,
prospective holders of preferred shares are advised to consult their own tax
advisors to determine such tax treatment.
If a redemption of preferred shares is not treated as a distribution taxable as a
dividend to a particular holder, it will be treated as a taxable sale or exchange by
that holder. As a result, the holder will recognize gain or loss for federal income
tax purposes in an amount equal to the difference between (i) the amount of cash and
the fair market value of any property received (less any portion thereof
attributable to accumulated and declared but unpaid dividends, which will be taxable
as a dividend to the extent of our current and accumulated earnings and profits) and
(ii) the holders adjusted tax basis in the shares. Such gain or loss will be
capital gain or loss if the shares were held as a capital asset, and will be
long-term gain or loss if such shares were held for more than one year.
If the redemption is treated as a distribution taxable as a dividend, the amount of
the distribution will be measured by the amount of cash and the fair market value of
any property received by the holder. The holders adjusted tax basis in the
preferred shares redeemed will be transferred to any other shareholdings of the
holder in Brandywine. If the holder of the preferred shares owns no other shares,
under certain circumstances, such basis may be transferred to a related person, or
it may be lost entirely.
Information Reporting and Backup Withholding Applicable to U.S. Shareholders
In general, Brandywine will report to its U.S. Shareholders and the Internal Revenue
Service the amount of distributions paid (unless the U.S. Shareholder is an exempt
recipient such as a corporation) during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be subject
to backup withholding at the rate of 28% with respect to distributions paid unless
such shareholder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup withholding
and otherwise complies with applicable requirements of the backup withholding rules.
A shareholder that does not provide us with his correct taxpayer identification
number may also be subject to penalties imposed by the Internal Revenue Service. In
addition, we may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their non-foreign status to Brandywine. See
Taxation of non-U.S. Shareholders. Backup withholding is not an additional tax.
Any amounts withheld under the backup withholding rules may be allowed as a refund
or a credit against the shareholders income tax liability, provided the required
information is furnished to the Internal Revenue Service.
Taxation of Tax-Exempt Shareholders
U.S. tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts, generally are exempt from U.S. federal
income taxation. However, they are subject to taxation on their unrelated business
taxable income or UBTI. Distributions by us to a shareholder that is a tax-exempt
entity should generally not constitute UBTI, as defined in Section 512(a) of the
Code provided that the tax-exempt entity has not financed the acquisition of its
shares with acquisition indebtedness within the meaning of the Code and the shares
are not otherwise used in an unrelated trade or business of the tax-exempt entity.
Tax-exempt U.S. Shareholders that are social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group legal
services plans exempt from U.S. federal income taxation under sections 501(c)(7),
(c)(9), (c)(17) and (c)(20) of the Code, respectively, are subject to different UBTI
rules, which generally will require them to characterize distributions from us as
UBTI.
In certain circumstances, a pension trust (1) that is described in Section 401(a) of the Code,
(2) is tax exempt under section 501(a) of the Code, and (3) that owns more than 10% of our shares
could be required to treat a percentage of the dividends from us as UBTI if we are a pension-held
REIT. We will not be a pension-held REIT unless (1) either (A) one pension trust owns more than
25% of the value of our shares, or (B) a group of pension trusts, each individually holding more
than 10% of the value of our shares, collectively owns more than 50% of such shares and (2) we
would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides
that shares owned by such trusts shall be treated, for purposes of the requirement that not more
than 50% of the value of the outstanding shares of a REIT is owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities). Certain restrictions
on ownership and transfer of our shares should generally prevent a tax-exempt entity from owning
more than 10% of the value of our shares, or us from becoming a pension-held REIT.
Tax-exempt U.S. Shareholders are urged to consult their tax advisor regarding the U.S.
federal, state, local and foreign tax consequences of the acquisition, ownership and disposition of
our shares.
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of non-U.S. Shareholders
are complex and no attempt will be made herein to provide more than a summary of
such rules. Prospective non-U.S. Shareholders should consult with their own tax
advisors to determine the impact of federal, state and local income and estate tax
laws with regard to an investment in our shares, including any reporting
requirements.
