**Taxation of the Company*****Qualification of Brandywine as a REIT***Brandywine first elected to be taxed as a REIT for the taxable year ended December31, 1986. A REIT generally is not subject to federal income tax on the income thatit distributes to its shareholders if it meets the applicable REIT distributionrequirements and other requirements for qualification.We believe that we are organized and have operated in such a manner so as to qualifyas a REIT, but there can be no assurance that we have qualified or will remainquailed as a REIT.Qualification and taxation as a REIT depends on our ability to meet, on a continuingbasis, through actual operating results, distribution levels, and diversity of stockownership, various qualification requirements imposed upon REITs by the Code. Ourability to qualify as a REIT also requires that we satisfy certain asset tests, someof which depend upon the fair market values of assets directly or indirectly ownedby us. Such values may not be susceptible to a precise determination. While weintend 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 taxableyear 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 federalcorporate income taxes on that portion of our ordinary income or capital gain thatwe distribute currently to our shareholders, because the REIT provisions of the Codegenerally allow a REIT a deduction for distributions paid to its shareholders. Thisdeduction substantially eliminates the “double taxation” on earnings (taxation atboth the corporate level and shareholder level) that generally results frominvestment in a corporation. However, even if we qualify for taxation as a REIT, wewill be subject to federal income tax as follows: **•** We will be taxed at regular corporate rates on any undistributed REIT taxableincome, 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) suchincome 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 foreclosureof a mortgage loan or leasehold as “foreclosure property,” we may thereby avoid the100% tax on gain from a resale of that property (if the sale would otherwiseconstitute a prohibited transaction), but the income from the sale or operation ofthe property (and any other nonqualifying income from foreclosure property) may besubject 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 incometest (as discussed below), and nonetheless have maintained our qualification as aREIT 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 failthe 75% or 95% test, multiplied by a fraction intended to reflect ourprofitability;
 
 

 
 **•** If we fail to satisfy any of the REIT asset tests, as described below, by largerthan a de minimis amount, but our failure is due to reasonable cause and not due towillful negligence and we nonetheless maintain our REIT qualification because ofspecified 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 theperiod in which we failed to satisfy the asset tests;  **•** If we fail to satisfy any provision of the Code that would result in our failureto qualify as a REIT (other than a gross income or asset test requirement) and thatviolation is due to reasonable cause and not due to willful negligence, we mayretain our REIT qualification, but we will be required to pay a penalty of $50,000for each such failure;  **•** We may be required to pay monetary penalties to the IRS in certaincircumstances, including if we fail to meet record-keeping requirements intended tomonitor 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 gainnet income for such year, and (c) any undistributed taxable income from prioryears, we would be subject to a 4% excise tax on the excess of such requireddistribution 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. Inthat case, a shareholder would include its proportionate share of our undistributedlong-term capital gain in its income and would be allowed a credit for itsproportionate share of the tax we paid;  **•** A 100% excise tax may be imposed on some items of income and expense that aredirectly or constructively paid between us, our tenants and/or our taxable REITsubsidiaries if and to the extent that the IRS successfully adjusts the reportedamounts of these items;  **•** If we acquire appreciated assets from a C corporation (a corporation generallysubject to corporate level tax) in a transaction in which the adjusted tax basis ofthe assets in our hands is determined by reference to the adjusted tax basis of theassets in the hands of the C corporation, we may be subject to tax on suchappreciation at the highest corporate income tax rate then applicable if wesubsequently recognize gain on a disposition of such assets during the ten-yearperiod following their acquisition from the C corporation, unless the C corporationelects to treat the assets as if they were sold for their fair market value at thetime of our acquisition; and  **•** Income earned by any of our taxable REIT subsidiaries will be subject to tax atregular corporate rates.
 
 

 
***Requirements for Qualification as a REIT***We elected to be taxable as a REIT for U.S. federal income tax purposes for ourtaxable year ended December 31, 1986. In order to have so qualified, we must havemet and continue to meet the requirements discussed below, relating to ourorganization, sources of income, nature of assets and distributions of income toshareholders.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 bytransferable certificates of beneficial interest;3. that would be taxable as a domestic corporation but for the special Codeprovisions applicable to REITs;4. that is neither a financial institution nor an insurance company subject tocertain 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 valueof the outstanding shares is owned, directly or indirectly, by five or fewerindividuals (as defined in the Code to include specified entities), after applyingcertain attribution rules;7. that makes an election to be taxable as a REIT, or has made this election for aprevious taxable year which has not been revoked or terminated, and satisfies allrelevant filing and other administrative requirements established by the InternalRevenue 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 therecord keeping requirements of the Code and the Treasury Regulations; and9. that meets other applicable tests, described below, regarding the nature of itsincome and assets and the amount of its distributions.Conditions (1) through (4) must be satisfied during the entire taxable year, andcondition (5) must be satisfied during at least 335 days of a taxable year of 12months, 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 tosatisfy requirements (5) and (6) (the “100 Shareholder” and “five-or-fewer”requirements). In addition, our Declaration of Trust provides restrictionsregarding the transfer of our shares that are intended to assist us in continuing tosatisfy the requirements described in conditions (5) and (6) above However, theserestrictions may not ensure that we will, in all cases, be able to satisfy therequirements described in conditions (5) and (6) above. In addition, we have notobtained a ruling from the Internal Revenue Service as to whether the provisions ofour Declaration of Trust concerning restrictions on transfer and conversion ofcommon 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 willterminate. However, for taxable years beginning on or after January 1, 2005, if thefailure to meet the share ownership requirements is due to reasonable cause and notdue to willful neglect, we may avoid termination of our REIT status by paying apenalty of $50,000.To monitor compliance with the share ownership requirements, we are required tomaintain records regarding the actual ownership of our shares. To do so, we mustdemand written statements each year from the record holders of certain percentagesof 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). Alist of those persons failing or refusing to comply with this demand must bemaintained as part of our records. Failure by us to comply with these record-keepingrequirements could subject us to monetary penalties. If we satisfy theserequirements and have no reason to know that condition (6) is not satisfied, we willbe deemed to have satisfied such condition. A shareholder that fails or refuses tocomply with the demand is required by Treasury Regulations to submit a statementwith its tax return disclosing the actual ownership of the shares and otherinformation.***Qualified REIT Subsidiaries***The Code provides that a corporation that is a “qualified REIT subsidiary” shall notbe treated as a separate corporation, and all assets, liabilities and items ofincome, deduction and credit of a “qualified REIT subsidiary” shall be treated asassets, 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 isowned by the REIT, that has not elected to be a “taxable REIT subsidiary” (discussedbelow). In applying the requirements described herein, all of our “qualified REITsubsidiaries” will be ignored, and all assets, liabilities and items of income,deduction and credit of such subsidiaries will be treated as our assets, liabilitiesand items of income, deduction and credit. These subsidiaries,therefore, will not be subject to federal corporate income taxation, although theymay be subject to state and local taxation.***Taxable REIT Subsidiaries***A REIT may generally jointly elect with a subsidiary corporation, whether or notwholly owned, to treat the subsidiary as a “taxable REIT subsidiary.” In addition,if a taxable REIT subsidiary owns, directly or indirectly, securities representing35% or more of the vote or value of a subsidiary corporation, that subsidiary willalso be treated as a taxable REIT subsidiary. A taxable REIT subsidiary is acorporation subject to U.S. federal income tax, and state and local income tax whereapplicable, as a regular “C” corporation.
 
