extreme case possibly even with the 75% gross income test. Under those circumstances, however, we expect that we would qualify for the gross income tests relief provision described below,
although the penalty taxes associated with this relief could be material.
In applying the above criteria, each lease or
license of space is evaluated separately from each other lease or license, except that the 1% threshold for impermissible tenant services is applied on a site-by-site basis, as described above. For purposes of Section 856 of the Code, we
believe that each site license under our master license agreements may be tested separately from each other site license under the above criteria, and we have received a private letter ruling from the IRS to that effect.
With respect to any foreign properties, we have maintained, and will continue to maintain, appropriate books and records for our foreign
properties in local currencies. Accordingly, for federal income tax purposes, including presumably the 75% and 95% gross income tests summarized above, our income, gains and losses from our foreign operations that are not held in TRSs will generally
be calculated first in the applicable local currency, and then translated into U.S. dollars at appropriate exchange rates. On the periodic repatriation of monies from such foreign operations to the United States, we will be required to recognize
foreign exchange gains or losses; however, we believe that the foreign exchange gains we recognize from repatriation generally will constitute real estate foreign exchange gains under Section 856(n)(2) of the Code, and will thus be
excluded from the 75% and 95% gross income tests summarized above.
In addition, when we own interests in entities that are
controlled foreign corporations for federal income tax purposes, we are deemed to receive our allocable share of certain income (referred to as Subpart F Income) earned by such controlled foreign corporations whether or not
that income is actually distributed to us. Numerous exceptions apply in determining whether an item of income is Subpart F Income, including exceptions for rent received from an unrelated person and derived in the active conduct of a trade or
business. Rents from real property are generally treated as earned in an active trade or business if the landlord/licensor regularly performs active and substantial management and operational functions with respect to the property while it is leased
or licensed, but only if such activities are performed through the landlord/licensors own officers or staff of employees. We believe that our controlled foreign corporations generally satisfy this active rental exception, and accordingly we
have not recognized material amounts of Subpart F Income, though we may recognize material amounts of Subpart F Income in the future. In addition, we have received private letter rulings from the IRS that the types of Subpart F Income most likely to
be recognized by us qualify under the 95% gross income test. However, we have received no ruling regarding whether other types of Subpart F Income qualify for, or are excluded from, the 95% gross income test. In addition, we do not believe our
Subpart F Income qualifies under the 75% gross income test.
Other than sales of foreclosure property, any gain we realize on
the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of a trade or business may be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This
prohibited transaction income also may adversely affect our ability to satisfy the 75% and 95% gross income tests for federal income tax qualification as a REIT. 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 surrounding the particular transaction. There can be no assurance as to whether or not the IRS might successfully assert that one or more of
our dispositions is subject to the 100% penalty tax. Sections 857(b)(6)(C) and (E) of the Code provide a safe harbor pursuant to which limited sales of real property held for at least two years and meeting specified additional requirements will
not be treated as prohibited transactions. However, compliance with the safe harbor is not always achievable in practice.
we fail to satisfy one or both of the 75% gross income test or the 95% gross income test in any taxable year, we may nevertheless qualify for taxation as a REIT for that year if we satisfy the following requirements:
our failure to meet the test is due to reasonable cause and not due to willful neglect; and
after we identify the failure, we file a schedule describing each item of our gross income included in the 75% gross income test or the 95% gross
income test for that taxable year.