Ordinary Dividends
The portion of Ordinary Dividends received by non-U.S. Shareholders that are not
attributable to gain from sales or exchanges by us of United States real property
interests and which are not effectively connected with a U.S. trade or business of
the non-U.S. Shareholder will generally be subject to a withholding tax equal to
30% of the gross amount of the distribution unless an applicable tax treaty reduces
or eliminates that tax. Under some treaties, however, the lower rates generally
applicable to dividends do not apply to dividends from REITs. We intend to withhold
United States income tax at the rate of 30% on the gross amount of any such Ordinary
Dividends paid to a non-U.S. Shareholder unless (1) a lower treaty rate applies and
the non-U.S. Shareholder files a W-8 BEN (or applicable substitute form) claiming
the benefits of the lower treaty rate or (2) the non-U.S. Shareholder files an IRS
Form W-8 ECI with us claiming that the distribution is effectively connected with a
U.S. trade or business.
In general, non-U.S. Shareholders will not be considered to be engaged in a U.S.
trade or business solely as a result of their ownership of our shares. If income
from the investment in our shares is treated as effectively connected with the
non-U.S. Shareholders conduct of a United States trade or business, the non-U.S.
Shareholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. Shareholders are taxed with respect to such distributions (and may
also be subject to the 30% branch profits tax in the case of a shareholder that is a
foreign corporation).
Non-Dividend Distributions
Unless our shares constitute a U.S. real property interest (USRPI), any
Non-Dividend Distributions will not be taxable to a shareholder to the extent that
such distributions do not exceed the adjusted basis of the shareholders shares, but
rather will reduce the adjusted basis of the shareholder in such shares. To the
extent that Non-Dividend Distributions exceed the adjusted basis of a non-U.S.
Shareholders shares, such distributions will give rise to tax liability if the
non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of its shares, as described below (See Taxation of Non-U.S.
Shareholders Dispositions of our Shares). If it cannot be determined at the time
a distribution is made whether or not such distribution will be in excess of current
and accumulated earnings and profits, the distributions will be subject to
withholding at the same rate as Ordinary Dividends. Because we generally cannot
determine at the time we make a distribution whether or not the distribution will
exceed our current and accumulated earnings and profits, we normally will withhold
tax on the entire amount of any distribution at the same rate as we would withhold
on Ordinary Dividends. However, amounts thus withheld are refundable to the
non-U.S. Shareholder if it is subsequently determined that such distribution was, in
fact, in excess of our current and accumulated earnings and profits.
If our shares constitute a USRPI, as described below (See Taxation of Non-U.S. Shareholders
Dispositions of our Shares), Non-Dividend Distributions by us in excess of the non-U.S.
Shareholders adjusted tax basis in our shares will be taxed under the Foreign Investment in Real
Property Tax Act of 1980 (FIRPTA) at the rate of tax, including any applicable capital gains
rates, that would apply to a U.S. Shareholder of the same type (e.g., an
individual or a corporation, as the case may be), and the collection of the tax will be
enforced by a refundable withholding at a rate of 10% of the Non-Dividend Distribution.
Capital Gain Distributions
Except as discussed below with respect to 5% or less holders of regularly traded
classes of shares, distributions that are attributable to gain from sales or
exchanges by us of United States real property interests will be taxed to a non-U.S.
Shareholder under the provisions of FIRPTA Under FIRPTA, distributions attributable
to gain from sales of United States real property interests are taxed to a non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Individuals who are non-U.S. Shareholders will be required to report such
gain on a U.S. federal income tax return and such gain will be taxed at the normal
capital gain rates applicable to U.S. individual shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a foreign corporate shareholder
not entitled to treaty relief. Brandywine is required by applicable Treasury
Regulations to withhold 35% of any distribution that could be designated by us as a
capital gains dividend. The amount is creditable against the non-U.S. Shareholders
U.S. tax liability.
However, distributions attributable to gain from sales or exchanges by us of United
States real property interests are treated as ordinary dividends (not subject to the
35% withholding tax under FIRPTA) if the distribution is made to a non-U.S.
Shareholder with respect to any class of shares which is regularly traded on an
established securities market located in the United States and if the non-U.S.