 

 
Generally, a taxable REIT subsidiary of ours can perform some impermissible tenantservices without causing us to receive impermissible tenant services income underthe REIT income tests. However, several provisions regarding the arrangementsbetween a REIT and its taxable REIT subsidiaries ensure that a taxable REITsubsidiary will be subject to an appropriate level of United States federal incometaxation. For example, a taxable REIT subsidiary is limited in its ability to deductinterest payments in excess of a certain amount made to us. In addition, we will beobligated to pay a 100% penalty tax on some payments that we receive or on certainexpenses deducted by the taxable REIT subsidiary if the economic arrangements amongus, our tenants, and/or the taxable REIT subsidiary are not comparable to similararrangements among unrelated parties. A taxable REIT subsidiary may also engage inother activities that, if conducted by us other than through a taxable REITsubsidiary, could result in the receipt of non-qualified income or the ownership ofnon-qualified assets.***Ownership of Partnership Interests by a REIT***A REIT that is a partner in a partnership is deemed to own its proportionate shareof the assets of the partnership and is deemed to receive the income of thepartnership attributable to such share. In addition, the character of the assetsand gross income of the partnership retains the same character in the hands of theREIT. Accordingly, our proportionate share of the assets, liabilities and items ofincome of the Operating Partnership are treated as assets, liabilities and items ofincome of ours for purposes of applying the requirements described herein.Brandywine has control over the Operating Partnership and most of the partnershipand limited liability company subsidiaries of the Operating Partnership and intendsto operate them in a manner that is consistent with the requirements forqualification of Brandywine as a REIT.***Income Tests***In order to qualify as a REIT, Brandywine must generally satisfy two gross incomerequirements on an annual basis. First, at least 75% of our gross income (excludinggross income from prohibited transactions) for each taxable year must be deriveddirectly or indirectly from investments relating to real property or mortgages onreal property, including “rents from real property,” dividendsreceived from other REITs, interest income derived from mortgage loans secured byreal property (including certain types of mortgage-backed securities), and gainsform the sale of real estate assets, as well as income from certain kinds oftemporary investments. Second, at least 95% of our gross income (excluding grossincome from prohibited transactions) for each taxable year must be derived from thesame 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 haveany relation to real property.Rents received by a REIT will qualify as “rents from real property” in satisfyingthe 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 orprofits of any person. However, an amount received or accrued generally will notbe excluded from the term “rents from real property” solely by reason of beingbased on a fixed percentage or percentages of gross receipts or sales.
 
 

 
 **•** Rents received from a tenant will not qualify as “rents from real property” insatisfying 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 subsidiarywill qualify as rents from real property even if we own more than 10% of the totalvalue or combined voting power of the taxable REIT subsidiary if at least 90% ofthe property is leased to unrelated tenants and the rent paid by the taxable REITsubsidiary is substantially comparable to the rent paid by the unrelated tenantsfor comparable space.  **•** Rent attributable to personal property leased in connection with a lease of realproperty will not qualify as “rents from real property” if such rent exceeds 15% ofthe total rent received under the lease.  **•** the REIT generally must not operate or manage the property or furnish or renderservices to tenants, except through an “independent contractor” who is adequatelycompensated and from whom the REIT derives no income, or through a taxable REITsubsidiary. The “independent contractor” requirement, however, does not apply tothe 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 otherwiseconsidered “rendered to the occupant.” In addition, a de minimis rule applies withrespect to non-customary services. Specifically, if the value of the non-customaryservice income with respect to a property (valued at no less than 150% of thedirect costs of performing such services) is 1% or less of the total income derivedfrom the property, then all rental income except the non-customary service incomewill qualify as “rents from real property.” A taxable REIT subsidiary may provideservices (including noncustomary services) to a REIT’s tenants without “tainting”any of the rental income received by the REIT, and will be able to manage oroperate properties for third parties and generally engage in other activitiesunrelated to real estate.We do not anticipate receiving rent that is based in whole or in part on the incomeor profits of any person (except by reason of being based on a fixed percentage orpercentages 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 anyRelated Party Tenant or rents attributable to personal property leased in connectionwith real property that will exceed 15% of the total rents received with respect tosuch 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 customarilyrendered” in connection with the rental of space for occupancy only so that theprovision of such services will not jeopardize the qualification of rent from theproperties 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 “independentcontractor” or a taxable REIT subsidiary to provide such services.The Operating Partnership may receive certain types of income that will not qualifyunder the 75% or 95% gross income tests. In particular, dividends received from ataxable 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 anytaxable year will not cause Brandywine to exceed the limits on non-qualifying incomeunder either the 75% or 95% gross income tests.
 
 

 
If Brandywine fails to satisfy one or both of the 75% or 95% gross income tests forany taxable year, Brandywine may nevertheless qualify as a REIT for such year if itis entitled to relief under certain provisions of the Code. These relief provisionswill be generally available if (1) the failure to meet such tests was due toreasonable cause and not due to willful neglect, (2) we have attached a schedule ofthe sources of our income to our return, and (3) any incorrect information on theschedule was not due to fraud with intent to evade tax. In addition, for taxableyears beginning on or after January 1, 2005, we must also file a disclosure schedulewith the IRS after we determine that we have not satisfied one of the gross incometests. It is not possible, however, to state whether in all circumstancesBrandywine would be entitled to the benefit of these relief provisions. Asdiscussed above in “Taxation of Brandywine as a REIT,” even if these reliefprovisions 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 thefollowing four tests relating to the nature of our assets:First, at least 75% of the value of our total assets must be represented by somecombination 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 asland, buildings, leasehold interests in real property, stock ofother 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 theadditional asset tests described below, while securities that do qualify forpurposes of the 75% test are generally not subject to the additional asset tests.Second, the value of any one issuer’s securities we own may not exceed 5% of thevalue of our total assets.Third, we may not own more than 10% of the vote or value of any one issuer’soutstanding securities. The 5% and 10% tests do not apply to our interests in theOperating Partnership, noncorporate subsidiaries, taxable REIT subsidiaries and anyqualified REIT subsidiaries, and the 10% value test does not apply with respect tocertain “straight debt” securities.Effective for taxable years beginning after December 31, 2000, the safe harbor underwhich certain types of securities are disregarded for purposes of the 10% valuelimitation includes (1) straight debt securities (including straight debt securitiesthat provides for certain contingent payments); (2) any loan to an individual or anestate; (3) any rental agreement described in Section 467 of the Code, other thanwith 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 theCommonwealth of Puerto Rico; (6) any security issued by a REIT; and (7) any otherarrangement that, as determined by the Secretary of the Treasury, is excepted fromthe definition of a security. In addition, for purposes of applying the 10% valuelimitation, (a) a REIT’s interest as a partner in a partnership is not considered asecurity; (b) any debt instrument issued by a partnership is not treated as asecurity if at least 75% of the partnership’s gross income is from sources thatwould qualify for the 75% REIT gross income test, and (c) any debt instrument issuedby a partnership is not treated as a security to the extent of the REIT’s interestas 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 moretaxable REIT subsidiaries.We own, directly or indirectly, common shares of certain entities that have electedor 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 (includingsatisfaction of the ownership, income, asset and distribution tests discussedherein) the common shares of the Captive REITs will qualify as real estate assetsunder the 75% test. However, if any Captive REIT fails to qualify as a REIT in anyyear, then the common shares of such Captive REIT will not qualify as real estateassets 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 notsatisfy the 10% test if any Captive REIT were to fail to qualify as a REIT.Accordingly, Brandywine’s qualification as a REIT depends upon the ability of eachCaptive REIT to continue to qualify as a REIT.After initially meeting the asset tests at the close of any quarter, Brandywine willnot lose its status as a REIT for failure to satisfy the asset tests at the end of alater quarter solely by reason of changes in asset values. If the failure tosatisfy the asset tests results from an acquisition of securities or other propertyduring a quarter, the failure can be cured by disposition of sufficientnonqualifying assets within 30 days after the close of that quarter. We intend tomaintain adequate records of the value of our assets to ensure compliance with theasset tests, and to take such other action within 30 days after the close of anyquarter as may be required to cure any noncompliance. However, there can be noassurance that such other action will always be successful. If we fail to cure anynoncompliance with the asset tests within such time period, our status as a REITwould be lost.For taxable years beginning on or after January 1, 2005, the Code provides relieffrom certain failures to satisfy the REIT asset tests. If the failure relates tothe 5% test or 10% test, and if the failure is de minimis (does not exceed thelesser of $10 million or 1% of our assets as of the end of the quarter), we mayavoid the loss of our REIT status by disposing of sufficient assets to cure thefailure within 6 months after the end of the quarter in which the failure wasidentified. For failures to meet the asset tests that are more than a de minimisamount, we may avoid the loss of our REIT status if: the failure was due toreasonable cause, we file a disclosure schedule at the end of the quarter in whichthe failure was identified, we dispose of sufficient assets to cure the failurewithin 6 months after the end of the quarter, and we pay a tax equal to the greaterof $50,000 or the highest corporate tax rate multiplied by the net income generatedby the non-qualifying assets.***Annual Distribution Requirements***In order to qualify as a REIT, Brandywine is required to distribute dividends (other thancapital 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 theREIT’s net capital gain or loss) and (b) 90% of the net income (after tax), if any, fromforeclosure property, minus (2) certain “excess” non-cash income as defined in the Code. Thesedistributions must be paid in the taxable year to which they relate, or in the following taxableyear if such distributions are declared in October, November or December of the taxable year, arepayable to shareholders of record on a specified date in any such month, and are actually paidbefore the end of January of the following year. Such distributions are treated as both paid by usand 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 wetimely file our tax return for the year provided we pay such distribution with or before our firstregular dividend payment after such declaration, and such payment is made during the 12-monthperiod following the close of such taxable year. Such distributions are taxable to ourshareholders in the year in which paid, even though the distributions relate to our prior taxableyear for purposes of the 90% distribution requirement.In order for distributions to be counted towards our distribution requirement, and to providea tax deduction to us, they must not be “preferential dividends.” A dividend is not a preferentialdividend if it is *pro rata*among all outstanding shares within a particular class, and is inaccordance with the preferences among our different classes of shares as set forth in ourorganizational 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, wemay elect to retain, rather than distribute, our net long-term capital gains and pay tax on suchgains. In this case, we would elect to have our shareholders include their proportionate share ofsuch undistributed long-term capital gains in their income and receive a corresponding credit fortheir proportionate share of the tax paid by us. Our shareholders would then increase theiradjusted basis in our shares by the difference between the amount included in their long-termcapital 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 distributionswith declaration and record dates falling in the last three months of the calendar year, by the endof January following such calendar year) at least the sum of (1) 85% of our REIT ordinary incomefor such year, (2) 95% of our REIT net capital gain income for such year and (3) any undistributedtaxable income from prior periods, we would be subject to a 4% excise tax on the excess of suchrequired distribution over the sum of (a) the amounts actually distributed plus (b) retainedamounts on which corporate level tax is paid by us.Brandywine intends to make timely distributions sufficient to satisfy the annual distributionrequirements. In this regard, the limited partnership agreement of the Operating Partnershipauthorizes Brandywine, as general partner, to operate the partnership in a manner that will enableit to satisfy the REIT requirements and avoid the imposition of any federal income or excise taxliability. It is possible that we, from time to time, may not have sufficient cash or other liquidassets to meet the 90% distribution requirement. This could arise, for example, when there is anexpenditure 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, ourREIT taxable income may exceed our economic income. In order to meet the 90% distributionrequirement, we may borrow or may cause the Operating Partnership to arrange for short-term orpossibly long-term borrowing to permit the payment of required distributions, or we may paydividends in the form of taxable in-kind distributions of property, including potentially, ourshares.
 
