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IRS publishes guidance on stock distributions for publicly offered REITs and RICs

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Tax Hot TopicsOn Aug. 11, the IRS published a revenue procedure (Rev. Proc. 2017-45) providing a set of procedures that a publicly offered real estate investment trust (REIT) or a publicly offered regulated investment company (RIC) can follow to ensure that certain distributions of stock are respected as distributions of property.

To qualify as a REIT or a RIC, a corporation is generally required to annually distribute most of its taxable income. A corporation’s issuance of its own stock to its shareholders is generally not treated as a distribution. Section 305(b)(1) provides, however, that if a shareholder can elect to receive a distribution as either property or as shares of the corporation, the whole amount of the distribution is treated as a distribution of property.

Rev. Proc. 2017-45 provides guidance that publicly offered REITs and RICs can follow to ensure that the entire amount of certain distributions that include both cash and their own stock will be treated as distributions of property. For the revenue procedure to apply, a distribution must allow each shareholder a cash-or-stock election regarding part or all of the distribution and at least 20% of the total value of the distribution must be cash.

The revenue procedure also contains a series of rules that must be followed when the distribution is oversubscribed (i.e. when shareholders on aggregate elect to receive more cash than is available in the distribution). If the transaction satisfies the conditions in the revenue procedure, the value of the stock received by any shareholder in lieu of cash will be considered equal to the amount of cash for which the stock is substituted.

Contact Lorraine White
Partner, Philadelphia Office
T +1 215 814 1728

Bryan Keith
Managing Director, Washington National Tax Office
T +1 202 861 4116

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