Shareholder did not own more than 5% of such class of shares at any time during the
taxable year. Such distributions will generally be subject to a 30% U.S.
withholding tax (subject to reduction under applicable treaty) and a non-U.S.
Shareholder will not be required to report the distribution on a U.S. tax return.
In addition, the branch profits tax will not apply to such distributions. ( See
-Taxation of Non-U.S. Shareholders Ordinary Dividends)
Dividends Paid in Common Shares
A recent Internal Revenue Service revenue procedure allows us to satisfy the REIT
distribution requirements with respect to certain taxable years by distributing up
to 90% of our dividends in the form of common shares rather than cash. In the event
that we pay a portion of a dividend in common shares, we may be required to withhold
U.S. tax with respect to such dividend, including in respect of all or a portion of
such dividend that is payable in common shares.
Dispositions of our Shares
Unless our shares constitutes a USRPI, gain recognized by a non-U.S. Shareholder
upon a sale of shares generally will not be taxed under FIRPTA. Our shares will not
be treated as a USRPI if Brandywine is a domestically controlled
REIT, defined generally as a REIT in which at all times during a specified testing
period less than 50% in value of the shares of beneficial interest was held directly
or indirectly by foreign persons. It is currently anticipated that we will be a
domestically controlled REIT, and therefore the sale of shares by a non-U.S.
Shareholder will not be subject to taxation under FIRPTA. However, because the
shares may be traded, we cannot be sure that we will continue to be a domestically
controlled REIT. Further, even if we are a domestically controlled REIT, pursuant
to wash sale rules under FIRPTA, a non-U.S. Shareholder may incur tax under FIRPTA
to the extent such non-U.S. Shareholder disposes of our shares within a certain
period prior to a capital gain distribution and directly or indirectly (including
through certain affiliates) reacquires our shares within certain prescribed periods.
However, a non-U.S. shareholder will not incur tax under FIRPTA on a sale of common
or preferred shares if (1) our preferred shares or common shares is regularly
traded on an established securities market within the meaning of applicable
Treasury regulations and (2) the non-U.S. Shareholder did not actually, or
constructively under specified attribution rules under the Code, own more than 5% of
our preferred shares or common shares at any time during the shorter of the
five-year period preceding the disposition or the holders holding period.
Even if our common or preferred shares were not regularly traded on an established
securities market, a non-U.S. Shareholder would not be subject to taxation under
FIRPTA as a sale of a U.S. real property interest if such non-U.S. Shareholders
common or preferred shares had a fair market value on the date of acquisition that
was equal to or less than 5% of our regularly traded class of shares with the lowest
fair market value. For purposes of this test, if a non-U.S. Shareholder acquired
shares of common or preferred shares and subsequently acquired additional shares at
a later date, then all such shares would be aggregated and valued as of the date of
the subsequent acquisition.
If gain on the sale of our shares is subject to taxation under FIRPTA, the non-U.S.
Shareholder will be subject to the same treatment as a U.S. Shareholder with respect
to such gain, subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of non-resident alien individuals, and the
purchaser of the shares could be required to withhold 10% of the purchase price and
remit such amount to the Internal Revenue Service. Gain not subject to FIRPTA will
nonetheless be taxable in the United States to a non-U.S. Shareholder if (1)
investment in the shares is effectively connected with the non-U.S. Shareholders
United States trade or business, in which case the non-U.S. Shareholder will be
subject to the same treatment as U.S. Shareholders with respect to such gain or (2)
the non-U.S. Shareholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year, in which case the
nonresident alien individual will be subject to a 30% tax on the individuals
capital gains.
Information Reporting and Backup Withholding Applicable to non-U.S. Shareholders
We must report annually to the IRS and to each non-U.S. Shareholder the amount of
dividends paid to such holder and the tax withheld with respect to such dividends,
regardless of whether withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made available to the tax
authorities in the country in which the non-U.S. Shareholder resides under the
provisions of an applicable income tax treaty.