 

 
Under certain circumstances, Brandywine may be able to rectify a failure to meet thedistribution requirement for a given year by paying “deficiency dividends” to shareholders in alater year that may be included in Brandywine’s deduction for distributions paid for the earlieryear. Thus, Brandywine may be able to avoid losing our REIT qualification or being taxed onamounts distributed as deficiency dividends. However, Brandywine will be required to pay to theInternal Revenue Service interest and a penalty based upon the amount of any deduction taken fordeficiency dividends.***Failure to Qualify***For taxable years beginning on or after January 1, 2005, the Code provides relieffor many failures to satisfy the REIT requirements. In addition to the reliefprovisions for failures to satisfy the income and asset tests (discussed above), theCode provides additional relief for other failures to satisfy REIT requirements. Ifthe failure is due to reasonable cause and not due to willful neglect, and we electto pay a penalty of $50,000 for each failure, we can avoid the loss of our REITstatus.If Brandywine fails to qualify for taxation as a REIT in any taxable year and therelief provisions do not apply, it will be subject to tax (including any applicablecorporate alternative minimum tax) on its taxable income at regular corporate rates.Distributions to shareholders in any year in which Brandywine fails to qualify willnot be deductible to us. In such event, to the extent of Brandywine’s current andaccumulated earnings and profits, all distributions to shareholders will be taxableto them as dividends, and, subject to certain limitations of the Code, corporatedistributees may be eligible for the dividends received deduction. Under currentlaw (in effect through 2010), such dividends will generally be taxable to individualshareholders at the 15% rate for qualified dividends provided that applicableholding period requirements are met. Unless entitled to relief under specificstatutory provisions, Brandywine also will be disqualified from taxation as a REITfor the four taxable years following the year during which qualification was lost.It is not possible to state whether in all circumstances Brandywine would beentitled 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 thanforeclosure property) that is held primarily for sale to customers in the ordinary course of atrade or business. Under existing law, whether property is held as inventory or primarily for saleto customers in the ordinary course of a trade or business is a question of fact that depends onall the facts and circumstances of a particular transaction. We intend to hold properties forinvestment 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 areconsistent with our investment objectives. No assurance can be given that any property that wesell will not be treated as property held for sale to customers, or that we can comply with certainsafe-harbor provisions of the Code that would prevent the imposition of the 100% tax. The 100% taxdoes not apply to gains from the sale of property that is held through a taxable REIT subsidiary orother taxable corporation, although such income will be subject to tax in the hands of thatcorporation at regular corporate tax rates.
 
 

 
***Foreclosure Property***Foreclosure property is real property (including interests in real property) and anypersonal property incident to such real property (1) that is acquired by a REIT as aresult of the REIT having bid in the property at foreclosure, or having otherwisereduced 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 amortgage loan held by the REIT and secured by the property, (2) for which therelated loan or lease was made, entered into or acquired by the REIT at a time whendefault was not imminent or anticipated and (3) for which such REIT makesan election to treat the property as foreclosure property. REITs generally aresubject to tax at the maximum corporate rate (currently 35%) on any net income fromforeclosure property, including any gain from the disposition of the foreclosureproperty, other than income that would otherwise be qualifying income for purposesof the 75% gross income test. Any gain from the sale of property for which aforeclosure property election has been made will not be subject to the 100% tax ongains from prohibited transactions described above, even if the property is heldprimarily 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 orliabilities. Hedging transactions could take a variety of forms, including interestrate swaps or cap agreements, options, futures contracts, forward rate agreements orsimilar financial instruments. Except to the extent provided by TreasuryRegulations, any income from a hedging transaction (i) made in the normal course ofour business primarily to manage risk of interest rate or price changes or currencyfluctuations with respect to borrowings made or to be made, or ordinary obligationsincurred 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 currencyfluctuations with respect to any item of income or gain that would be qualifyingincome under the 75% or 95% income tests (or any property which generates suchincome or gain), which is clearly identified as such before the close of the day onwhich it was acquired, originated or entered into, including gain from thedisposition of such a transaction, will not constitute gross income for purposes ofthe 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 hedgingtransactions, the income from those transactions is likely to be treated asnon-qualifying income for purposes of both the 75% and 95% gross income tests. Weintend to structure any hedging transactions in a manner that does not jeopardizeour 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 considerationsapplicable to Brandywine’s investment in the Operating Partnership and the OperatingPartnership’s subsidiary partnerships and limited liability companies (referred toas the “Subsidiary Partnerships”).
 
