Stock distribution rules relaxed for REITs, RICs

Tax Hot Topics newsletterThe IRS issued guidance (Rev. Proc. 2020-19) on May 4 modifying a safe harbor to decrease the amount of cash that must be distributed by real estate investment trusts (REITs) and regulated investment companies (RICs) seeking to meet annual dividend requirements.

To qualify as a REIT or a RIC, a corporation is generally required to annually distribute 90% of its taxable income. A shareholder of a corporation generally does not have income for a distribution by such corporation of its own stock under Section 305(a). Section 305(b)(1) provides, however, that Section 305(a) does not apply to a distribution by a corporation if the distribution is, at the election of any of the shareholders, payable in either stock of the corporation or in property.

On Aug. 11, 2017, the IRS published Rev. Proc. 2017-45 providing a safe harbor for publicly offered REITs or RICs to ensure that certain distributions of stock are treated as distributions of property that Section 301 applies by reason of Section 305(b). Specifically, 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 the maximum aggregate amount of cash to be distributed). 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.

For dividends made between April 1, 2020, and Dec. 31, 2020, Rev. Proc. 2020-19 modifies the safe harbor in Rev. Proc. 2017-45 to reduce the cash limitation amount from 20% to 10%. The IRS stated that this revision was made in recognition of the need for enhanced liquidity during the current period of economic disruption.

Jeff Borghino
Washington National Tax Office
T +1 202 521 1532

Evan Adams
Washington National Tax Office
T +1 202 521 1591