Payments of dividends or of proceeds from the disposition of stock made to a
non-U.S. Shareholder may be subject to information reporting and backup withholding
unless such holder establishes an exemption, for example, by properly certifying its
non-United States status on an IRS Form W-8 BEN or another appropriate version of
IRS Form W-8. Notwithstanding the foregoing, backup withholding may apply if either
we or our paying agent has actual knowledge, or reason to know, that a non-U.S.
Shareholder is a United States person.
Backup withholding is not an additional tax. Any amounts withheld under the backup
withholding rules may be allowed as a refund or a credit against the shareholders
income tax liability, provided the required information is furnished to the Internal
Revenue Service.
State, Local and Foreign Tax Consequences
Brandywine, the Operating Partnership, the Subsidiary Partnerships and Brandywines
shareholders may be subject to state, local and foreign taxation in various
jurisdictions, including those in which it or they transact business or reside. The
state, local and foreign tax treatment of Brandywine, the Operating Partnership, the
Subsidiary Partnerships and Brandywines shareholders may not conform to the federal
income tax consequences discussed above. Any foreign taxes incurred by us would not
pass through to shareholders as a credit against their U.S. federal income tax
liability. Prospective shareholders should consult their own tax advisors regarding
the effect of state, local and foreign tax laws on an investment in our shares.
Legislative or Other Actions Affecting REITs
The rules dealing with U.S. federal income taxation are constantly under review by
persons involved in the legislative process and by the Internal Revenue Service and
the U.S. Treasury Department. No assurance can be given as to whether, when, or in
what form, the U.S. federal income tax laws applicable to us and our shareholders
may be enacted. Changes to the U.S. federal tax laws and interpretations of U.S.
federal tax laws could adversely affect an investment in our shares.
Debt Securities
This section describes the material United States federal income tax consequences of
owning the debt securities that Brandywine Realty Trust or Brandywine Operating
Partnership may offer. This summary is for general information only and is not tax
advice. The tax consequences of owning any particular issue of debt securities will
be discussed in the applicable prospectus.
As used herein, a U.S. Holder means a beneficial owner of our debt securities, who
is, for U.S. federal income tax purposes:
| a citizen or resident of the U.S. as defined in section 7701(b) of the Code, |
| a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S. or any state thereof or the District of Columbia, |
| an estate the income of which is subject to U.S. federal income taxation regardless of its source or |
| a trust if it (a) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
As used herein, a non-U.S. Holder means a beneficial owner of our debt securities
that is not a U.S. Holder, and that is not a partnership (or other entity treated
as a partnership for U.S. federal income tax purposes).
If a partnership holds debt securities, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding debt securities, you
should consult your tax advisors.
Taxation of U.S. Holders
Interest
The stated interest on debt securities generally will be taxable to a U.S. Holder as
ordinary income at the time that it is paid or accrued, in accordance with the U.S.
Holders method of accounting for United States federal income tax purposes.
Original Issue Discount
If you own debt securities issued with original issue discount (OID), you will be
subject to special tax accounting rules, as described in greater detail below. In
that case, you should be aware that you generally must include OID in gross income
in advance of the receipt of cash attributable to that income. However, you
generally will not be required to include separately in income cash payments
received on the debt securities, even if denominated as interest, to the extent
those payments
do not constitute qualified stated interest, as defined below. If we determine
that a particular debt security will be an OID debt security, we will disclose that
determination in the prospectus relating to those debt securities.
A debt security with an issue price that is less than the stated redemption price
at maturity (the sum of all payments to be made on the debt security other than
qualified stated interest) generally will be issued with OID if that difference is
at least 0.25% of the stated redemption price at maturity multiplied by the number
of complete years to maturity. The issue price of each debt security in a
particular offering will be the first price at which a substantial amount of that
particular offering is sold to the public. The term qualified stated interest
means stated interest that is unconditionally payable in cash or in property, other
than debt instruments of the issuer, and the interest to be paid meets all of the
following conditions:
| it is payable at least once per year; |
| it is payable over the entire term of the debt security; and | ||
| it is payable at a single fixed rate or, subject to certain conditions, based on one or more interest indices. |
If we determine that particular debt securities of a series will bear interest that
is not qualified stated interest, we will disclose that determination in the
prospectus relating to those debt securities.