 

 
**General**We may hold investments through entities that are classified as partnerships forU.S. federal income tax purposes, including our interest in the OperatingPartnership and the equity interests in Subsidiary Partnerships. In general,partnerships are “pass-through” entities that are not subject to U.S. federal incometax. Rather, partners are allocated their proportionate shares of the items ofincome, gain, loss, deduction and credit of a partnership, and are subject to tax onthese items without regard to whether the partners receive a distribution from thepartnership. We will include in our income our proportionate share of thesepartnership items for purposes of the various REIT income tests and in thecomputation of our REIT taxable income. Moreover, for purposes of the REIT assettests, we will include our proportionate share of assets held by subsidiarypartnerships. Consequently, to the extent that we hold an equity interest in apartnership, the partnership’s assets and operations may affect our ability toqualify as a REIT.**Classification of the Operating Partnership and Subsidiary Partnerships as Partnerships**The investment by us in partnerships involves special tax considerations, includingthe possibility of a challenge by the Internal Revenue Service to the status of theOperating Partnership or any if our Subsidiary Partnerships as a partnership, asopposed to an association taxable as a corporation, for U.S. federal income taxpurposes. If any of these entities were treated as an association for U.S. federalincome tax purposes, it would be taxable as a corporation and, therefore, could besubject to an entity-level tax on its income. In such a situation, the character ofour assets and items of our gross income would change and could preclude us fromsatisfying the REIT asset tests or the REIT income tests as discussed in “—Taxation of the Company — Asset Tests” and “— Income Tests” above, and in turncould 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 meetthese tests for a taxable year. In addition, any change in the status of any of oursubsidiary partnerships for tax purposes might be treated as a taxable event, inwhich case we could have taxable income that is subject to the REIT distributionrequirements 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 acorporation (an “Eligible Entity”) may elect to be treated as a partnership ordisregarded entity for federal income tax purposes. Unless it elects otherwise, anEligible Entity in existence prior to January 1, 1997**,**will have the sameclassification for federal income tax purposes that it claimed under the entityclassification Treasury Regulations in effect prior to this date. In addition, anEligible Entity that did not exist or did not claim a classification prior toJanuary 1, 1997 will be classified as a partnership or disregarded entity forfederal income tax purposes unless it elects otherwise. The Operating Partnershipand the Subsidiary Partnerships (other than those Subsidiary Partnerships that haveelected to be treated as taxable REIT subsidiaries) intend to claim classificationas partnerships or disregarded entities under these Treasury Regulations. As aresult, we believe that the Operating Partnership and such Subsidiary Partnerships(other than those Subsidiary Partnerships that have elected to be treated as taxableREIT subsidiaries) will be classified as partnerships or disregarded entities forfederal income tax purposes. We have not requested and do not intend to request aruling from the Internal Revenue Service that the Operating Partnership orSubsidiary Partnerships will be classified as partnerships for federal income taxpurposes.
 
 

 
**Partnership Allocations**Although a partnership agreement will generally determine the allocation of incomeand losses among partners, such allocations will be disregarded for tax purposes ifthey do not comply with the provisions of Section 704(b) of the Code and theTreasury Regulations promulgated thereunder, which require that partnershipallocations respect the economic arrangement of the partners. If an allocation isnot recognized for Federal income tax purposes, the item subject to the allocationwill be reallocated in accordance with the partners’ interests in the partnership,which will be determined by taking into account all of the facts and circumstancesrelating to the economic arrangement of the partners with respect to such item. TheOperating Partnership’s allocations of taxable income and loss are intended tocomply with the requirements of Section 704(b) of the Code and the TreasuryRegulations promulgated thereunder.**Tax Allocations With Respect to Contributed Properties**Pursuant to Section 704(c) of the Code, items of income, gain, loss and deductionattributable to appreciated or depreciated property that is contributed to apartnership in exchange for an interest in the partnership must be allocated forfederal income tax purposes in a manner such that the contributor is charged with orbenefits from the unrealized gain or unrealized loss associated with the property atthe time of the contribution. The amount of such unrealized gain or unrealized lossis generally equal to the difference between the fair market value of thecontributed property at the time of contribution and the adjusted tax basis of suchproperty at the time of contribution. Such allocations are solely for federalincome tax purposes and do not affect other economic or legal arrangements among thepartners.Our Operating Partnership has entered into transactions involving the contribution to theOperating Partnership of appreciated property, and the Operating Partnership may enter into suchtransactions in the future. The partnership agreement of the Operating Partnership requiresallocations of income, gain, loss and deduction attributable to contributed property to be made ina manner that is consistent with Section 704(c) of the Code. Treasury Regulations issued underSection 704(c) give partnerships a choice of several methods of allocating taxable income withrespect to contributed properties. Depending upon the method chosen, (1) our tax depreciationdeductions attributable to those properties may be lower than they would have been if our OperatingPartnership had acquired those properties for cash and (2) in the event of a sale of suchproperties, we could be allocated gain in excess of our corresponding economic or book gain. Theseallocations 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 orresult in our shareholders recognizing additional dividend income without an increase indistributions.**Depreciation**The Operating Partnership’s assets include a substantial amount of appreciatedproperty contributed by its partners. Assets contributed to a partnership in a tax-free transaction generally retain the same depreciation method and recovery periodas they had in the hands of the partner who contributed them to the partnership.Accordingly, a substantial amount of the Operating Partnership’s depreciationdeductions for its real property are based on the historic taxdepreciationschedules for the properties prior to their contribution to the OperatingPartnership. The properties are being depreciated over a range of 15 to 40 yearsusing various methods of depreciation which were determined at the time that eachitem of depreciable property was placed in service. Any depreciable real propertypurchased by the Partnerships is currently depreciated over 40 years. In certaininstances where a partnership interest rather than real property is contributed tothe Partnership, the real property may not carry over its recovery period but rathermay, 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 interestgenerally (1) will be equal to the amount of cash and the basis of any otherproperty contributed to such partnership by us, (2) will be increased by (a) ourallocable share of such partnership’s income and (b) our allocable share of anyindebtedness of such partnership, and (3) will be reduced, but not below zero, byour allocable share of (a) such partnership’s loss and (b) the amount of cash andthe tax basis of any property distributed to us and by constructive distributionsresulting 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 whichwe have an interest would reduce the adjusted tax basis of our partnership interestin such partnership below zero, the recognition of such loss will be deferred untilsuch time as the recognition of such loss (or portion thereof) would not reduce ouradjusted tax basis below zero. To the extent that distributions to us from apartnership, or any decrease in our share of the nonrecourse indebtedness of apartnership (each such decrease being considered a constructive cash distribution tothe 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 aslong-term capital gain if our interest in such partnership has been held for longerthan 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 thepartnership for more than 12 months will be long-term capital gain, except for anyportion of such gain that is treated as depreciation or cost recovery recapture.However, under requirements applicable to REITs under the Code, our share as apartner of any gain realized by the Operating Partnership on the sale of anyproperty held as inventory or other property held primarily for sale to customers inthe ordinary course of a trade or business will be treated as income from aprohibited transaction that is subject to a 100% penalty tax. See “—Taxation of theCompany — Prohibited Transactions.”**Taxation of Shareholders**As used herein, a “U.S. Shareholder” means a beneficial owner of our common sharesor 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 incometax purposes) created or organized in or under the laws of the U.S. or any statethereof or the District of Columbia,
 
 

 
 **•** an estate the income of which is subject to U.S. federal income taxationregardless of its source or  **•** a trust if it (a) is subject to the primary supervision of a court within theU.S. and one or more U.S. persons have the authority to control all substantialdecisions 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 apartnership (or other entity treated as a partnership for U.S. federal income taxpurposes).If a partnership holds common shares or preferred shares, the tax treatment of apartner will generally depend upon the status of the partner and the activities ofthe partnership. If you are a partner of a partnership holding common shares orpreferred 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 Brandywine’staxable U.S. Shareholders out of current or accumulated earnings and profits (andnot designated as capital gain dividends) (“Ordinary Dividends”) will be dividendstaxable to such U.S. Shareholders as ordinary income and will not be eligible forthe dividends received deduction for corporations. Dividends received from REITsare generally not eligible for taxation at the preferential rates for qualifieddividends received by individual shareholders. We may designate a distribution asqualified dividend income to the extent of (1) qualified dividend income we receiveduring the current year (for example, dividends received from our taxable REITsubsidiaries), plus (2) income on which we have been subject to corporate level taxduring the prior year (for example, undistributed REIT taxable income), plus (3) anyincome attributable to the sale of a built in gain asset that was acquired from a Ccorporation in a carry-over basis transaction less the taxpaid on that income. To the extent that we designate a dividend as qualifieddividend income, an individual will be taxable at preferential rates (15% maximumfederal rate through the end of 2010) on such qualified dividend income providedcertain holding period requirements are met. However, we expect that ordinarydividends paid by Brandywine generally will not be eligible for treatment asqualified dividend income to any significant extent.**Capital Gain Distributions**Distributions that are designated as long-term capital gain dividends will be taxedas long-term capital gains (to the extent they do not exceed our actual net capitalgain 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 todepreciation recapture will be taxable at the maximum rate of 25%. However,corporate shareholders may be required to treat up to 20% of certain capital gaindividends as ordinary income.
 
 

 
We may elect under the applicable provisions of the Code to retain and pay tax onour net capital gains. In such event U.S. Shareholders will be taxable on theirproportionate share of such undistributed capital gains. Each U.S. Shareholderwould then receive a credit, for use on their return, in the amount of theirproportionate share of the capital gains tax paid by us. If the credit results inan amount owed to a U.S. Shareholder, such U.S. Shareholder would receive a refund.A U.S. Shareholder’s basis in our shares will be increased by the amount of theshareholder’s allocable share of any retained capital gains less the shareholder’sallocable 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 theextent that they do not exceed the adjusted basis of the shareholder’s shares, butrather will reduce the adjusted basis of such shares. To the extent thatNon-Dividend exceed the adjusted basis of a U.S. Shareholder’s shares, suchdistributions will be included in income as long-term capital gain (or short-termcapital gain if the shares have been held for 12 months or less) assuming the sharesare a capital asset in the hands of the shareholder. In determining the extent towhich a distribution on our shares constitutes a dividend for tax purposes, theearnings and profits of Brandywine will be allocated first to distributions withrespect to the preferred shares and second to distributions with respect to common shares. Therefore, depending on our earnings and profits, distributions with respectto 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 adistribution in excess of basis.**Dividends Paid in Common Shares**A recent Internal Revenue Service revenue procedure allows us to satisfy the REITdistribution requirements with respect to certain taxable years by distributing upto 90% of our dividends in the form of common shares rather than cash. In the eventthat we pay a portion of a dividend in common shares, taxable U.S. Shareholderswould be required to pay tax on the full amount of the dividend (including the fairmarket value of any common shares received) and the amount of the tax may exceed theamount of cash received.**Timing of Distributions**Any distribution declared by us in October, November or December of any year payableto a shareholder of record on a specified date in any such month shall be treated asboth 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 endof January of the following calendar year. Shareholders may not include in theirindividual income tax returns any of Brandywine’s losses.
 
 

 
**Sale or Exchange of Common and Preferred Shares**In general, a U.S. Shareholder will recognize capital gain or loss on thedisposition of common or preferred shares equal to the difference between the salesprice for such shares and the adjusted tax basis for such shares. In general, aU.S. Shareholder’s adjusted tax basis will equal the U.S. Shareholder’s acquisitioncost, increased by the U.S. Shareholder’s allocable share of any retained capitalgains, less the U.S. Shareholder’s allocable share of the tax paid by us on suchretained 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 toa 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. Gainsrecognized by U.S. Shareholders that are corporations are subject to U.S. federalincome tax at a maximum rate of 35%, whether or not classified as long-term capitalgains.Capital losses recognized by a U.S. Shareholder upon the disposition of our sharesheld for more than one year at the time of disposition will be considered long-termcapital losses, and are generally available only to offset capital gain income ofthe U.S. Shareholder but not ordinary income (except in the case of individuals, whomay offset up to $3,000 of ordinary income each year). However, any loss upon a saleor exchange of shares by a U.S. Shareholder who has held such shares for six monthsor less (after applying certain holding period rules) will be treated as a long-termcapital loss to the extent such shareholder has received distributions from usrequired to be treated as long-term capital gain.If a U.S. Shareholder recognizes a loss upon a subsequent disposition of our sharesin an amount that exceeds a prescribed threshold, it is possible that theprovisions of Treasury Regulations involving “reportable transactions” could apply,with a resulting requirement to separately disclose the loss generating transactionsto the IRS. While these regulations are directed towards “tax shelters,” they arewritten broadly, and apply to transactions that would not typically be consideredtax shelters. Significant penalties apply for failure to comply with theserequirements. You should consult your tax advisors concerning any possibledisclosure obligation with respect to the receipt or disposition of our shares, ortransactions that might be undertaken directly or indirectly by us. Moreover, youshould be aware that we and other participants in transactions involving us(including our advisors) might be subject to disclosure or other requirementspursuant to these regulations.**Passive Activity Losses and Investment Interest Limitations**Distributions from us and gain from the disposition of shares will not be treated aspassive activity income and, therefore, U.S. Shareholders will not be able to applyany “passive losses” against such income. Distributions from us (to the extent theydo not constitute a return of capital or capital gain dividends) will generally betreated as investment income for purposes of the investment income limitation. Ashareholder may elect to treat capital gain dividends and capital gains from thedisposition of shares as investment income for purposes of the investment incomelimitation, but in such event a shareholder will be taxed at ordinary income rateson such amounts.
 
 

 
**Redemption of Preferred Shares**Our preferred shares are redeemable by us under certain circumstances. A redemptionof preferred shares will be treated under Section 302 of the Internal Revenue Codeas a distribution taxable as a dividend (to the extent of our current andaccumulated earnings and profits) at ordinary income rates, unless the redemptionsatisfies one of the tests set forth in Section 302(b) of the Internal Revenue Codeand is therefore treated as a sale or exchange of the redeemed shares. Theredemption will be treated as a sale or exchange if it (i) is “substantiallydisproportionate” with respect to the holder, (ii) results in a “completetermination” of the holder’s share interest in our company, or (iii) is “notessentially equivalent to a dividend with respect to the holder, all within themeaning of Section 302(b) of the Internal Revenue Code.In determining whether any of these tests has been met, there must be taken intoaccount not only any preferred shares owned by the holder, but also such holder’sownership of the our common shares, other series of preferred shares and any optionsto acquire any of the foregoing. The holder also must take into account any suchsecurities (including options) which are considered to be owned by such holder byreason of the constructive ownership rules set forth in Sections 318 and 302(c) ofthe 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 “notessentially equivalent to a dividend.” However, because the determination as towhether any of the alternative tests of Section 302(b) of the Internal Revenue Codewill be satisfied with respect to any particular holder of preferred shares dependsupon the facts and circumstances at the time the determination must be made,prospective holders of preferred shares are advised to consult their own taxadvisors to determine such tax treatment.If a redemption of preferred shares is not treated as a distribution taxable as adividend to a particular holder, it will be treated as a taxable sale or exchange bythat holder. As a result, the holder will recognize gain or loss for federal incometax purposes in an amount equal to the difference between (i) the amount of cash andthe fair market value of any property received (less any portion thereofattributable to accumulated and declared but unpaid dividends, which will be taxableas a dividend to the extent of our current and accumulated earnings and profits) and(ii) the holder’s adjusted tax basis in the shares. Such gain or loss will becapital gain or loss if the shares were held as a capital asset, and will belong-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 ofthe distribution will be measured by the amount of cash and the fair market value ofany property received by the holder. The holder’s adjusted tax basis in thepreferred shares redeemed will be transferred to any other shareholdings of theholder 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, orit 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 RevenueService the amount of distributions paid (unless the U.S. Shareholder is an exemptrecipient such as a corporation) during each calendar year, and the amount of taxwithheld, if any. Under the backup withholding rules, a shareholder may be subjectto backup withholding at the rate of 28% with respect to distributions paid unlesssuch shareholder (a) is a corporation or comes within certain other exemptcategories and, when required, demonstrates this fact, or (b) provides a taxpayeridentification number, certifies as to no loss of exemption from backup withholdingand otherwise complies with applicable requirements of the backup withholding rules.A shareholder that does not provide us with his correct taxpayer identificationnumber may also be subject to penalties imposed by the Internal Revenue Service. Inaddition, we may be required to withhold a portion of capital gain distributions toany 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 refundor a credit against the shareholder’s income tax liability, provided the requiredinformation is furnished to the Internal Revenue Service.***Taxation of Tax-Exempt Shareholders***U.S. tax-exempt entities, including qualified employee pension and profit sharingtrusts and individual retirement accounts, generally are exempt from U.S. federalincome taxation. However, they are subject to taxation on their unrelated businesstaxable income or UBTI. Distributions by us to a shareholder that is a tax-exemptentity should generally not constitute UBTI, as defined in Section 512(a) of theCode 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 sharesare 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 benefitassociations, supplemental unemployment benefit trusts, and qualified group legalservices 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 UBTIrules, which generally will require them to characterize distributions from us asUBTI.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 sharescould be required to treat a percentage of the dividends from us as UBTI if we are a “pension-heldREIT.” We will not be a pension-held REIT unless (1) either (A) one pension trust owns more than25% of the value of our shares, or (B) a group of pension trusts, each individually holding morethan 10% of the value of our shares, collectively owns more than 50% of such shares and (2) wewould not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code providesthat shares owned by such trusts shall be treated, for purposes of the requirement that not morethan 50% of the value of the outstanding shares of a REIT is owned, directly or indirectly, by fiveor fewer “individuals” (as defined in the Code to include certain entities). Certain restrictionson ownership and transfer of our shares should generally prevent a tax-exempt entity from owningmore 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 ofour shares.
 