If you own a debt security issued with de minimis OID, which is discount that is
not OID because it is less than 0.25% of the stated redemption price at maturity
multiplied by the number of complete years to maturity, you generally must include
the de minimis OID in income at the time principal payments on the debt securities
are made in proportion to the amount paid. Any amount of de minimis OID that you
have included in income will be treated as capital gain.
Certain of the debt securities may contain provisions permitting them to be redeemed
prior to their stated maturity at our option and/or at your option. OID debt
securities containing those features may be subject to rules that differ from the
general rules discussed herein. If you are considering the purchase of OID debt
securities with those features, you should carefully examine the applicable
prospectus and should consult your own tax advisors with respect to those features
since the tax consequences to you with respect to OID will depend, in part, on the
particular terms and features of the debt securities.
If you own OID debt securities with a maturity upon issuance of more than one year
you generally must include OID in income in advance of the receipt of some or all of
the related cash payments using the constant yield method described in the
following paragraphs. This method takes into account the compounding of interest.
The amount of OID that you must include in income if you are the initial United
States holder of an OID debt security is the sum of the daily portions of OID
with respect to the debt security for each day during the taxable year or portion of
the taxable year in which you held that debt security (accrued OID). The daily
portion is determined by allocating to each day in any accrual period a pro rata
portion of the OID allocable to that accrual period. The accrual period for an OID
debt security may be of any length and may vary in length over the term of the debt
security, provided that each accrual period is no longer than one year and each
scheduled payment of principal or interest occurs on the first day or the final day
of an accrual period. The amount of OID allocable to any accrual period is an amount
equal to the excess, if any, of:
| the debt securitys adjusted issue price at the beginning of the accrual period multiplied by its yield to maturity, determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period, over | ||
| the aggregate of all qualified stated interest allocable to the accrual period. |
OID allocable to a final accrual period is the difference between the amount payable
at maturity, other than a payment of qualified stated interest, and the adjusted
issue price at the beginning of the final accrual period. Special rules will apply
for calculating OID for an initial short accrual period. The adjusted issue price
of a debt security at the beginning of any accrual period is equal to its issue
price increased by the accrued OID for each prior accrual period, determined without
regard to the amortization of any acquisition or bond premium, as described below,
and reduced by any payments made on the debt security (other than qualified stated
interest) on or before the first day of the accrual period. Under these rules, you
will generally have to include in income increasingly greater amounts of OID in
successive accrual periods. We are required to provide information returns stating
the amount of OID accrued on debt securities held of record by persons other than
corporations and other exempt holders.
Floating rate debt securities are subject to special OID rules. In the case of an
OID debt security that is a floating rate debt security, both the yield to
maturity and qualified stated interest will be determined solely for purposes of
calculating the accrual of OID as though the debt security will bear interest in all
periods at a fixed rate generally equal to the rate that would be applicable to
interest payments on the debt security on its date of issue or, in the case of
certain floating rate debt securities, the rate that reflects the yield to maturity
that is reasonably expected for the debt security. Additional rules may apply if
either:
| the interest on a floating rate debt security is based on more than one interest index; or | ||
| the principal amount of the debt security is indexed in any manner. |
This discussion does not address the tax rules applicable to debt securities with an
indexed principal amount. If you are considering the purchase of floating rate OID
debt securities or securities with indexed principal amounts, you should carefully
examine the prospectus relating to those debt securities, and should consult your
own tax advisors regarding the United States federal income tax consequences to you
of holding and disposing of those debt securities.
You may elect to treat all interest on any debt securities as OID and calculate the
amount includible in gross income under the constant yield method described above.
For purposes of this election, interest includes stated interest, acquisition
discount, OID, de minimis OID, market discount, de minimis market discount and
unstated interest, as adjusted by any amortizable bond premium or acquisition
premium. You must make this election for the taxable year in which you acquired the
debt security, and you may not revoke the election without the consent of the
Internal Revenue Service (the IRS). You should consult with your own tax advisors
about this election.
Market Discount
If you purchase debt securities, other than OID debt securities, for an amount that
is less than their stated redemption price at maturity, or, in the case of OID debt
securities, their adjusted issue price, the amount of the difference will be treated
as market discount for United States federal income tax purposes, unless that
difference is less than a specified de minimis amount. Under the market discount
rules, you will be required to treat any principal payment on, or any gain on the
sale, exchange, retirement or other disposition of, the debt securities as ordinary
income to the extent of the market discount that you have not previously included in
income and are treated as having accrued on the debt securities at the time of their
payment or disposition. In addition, you may be required to defer, until the
maturity of the debt securities or their earlier disposition in a taxable
transaction, the deduction of all or a portion of the interest expense on any
indebtedness attributable to the debt securities. You may elect, on a debt
security-by-debt security basis, to deduct the deferred interest expense in a tax
year prior to the year of disposition. You should consult your own tax advisors
before making this election.
Any market discount will be considered to accrue ratably during the period from the
date of acquisition to the maturity date of the debt securities, unless you elect to
accrue on a constant interest method. You may elect to include market discount in
income currently as it accrues, on either a ratable or constant interest method, in
which case the rule described above regarding deferral of interest deductions will
not apply. Your election to include market discount in income currently, once made,
applies to all market discount obligations acquired by you on or after the first
taxable year to which your election applies and may not be revoked without the
consent of the IRS. You should consult your own tax advisor before making this
election.
Acquisition Premium and Amortizable Bond Premium
If you purchase OID debt securities for an amount that is greater than their
adjusted issue price but equal to or less than the sum of all amounts payable on the
debt securities after the purchase date other than payments of qualified stated
interest, you will be considered to have purchased those debt securities at an
acquisition premium. Under the acquisition premium rules, the amount of OID that
you must include in gross income with respect to those debt securities for any
taxable year will be reduced by the portion of the acquisition premium properly
allocable to that year.
If you purchase debt securities (including OID debt securities) for an amount in
excess of the sum of all amounts payable on those debt securities after the purchase
date other than qualified stated interest, you will be considered to have purchased
those debt securities at a premium and, if they are OID debt securities, you will
not be required to include any OID in income. You generally may elect to amortize
the premium over the remaining term of those debt securities on a constant yield
method as an offset to interest when includible in income under your regular
accounting method. In the case of debt securities that provide for alternative
payment schedules, bond premium is calculated by assuming that (a) you will exercise
or not exercise options in a manner that maximizes your yield, and (b) we will
exercise or not exercise options in a manner that minimizes your yield (except that
we will be assumed to exercise call options in a manner that maximizes your yield).
If you do not elect to amortize bond premium, that premium will decrease the gain or
increase the loss you would otherwise recognize on disposition of the debt security.
Your election to amortize premium on a constant yield method will also apply to all
debt obligations held or subsequently acquired by you on or after the first day of
the first taxable year to which the election applies. You may not revoke the
election without the consent of the IRS. You should consult your own tax advisor
before making this election.
Sale, Exchange and Retirement of debt securities
A U.S. Holder of debt securities will recognize gain or loss upon the sale,
exchange, retirement, redemption or other taxable disposition of such debt
securities in an amount equal to the difference between:
| the amount of cash and the fair market value of other property received in exchange for such debt securities, other than amounts attributable to accrued but unpaid stated interest, which will be subject to tax as ordinary income to the extent not previously included in income; and | ||
| the U.S. Holders adjusted tax basis in such debt securities. |
A U.S. Holders adjusted tax basis in a debt security generally will equal the cost
of the debt security to such holder (A) increased by the amount of OID or accrued
market discount (if any) previously included in income by such holder and (B)
decreased by the amount of any payments other than qualified stated interest
payments and any amortizable bond premium taken by the holder.
Any gain or loss recognized will generally be capital gain or loss, and such capital
gain or loss will generally be long-term capital gain or loss if debt securities has
been held by the U.S. Holder for more than one year. Long-term capital gain for
non-corporate taxpayers is subject to reduced rates of United States federal income
taxation (15% maximum federal rate through the end of 2010). The deductibility of
capital losses is subject to certain limitations.