 

 
***Taxation of Non-U.S. Shareholders*****The rules governing United States federal income taxation of non-U.S. Shareholdersare complex and no attempt will be made herein to provide more than a summary ofsuch rules. Prospective non-U.S. Shareholders should consult with their own taxadvisors to determine the impact of federal, state and local income and estate taxlaws with regard to an investment in our shares, including any reportingrequirements.****Ordinary Dividends**The portion of Ordinary Dividends received by non-U.S. Shareholders that are notattributable to gain from sales or exchanges by us of United States real propertyinterests and which are not effectively connected with a U.S. trade or business ofthe non-U.S. Shareholder will generally be subject to a withholding tax equal to30% of the gross amount of the distribution unless an applicable tax treaty reducesor eliminates that tax. Under some treaties, however, the lower rates generallyapplicable to dividends do not apply to dividends from REITs. We intend to withholdUnited States income tax at the rate of 30% on the gross amount of any such OrdinaryDividends paid to a non-U.S. Shareholder unless (1) a lower treaty rate applies andthe non-U.S. Shareholder files a W-8 BEN (or applicable substitute form) claimingthe benefits of the lower treaty rate or (2) the non-U.S. Shareholder files an IRSForm W-8 ECI with us claiming that the distribution is effectively connected with aU.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 incomefrom the investment in our shares is treated as effectively connected with thenon-U.S. Shareholder’s 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 samemanner as U.S. Shareholders are taxed with respect to such distributions (and mayalso be subject to the 30% branch profits tax in the case of a shareholder that is aforeign corporation).**Non-Dividend Distributions**Unless our shares constitute a U.S. real property interest (“USRPI”), anyNon-Dividend Distributions will not be taxable to a shareholder to the extent thatsuch distributions do not exceed the adjusted basis of the shareholder’s shares, butrather will reduce the adjusted basis of the shareholder in such shares. To theextent that Non-Dividend Distributions exceed the adjusted basis of a non-U.S.Shareholder’s shares, such distributions will give rise to tax liability if thenon-U.S. Shareholder would otherwise be subject to tax on any gain from the sale ordisposition of its shares, as described below (See — Taxation of Non-U.S.Shareholders — Dispositions of our Shares). If it cannot be determined at the timea distribution is made whether or not such distribution will be in excess of currentand accumulated earnings and profits, the distributions will be subject towithholding at the same rate as Ordinary Dividends. Because we generally cannotdetermine at the time we make a distribution whether or not the distribution willexceed our current and accumulated earnings and profits, we normally will withholdtax on the entire amount of any distribution at the same rate as we would withholdon Ordinary Dividends. However, amounts thus withheld are refundable to thenon-U.S. Shareholder if it is subsequently determined that such distribution was, infact, 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.Shareholder’s adjusted tax basis in our shares will be taxed under the Foreign Investment in RealProperty Tax Act of 1980 (“FIRPTA”) at the rate of tax, including any applicable capital gainsrates, that would apply to a U.S. Shareholder of the same type (*e.g.*, anindividual or a corporation, as the case may be), and the collection of the tax will beenforced 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 tradedclasses of shares, distributions that are attributable to gain from sales orexchanges 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 attributableto 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 Statesbusiness. Individuals who are non-U.S. Shareholders will be required to report suchgain on a U.S. federal income tax return and such gain will be taxed at the normalcapital gain rates applicable to U.S. individual shareholders (subject to applicablealternative minimum tax and a special alternative minimum tax in the case ofnonresident alien individuals). Also, distributions subject to FIRPTA may besubject to a 30% branch profits tax in the hands of a foreign corporate shareholdernot entitled to treaty relief. Brandywine is required by applicable TreasuryRegulations to withhold 35% of any distribution that could be designated by us as acapital gains dividend. The amount is creditable against the non-U.S. Shareholder’sU.S. tax liability.However, distributions attributable to gain from sales or exchanges by us of UnitedStates real property interests are treated as ordinary dividends (not subject to the35% 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 anestablished 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 thetaxable 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 REITdistribution requirements with respect to certain taxable years by distributing upto 90% of our dividends in the form of common shares rather than cash. In the eventthat we pay a portion of a dividend in common shares, we may be required to withholdU.S. tax with respect to such dividend, including in respect of all or a portion ofsuch dividend that is payable in common shares.
 
 

 
**Dispositions of our Shares**Unless our shares constitutes a USRPI, gain recognized by a non-U.S. Shareholderupon a sale of shares generally will not be taxed under FIRPTA. Our shares will notbe treated as a USRPI if Brandywine is a “domestically controlledREIT,” defined generally as a REIT in which at all times during a specified testingperiod less than 50% in value of the shares of beneficial interest was held directlyor 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 “domesticallycontrolled REIT.” Further, even if we are a domestically controlled REIT, pursuantto “wash sale” rules under FIRPTA, a non-U.S. Shareholder may incur tax under FIRPTAto the extent such non-U.S. Shareholder disposes of our shares within a certainperiod prior to a capital gain distribution and directly or indirectly (includingthrough 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 commonor preferred shares if (1) our preferred shares or common shares is “regularlytraded” on an established securities market within the meaning of applicableTreasury regulations and (2) the non-U.S. Shareholder did not actually, orconstructively under specified attribution rules under the Code, own more than 5% ofour preferred shares or common shares at any time during the shorter of thefive-year period preceding the disposition or the holder’s holding period.Even if our common or preferred shares were not regularly traded on an establishedsecurities market, a non-U.S. Shareholder would not be subject to taxation underFIRPTA as a sale of a U.S. real property interest if such non-U.S. Shareholder’scommon or preferred shares had a fair market value on the date of acquisition thatwas equal to or less than 5% of our regularly traded class of shares with the lowestfair 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 ata later date, then all such shares would be aggregated and valued as of the date ofthe 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 respectto such gain, subject to applicable alternative minimum tax and a specialalternative minimum tax in the case of non-resident alien individuals, and thepurchaser of the shares could be required to withhold 10% of the purchase price andremit such amount to the Internal Revenue Service. Gain not subject to FIRPTA willnonetheless 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. Shareholder’sUnited States trade or business, in which case the non-U.S. Shareholder will besubject 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 theUnited States for 183 days or more during the taxable year, in which case thenonresident alien individual will be subject to a 30% tax on the individual’scapital 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 ofdividends paid to such holder and the tax withheld with respect to such dividends,regardless of whether withholding was required. Copies of the information returnsreporting such dividends and withholding may also be made available to the taxauthorities in the country in which the non-U.S. Shareholder resides under theprovisions of an applicable income tax treaty.Payments of dividends or of proceeds from the disposition of stock made to anon-U.S. Shareholder may be subject to information reporting and backup withholdingunless such holder establishes an exemption, for example, by properly certifying itsnon-United States status on an IRS Form W-8 BEN or another appropriate version ofIRS Form W-8. Notwithstanding the foregoing, backup withholding may apply if eitherwe 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 backupwithholding rules may be allowed as a refund or a credit against the shareholder’sincome tax liability, provided the required information is furnished to the InternalRevenue Service.***State, Local and Foreign Tax Consequences***Brandywine, the Operating Partnership, the Subsidiary Partnerships and Brandywine’sshareholders may be subject to state, local and foreign taxation in variousjurisdictions, including those in which it or they transact business or reside. Thestate, local and foreign tax treatment of Brandywine, the Operating Partnership, theSubsidiary Partnerships and Brandywine’s shareholders may not conform to the federalincome tax consequences discussed above. Any foreign taxes incurred by us would notpass through to shareholders as a credit against their U.S. federal income taxliability. Prospective shareholders should consult their own tax advisors regardingthe 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 bypersons involved in the legislative process and by the Internal Revenue Service andthe U.S. Treasury Department. No assurance can be given as to whether, when, or inwhat form, the U.S. federal income tax laws applicable to us and our shareholdersmay 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 ofowning the debt securities that Brandywine Realty Trust or Brandywine OperatingPartnership may offer. This summary is for general information only and is not taxadvice. The tax consequences of owning any particular issue of debt securities willbe discussed in the applicable prospectus.
 
 

 
As used herein, a “U.S. Holder” means a beneficial owner of our debt securities, whois, 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 incometax purposes) created or organized in or under the laws of the U.S. or any statethereof or the District of Columbia, **•** an estate the income of which is subject to U.S. federal income taxationregardless of its source or **•** a trust if it (a) is subject to the primary supervision of a court within theU.S. and one or more U.S. persons have the authority to control all substantialdecisions 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 securitiesthat is not a “U.S. Holder,” and that is not a partnership (or other entity treatedas a partnership for U.S. federal income tax purposes).If a partnership holds debt securities, the tax treatment of a partner willgenerally depend upon the status of the partner and the activities of thepartnership. If you are a partner of a partnership holding debt securities, youshould 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 asordinary income at the time that it is paid or accrued, in accordance with the U.S.Holder’s 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 besubject to special tax accounting rules, as described in greater detail below. Inthat case, you should be aware that you generally must include OID in gross incomein advance of the receipt of cash attributable to that income. However, yougenerally will not be required to include separately in income cash paymentsreceived on the debt securities, even if denominated as interest, to the extentthose paymentsdo not constitute “qualified stated interest,” as defined below. If we determinethat a particular debt security will be an OID debt security, we will disclose thatdetermination in the prospectus relating to those debt securities.A debt security with an “issue price” that is less than the “stated redemption priceat 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 isat least 0.25% of the stated redemption price at maturity multiplied by the numberof complete years to maturity. The “issue price” of each debt security in aparticular offering will be the first price at which a substantial amount of thatparticular offering is sold to the public. The term “qualified stated interest”means stated interest that is unconditionally payable in cash or in property, otherthan debt instruments of the issuer, and the interest to be paid meets all of thefollowing 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 oneor more interest indices.If we determine that particular debt securities of a series will bear interest thatis not qualified stated interest, we will disclose that determination in theprospectus relating to those debt securities.If you own a debt security issued with “*de minimis*” OID, which is discount that isnot OID because it is less than 0.25% of the stated redemption price at maturitymultiplied by the number of complete years to maturity, you generally must includethe *de minimis*OID in income at the time principal payments on the debt securitiesare made in proportion to the amount paid. Any amount of *de minimis*OID that youhave included in income will be treated as capital gain.Certain of the debt securities may contain provisions permitting them to be redeemedprior to their stated maturity at our option and/or at your option. OID debtsecurities containing those features may be subject to rules that differ from thegeneral rules discussed herein. If you are considering the purchase of OID debtsecurities with those features, you should carefully examine the applicableprospectus and should consult your own tax advisors with respect to those featuressince the tax consequences to you with respect to OID will depend, in part, on theparticular terms and features of the debt securities.If you own OID debt securities with a maturity upon issuance of more than one yearyou generally must include OID in income in advance of the receipt of some or all ofthe related cash payments using the “constant yield method” described in thefollowing 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 UnitedStates holder of an OID debt security is the sum of the “daily portions” of OIDwith respect to the debt security for each day during the taxable year or portion ofthe taxable year in which you held that debt security (“accrued OID”). The dailyportion is determined by allocating to each day in any “accrual period” a pro rataportion of the OID allocable to that accrual period. The “accrual period” for an OIDdebt security may be of any length and may vary in length over the term of the debtsecurity, provided that each accrual period is no longer than one year and eachscheduled payment of principal or interest occurs on the first day or the final dayof an accrual period. The amount of OID allocable to any accrual period is an amountequal to the excess, if any, of: **•** the debt security’s “adjusted issue price” at the beginning of the accrual periodmultiplied by its yield to maturity, determined on the basis of compounding at theclose of each accrual period and properly adjusted for the length of the accrualperiod, 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 payableat maturity, other than a payment of qualified stated interest, and the adjustedissue price at the beginning of the final accrual period. Special rules will applyfor 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 issueprice increased by the accrued OID for each prior accrual period, determined withoutregard 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 statedinterest) on or before the first day of the accrual period. Under these rules, youwill generally have to include in income increasingly greater amounts of OID insuccessive accrual periods. We are required to provide information returns statingthe amount of OID accrued on debt securities held of record by persons other thancorporations and other exempt holders.Floating rate debt securities are subject to special OID rules. In the case of anOID debt security that is a floating rate debt security, both the “yield tomaturity” and “qualified stated interest” will be determined solely for purposes ofcalculating the accrual of OID as though the debt security will bear interest in allperiods at a fixed rate generally equal to the rate that would be applicable tointerest payments on the debt security on its date of issue or, in the case ofcertain floating rate debt securities, the rate that reflects the yield to maturitythat is reasonably expected for the debt security. Additional rules may apply ifeither: **•** the interest on a floating rate debt security is based on more than one interestindex; 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 anindexed principal amount. If you are considering the purchase of floating rate OIDdebt securities or securities with indexed principal amounts, you should carefullyexamine the prospectus relating to those debt securities, and should consult yourown tax advisors regarding the United States federal income tax consequences to youof holding and disposing of those debt securities.You may elect to treat all interest on any debt securities as OID and calculate theamount includible in gross income under the constant yield method described above.For purposes of this election, interest includes stated interest, acquisitiondiscount, OID, *de minimis*OID, market discount, *de minimis*market discount andunstated interest, as adjusted by any amortizable bond premium or acquisitionpremium. You must make this election for the taxable year in which you acquired thedebt security, and you may not revoke the election without the consent of theInternal Revenue Service (the “IRS”). You should consult with your own tax advisorsabout this election.**Market Discount**If you purchase debt securities, other than OID debt securities, for an amount thatis less than their stated redemption price at maturity, or, in the case of OID debtsecurities, their adjusted issue price, the amount of the difference will be treatedas “market discount” for United States federal income tax purposes, unless thatdifference is less than a specified de minimis amount. Under the market discountrules, you will be required to treat any principal payment on, or any gain on thesale, exchange, retirement or other disposition of, the debt securities as ordinaryincome to the extent of the market discount that you have not previously included inincome and are treated as having accrued on the debt securities at the time of theirpayment or disposition. In addition, you may be required to defer, until thematurity of the debt securities or their earlier disposition in a taxabletransaction, the deduction of all or a portion of the interest expense on anyindebtedness attributable to the debt securities. You may elect, on a debtsecurity-by-debt security basis, to deduct the deferred interest expense in a taxyear prior to the year of disposition. You should consult your own tax advisorsbefore making this election.
 
 