If a U.S. Holder recognizes a loss upon a subsequent disposition of our debt
securities in an amount that exceeds a prescribed threshold, it is possible that the
provisions of Treasury Regulations involving reportable transactions could apply,
with a resulting requirement to separately disclose the loss generating transactions
to the IRS. While these regulations are directed towards tax shelters, they are
written broadly, and apply to transactions that would not typically be considered
tax shelters. Significant penalties apply for failure to comply with these
requirements. You should consult your tax advisors concerning any possible
disclosure obligation with respect to the receipt or disposition of our debt
securities, or transactions that might be undertaken directly or indirectly by us.
Moreover, you should be aware that we and other participants in transactions
involving us (including our advisors) might be subject to disclosure or other
requirements pursuant to these regulations.
Taxation of Tax-Exempt Holders of Debt Securities
Assuming the debt security is debt for tax purposes, interest income accrued on the
debt security should not constitute unrelated business taxable income to a
tax-exempt holder. As a result, a tax-exempt holder generally should not be subject
to U.S. federal income tax on the interest income accruing on our debt securities.
Similarly, any gain recognized by the tax-exempt holder in connection with a sale of
the debt security generally should not be unrelated business taxable income.
However, if a tax-exempt holder were to finance its acquisition of the debt security
with debt, a portion of the interest income and gain attributable to the debt
security would constitute unrelated business taxable income pursuant to the
debt-financed property rules. Tax-exempt holders should consult their own counsel
to determine the potential tax consequences of an investment in our debt securities.
Taxation of Non-U.S. Holders
The rules governing the U.S. federal income taxation of a Non-U.S. Holder are
complex and no attempt will be made herein to provide more than a summary of such
rules. Non-U.S. Holders should consult their tax advisors to determine the effect of
U.S. federal, state, local and foreign tax laws, as well as tax treaties, with
regard to an investment in the debt securities.
Interest
Interest (including OID) paid to a non-U.S. Holder of debt securities will not be
subject to United States federal withholding tax under the portfolio interest
exception, provided that:
| interest paid on debt securities is not effectively connected with a non-U.S. Holders conduct of a trade or business in the United States; | ||
| the non-U.S. Holder does not actually or constructively own 10% or more of the capital or profits interest in the Operating Partnership (in the case of debt issued by the Operating Partnership), or 10% or more of the shares of Brandywine (in the case of debt issued by Brandywine); | ||
| the non-U.S. Holder is not |
| a controlled foreign corporation that is related to the Operating Partnership or Brandywine, as applicable, or | ||
| a bank that receives such interest on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business; and |
| the beneficial owner of debt securities provides a certification, which is generally made on an IRS Form W-8BEN or a suitable substitute form and signed under penalties of perjury, that it is not a United States person. |
A payment of interest (including OID) to a non-U.S. Holder that does not qualify for
the portfolio interest exception and that is not effectively connected to a United
States trade or business will be subject to United States federal withholding tax at
a rate of 30%, unless a United States income tax treaty applies to reduce or
eliminate withholding.
A non-U.S. Holder will generally be subject to tax in the same manner as a U.S.
Holder with respect to payments of interest (including OID) if such payments are
effectively connected with the conduct of a trade or business by the non-U.S. Holder
in the United States and, if an applicable tax treaty provides, such gain is
attributable to a United States permanent establishment maintained by the non-U.S.
Holder. In some circumstances, such effectively connected income received by a
non-U.S. Holder which is a corporation may be subject to an additional branch
profits tax at a 30% base rate or, if applicable, a lower treaty rate.
To claim the benefit of a lower treaty rate or to claim exemption from withholding
because the income is effectively connected with a United States trade or business,
the non-U.S. Holder must provide a properly executed IRS Form W-8BEN or IRS Form
W-8ECI, or a suitable substitute form, as applicable, prior to the payment of
interest. Such certificate must contain, among other information, the name and
address of the non-U.S. Holder.
Non-U.S. Holders are urged to consult their own tax advisors regarding applicable
income tax treaties, which may provide different rules.
Sale or Retirement of debt securities
A non-U.S. Holder generally will not be subject to United States federal income tax
or withholding tax on gain realized on the sale, exchange or redemption of debt
securities unless:
| the non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange or redemption, and certain other conditions are met; or | ||
| the gain is effectively connected with the conduct of a trade or business of the non-U.S. Holder in the United States and, if an applicable tax treaty so provides, such gain is attributable to a United States permanent establishment maintained by such holder. |
Except to the extent that an applicable tax treaty provides otherwise, a non-U.S.