 
Any market discount will be considered to accrue ratably during the period from thedate of acquisition to the maturity date of the debt securities, unless you elect toaccrue on a constant interest method. You may elect to include market discount inincome currently as it accrues, on either a ratable or constant interest method, inwhich case the rule described above regarding deferral of interest deductions willnot 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 firsttaxable year to which your election applies and may not be revoked without theconsent of the IRS. You should consult your own tax advisor before making thiselection.**Acquisition Premium and Amortizable Bond Premium**If you purchase OID debt securities for an amount that is greater than theiradjusted issue price but equal to or less than the sum of all amounts payable on thedebt securities after the purchase date other than payments of qualified statedinterest, you will be considered to have purchased those debt securities at an“acquisition premium.” Under the acquisition premium rules, the amount of OID thatyou must include in gross income with respect to those debt securities for anytaxable year will be reduced by the portion of the acquisition premium properlyallocable to that year.If you purchase debt securities (including OID debt securities) for an amount inexcess of the sum of all amounts payable on those debt securities after the purchasedate other than qualified stated interest, you will be considered to have purchasedthose debt securities at a “premium” and, if they are OID debt securities, you willnot be required to include any OID in income. You generally may elect to amortizethe premium over the remaining term of those debt securities on a constant yieldmethod as an offset to interest when includible in income under your regularaccounting method. In the case of debt securities that provide for alternativepayment schedules, bond premium is calculated by assuming that (a) you will exerciseor not exercise options in a manner that maximizes your yield, and (b) we willexercise or not exercise options in a manner that minimizes your yield (except thatwe 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 orincrease 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 alldebt obligations held or subsequently acquired by you on or after the first day ofthe first taxable year to which the election applies. You may not revoke theelection without the consent of the IRS. You should consult your own tax advisorbefore 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 debtsecurities in an amount equal to the difference between: **•** the amount of cash and the fair market value of other property received in exchangefor such debt securities, other than amounts attributable to accrued but unpaid statedinterest, which will be subject to tax as ordinary income to the extent not previouslyincluded in income; and  **•** the U.S. Holder’s adjusted tax basis in such debt securities.A U.S. Holder’s adjusted tax basis in a debt security generally will equal the costof the debt security to such holder (A) increased by the amount of OID or accruedmarket discount (if any) previously included in income by such holder and (B)decreased by the amount of any payments other than qualified stated interestpayments and any amortizable bond premium taken by the holder.Any gain or loss recognized will generally be capital gain or loss, and such capitalgain or loss will generally be long-term capital gain or loss if debt securities hasbeen held by the U.S. Holder for more than one year. Long-term capital gain fornon-corporate taxpayers is subject to reduced rates of United States federal incometaxation (15% maximum federal rate through the end of 2010). The deductibility ofcapital losses is subject to certain limitations.If a U.S. Holder recognizes a loss upon a subsequent disposition of our debtsecurities in an amount that exceeds a prescribed threshold, it is possible that theprovisions of Treasury Regulations involving “reportable transactions” could apply,with a resulting requirement to separately disclose the loss generating transactionsto the IRS. While these regulations are directed towards “tax shelters,” they arewritten broadly, and apply to transactions that would not typically be consideredtax shelters. Significant penalties apply for failure to comply with theserequirements. You should consult your tax advisors concerning any possibledisclosure obligation with respect to the receipt or disposition of our debtsecurities, or transactions that might be undertaken directly or indirectly by us.Moreover, you should be aware that we and other participants in transactionsinvolving us (including our advisors) might be subject to disclosure or otherrequirements 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 thedebt security should not constitute unrelated business taxable income to atax-exempt holder. As a result, a tax-exempt holder generally should not be subjectto 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 ofthe debt security generally should not be unrelated business taxable income.However, if a tax-exempt holder were to finance its acquisition of the debt securitywith debt, a portion of the interest income and gain attributable to the debtsecurity would constitute unrelated business taxable income pursuant to the“debt-financed property” rules. Tax-exempt holders should consult their own counselto 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 arecomplex and no attempt will be made herein to provide more than a summary of suchrules. Non-U.S. Holders should consult their tax advisors to determine the effect ofU.S. federal, state, local and foreign tax laws, as well as tax treaties, withregard to an investment in the debt securities.**
 
 

 
**Interest**Interest (including OID) paid to a non-U.S. Holder of debt securities will not besubject to United States federal withholding tax under the “portfolio interestexception,” provided that: **•** interest paid on debt securities is not effectively connected with a non-U.S.Holder’s 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 thecapital or profits interest in the Operating Partnership (in the case of debt issued bythe Operating Partnership), or 10% or more of the shares of Brandywine (in the case ofdebt issued by Brandywine);  **•** the non-U.S. Holder is not **•** a controlled foreign corporation that is related to the OperatingPartnership or Brandywine, as applicable, or  **•** a bank that receives such interest on an extension of credit made pursuantto a loan agreement entered into in the ordinary course of its trade orbusiness; and **•** the beneficial owner of debt securities provides a certification, which is generallymade on an IRS Form W-8BEN or a suitable substitute form and signed under penalties ofperjury, that it is not a United States person.A payment of interest (including OID) to a non-U.S. Holder that does not qualify forthe portfolio interest exception and that is not effectively connected to a UnitedStates trade or business will be subject to United States federal withholding tax ata rate of 30%, unless a United States income tax treaty applies to reduce oreliminate 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 areeffectively connected with the conduct of a trade or business by the non-U.S. Holderin the United States and, if an applicable tax treaty provides, such gain isattributable to a United States permanent establishment maintained by the non-U.S.Holder. In some circumstances, such effectively connected income received by anon-U.S. Holder which is a corporation may be subject to an additional “branchprofits 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 withholdingbecause 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 FormW-8ECI, or a suitable substitute form, as applicable, prior to the payment ofinterest. Such certificate must contain, among other information, the name andaddress of the non-U.S. Holder.Non-U.S. Holders are urged to consult their own tax advisors regarding applicableincome 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 taxor withholding tax on gain realized on the sale, exchange or redemption of debtsecurities unless: **•** the non-U.S. Holder is an individual who is present in the United States for 183days or more in the taxable year of the sale, exchange or redemption, and certain otherconditions are met; or  **•** the gain is effectively connected with the conduct of a trade or business of thenon-U.S. Holder in the United States and, if an applicable tax treaty so provides, suchgain is attributable to a United States permanent establishment maintained by suchholder.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 withrespect to gain realized on the sale, exchange or redemption of debt securities ifsuch gain is effectively connected with the conduct of a trade or business by thenon-U.S. Holder in the United States and, if an applicable tax treaty provides, suchgain is attributable to a United States permanent establishment maintained by thenon-U.S. Holder. In certain circumstances, a non-U.S. Holder that is a corporationwill be subject to an additional “branch profits tax” at a 30% rate or, ifapplicable, 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 securitiesbeneficially owned by you at the time of your death, provided that any payment toyou on the debt securities, including OID, would be eligible for exemption from the30% U.S. federal withholding tax under the “portfolio interest” rule describedabove, 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 reportingrequirements on payments of principal and interest (including OID) on debtsecurities and payments of the proceeds of the sale, exchange, or redemption of debtsecurities, and backup withholding, currently imposed at a rate of 28%, may apply tosuch payment if the U.S. Holder: **•** fails to furnish an accurate taxpayer identification number, or TIN, to the payor inthe manner required;  **•** is notified by the IRS that it has failed to properly report payments of interest ordividends; or  **•** under certain circumstances, fails to certify, under penalties of perjury, that ithas furnished a correct TIN and that it has not been notified by the IRS that it issubject to backup withholding.
 
 

 
**Non-U.S. Holders**A non-U.S. Holder is generally not subject to backup withholding with respect topayments of interest (including OID) on debt securities if it certifies as to itsstatus as a non-U.S. Holder under penalties of perjury or if it otherwiseestablishes an exemption, provided that neither we nor our paying agent has actualknowledge or reason to know that the non-U.S. Holder is a United States person orthat the conditions of any other exemptions are not, in fact, satisfied. Informationreporting requirements, however, will apply to payments of interest (including OID)to non-U.S. Holders where such interest is subject to withholding or exempt fromUnited States withholding tax pursuant to a tax treaty. Copies of these informationreturns may also be made available under the provisions of aspecific treaty or agreement to the tax authorities of the country in which thenon-U.S. Holder resides.The payment of the proceeds from the disposition of debt securities to or throughthe United States office of any broker, United States or foreign, will be subject toinformation reporting and possible backup withholding unless the owner certifies asto its non-United States status under penalties of perjury or otherwise establishesan exemption, provided that the broker does not have actual knowledge or reason toknow that the non-U.S. Holder is a United States person or that the conditions ofany other exemption are not, in fact, satisfied.The payment of the proceeds from the disposition of debt securities to or through anon-United States office of a non-United States broker that is not a “United Statesrelated person” generally will not be subject to information reporting or backupwithholding. 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 thethree-year period ending with the close of its taxable year preceding the payment, orfor such part of the period that the broker has been in existence, is derived fromactivities that are effectively connected with the conduct of a United States trade orbusiness; or  **•** a foreign partnership that at any time during the partnership’s taxable year iseither engaged in the conduct of a trade or business in the United States or of which50% 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 orthrough a non-United States office of a broker that is either a United States personor a United States related person, the payment may be subject to informationreporting unless the broker has documentary evidence in its files that the owner isa 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 abroker that is a United States person or a United States related person, absentactual knowledge that the payee is a United States person.Backup withholding is not an additional tax. Any amounts withheld under the backupwithholding rules from a payment to a Holder will be allowed as a refund or a creditagainst such Holder’s United States federal income tax liability, provided that therequisite procedures are followed.Holders of debt securities are urged to consult their tax advisors regarding theirqualification for exemption from backup withholding and the procedure for obtainingsuch an exemption, if applicable.