Holder will generally be subject to tax in the same manner as a U.S. Holder with
respect to gain realized on the sale, exchange or redemption of debt securities if
such gain is effectively connected with the conduct of a trade or business by the
non-U.S. Holder in the United States and, if an applicable tax treaty provides, such
gain is attributable to a United States permanent establishment maintained by the
non-U.S. Holder. In certain circumstances, a non-U.S. Holder that is a corporation
will be subject to an additional branch profits tax at a 30% rate or, if
applicable, a lower treaty rate on such income.
U.S. Federal Estate Tax
Your estate will not be subject to U.S. federal estate tax on the debt securities
beneficially owned by you at the time of your death, provided that any payment to
you on the debt securities, including OID, would be eligible for exemption from the
30% U.S. federal withholding tax under the portfolio interest rule described
above, without regard to the certification requirement.
Information Reporting and Backup Withholding Applicable to Holders of Debt Securities
U.S. Holders
Certain non-corporate U.S. Holders may be subject to information reporting
requirements on payments of principal and interest (including OID) on debt
securities and payments of the proceeds of the sale, exchange, or redemption of debt
securities, and backup withholding, currently imposed at a rate of 28%, may apply to
such payment if the U.S. Holder:
| fails to furnish an accurate taxpayer identification number, or TIN, to the payor in the manner required; | ||
| is notified by the IRS that it has failed to properly report payments of interest or dividends; or | ||
| under certain circumstances, fails to certify, under penalties of perjury, that it has furnished a correct TIN and that it has not been notified by the IRS that it is subject to backup withholding. |
Non-U.S. Holders
A non-U.S. Holder is generally not subject to backup withholding with respect to
payments of interest (including OID) on debt securities if it certifies as to its
status as a non-U.S. Holder under penalties of perjury or if it otherwise
establishes an exemption, provided that neither we nor our paying agent has actual
knowledge or reason to know that the non-U.S. Holder is a United States person or
that the conditions of any other exemptions are not, in fact, satisfied. Information
reporting requirements, however, will apply to payments of interest (including OID)
to non-U.S. Holders where such interest is subject to withholding or exempt from
United States withholding tax pursuant to a tax treaty. Copies of these information
returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
non-U.S. Holder resides.
The payment of the proceeds from the disposition of debt securities to or through
the United States office of any broker, United States or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies as
to its non-United States status under penalties of perjury or otherwise establishes
an exemption, provided that the broker does not have actual knowledge or reason to
know that the non-U.S. Holder is a United States person or that the conditions of
any other exemption are not, in fact, satisfied.
The payment of the proceeds from the disposition of debt securities to or through a
non-United States office of a non-United States broker that is not a United States
related person generally will not be subject to information reporting or backup
withholding. For this purpose, a United States related person is:
| a controlled foreign corporation for United States federal income tax purposes; | ||
| a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment, or for such part of the period that the broker has been in existence, is derived from activities that are effectively connected with the conduct of a United States trade or business; or | ||
| a foreign partnership that at any time during the partnerships taxable year is either engaged in the conduct of a trade or business in the United States or of which 50% or more of its income or capital interests are held by United States persons. |
In the case of the payment of proceeds from the disposition of debt securities to or
through a non-United States office of a broker that is either a United States person
or a United States related person, the payment may be subject to information
reporting unless the broker has documentary evidence in its files that the owner is
a non-U.S. Holder and the broker has no knowledge or reason to know to the contrary.
Backup withholding will not apply to payments made through foreign offices of a
broker that is a United States person or a United States related person, absent
actual knowledge that the payee is a United States person.
Backup withholding is not an additional tax. Any amounts withheld under the backup
withholding rules from a payment to a Holder will be allowed as a refund or a credit
against such Holders United States federal income tax liability, provided that the
requisite procedures are followed.
Holders of debt securities are urged to consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for obtaining
such an exemption, if applicable.