REIT purging distributions receive section 301 treatment

Plain-English summary

A public corporation planned to elect real estate investment trust status and distribute its accumulated C corporation earnings and profits. Shareholders could choose cash or stock, but total cash would be capped at no less than 20 percent of each distribution. The IRS ruled that all cash and stock distributed under the arrangement would be property distributions governed by IRC § 301, and that the stock would be valued at fair market value on the distribution date. Contractual increases to the conversion rates of the corporation’s convertible debt would also be deemed stock distributions under §§ 301 and 305 when cash was distributed. The rulings depended on completing the distributions during the specified redacted tax years.

Ruling snapshot

• Question: How are the cash, stock, and convertible-debt adjustments in the planned REIT purging distributions treated?
• Outcome: Approved, the distributions and qualifying conversion-rate adjustments receive section 301 treatment
• Key authorities: IRC §§ 301, 305(b), 305(c), 856, and 857(a)(2)(B); Treas. Reg. §§ 1.305-1 and 1.305-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201446013 Third Party Communication: None
Release Date: 11/14/2014 Date of Communication: Not Applicable
Index Number: 301.00-00, 305.01-00,
305.04-00 Person To Contact:
----------------------, ID No. ----------------
------------------ ------------------------------ Telephone Number:
---------------- --------------------
------------------------------------------ Refer Reply To:
-------------------------------------- CC:CORP:03
PLR-117298-13
Date:
November 25, 2013

Taxpayer = ----------------
-------------------------------
----------------------

State A = ------------

Exchange = ----------------------------------

Date 1 = ----------------------

Date 2 = -------------

Date 3 = --------------------------

Date 4 = --------------------------

Date 5 = ---------------------

a = -------

b = ----------

x = ---------

y = ---------
PLR-117298-13 2

Dear -------------:

We respond to your letter dated June 24, 2013, requesting rulings under sections 301
and 305 of the Internal Revenue Code (the Code). Additional information was received
in a letter dated November 22, 2013. The information submitted is summarized below.

                                        Facts

Taxpayer is a State A corporation that is the common parent of an affiliated group of
corporations that files a consolidated Federal income tax return on a calendar year
basis. Taxpayer has one class of voting common stock outstanding (Taxpayer Stock),
which is publicly traded and listed on the Exchange.

Taxpayer intends to elect under section 856 of the Code to be treated as a real estate
investment trust (REIT), effective Date 5 (First REIT Taxable Year). In connection with
the REIT election, prior to the end of the First REIT Taxable Year, Taxpayer intends to
distribute all of its earnings and profits that were, or will be, accumulated by Taxpayer
for all taxable periods ending prior to the First REIT Taxable Year (C Corporation E&P)
as required by section 857(a)(2)(B). Specifically, Taxpayer intends to make one or
more distributions to its shareholders with respect to Taxpayer Stock during the taxable
years ending on Date 3 and Date 4 (each referred to as a Purging Distribution).

With respect to each Purging Distribution, Taxpayer will give each shareholder an
election to receive its portion of the distribution (i) entirely in cash (the Cash Option) or
(ii) entirely in Taxpayer Stock (the Equity Option). In the event that a shareholder does
not make an election, that shareholder will be considered to have chosen the Equity
Option.

The total amount of cash available in a Purging Distribution will be a specified
percentage of the aggregate value of the Purging Distribution (the Cash Amount), and
the Cash Amount will not be less than 20 percent of the aggregate value of the
distribution. If the number of shareholders that elect the Cash Option would result in the
payment of cash in an aggregate amount that is less than or equal to the Cash Amount,
then all shareholders electing the Cash Option will receive cash equal to the amount
elected; if the payment of cash would exceed the Cash Amount, then shareholders that
elect the Cash Option will receive a pro-rated portion of the Cash Amount, which will not
be less than 20 percent of its entire entitlement under the distribution, and the remaining
balance in Taxpayer Stock. Taxpayer also anticipates paying cash in lieu of fractional
shares of Taxpayer Stock, though cash paid in lieu of fractional shares will not count
against the Cash Amount.
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Taxpayer also has two classes of convertible debentures, one class that was issued on
Date 1 (the Date 1 Convertible Debt) and one class that was issued on Date 2 (the Date
2 Convertible Debt). The initial conversion rate for the Date 1 Convertible Debt was a
shares of Taxpayer Stock per $x principal amount and for the Date 2 Convertible Debt
was b shares of Taxpayer Stock per $y principal amount. In connection with each
Purging Distribution and pursuant to the terms of each of the Convertible Debts, the
conversion rates applicable to the Convertible Debts will be increased (the
Adjustments), which will entitle the holders of Convertible Debt (the Holders) to receive
upon conversion a greater number of shares of Taxpayer Stock than they otherwise
would be entitled to receive if the Adjustments to the Convertible Debts’ conversion
rates were not made. Accordingly, the Adjustments will entitle the Holders to receive
upon conversion a greater proportionate interest in the assets or earnings and profits of
Taxpayer than they otherwise would receive if the Adjustments were not made.

Taxpayer represents that the calculation of the number of Taxpayer Shares to be
received by any shareholder will be determined, over a period of up to two weeks
ending as close as practicable to the payment date, based upon a formula utilizing
market prices that is designed to equate in value the number of shares to be received
with the amount of money that could be received instead. Similarly, Taxpayer
represents that the Adjustment to the conversion rate on each class of the Convertible
Debt is typical for comparable convertible debt, in accordance with market practices and
norms, and designed to adjust the conversion rate so that a Holder of the Convertible
Debt receives value comparable to the distribution he would have received had he
previously converted his notes into Taxpayer Stock and thus received the distribution
paid on that stock.

Taxpayer represents that it currently does not have a dividend reinvestment plan (DRIP)
in effect and that it may choose to implement a DRIP in the future. Accordingly, for any
Taxpayer shareholder participating in a future DRIP, Taxpayer represents that the DRIP
will apply to the Purging Distribution only to the extent of the cash that the Taxpayer
shareholder would have received in the distribution in the absence of the DRIP.

                                    Rulings

Based solely on the information submitted and the representations made, we rule as
follows:

  (1)    Any and all of the cash and Taxpayer Stock distributed during the taxable
         years ending on Date 3 and Date 4 in a Purging Distribution by Taxpayer
         to holders of the Taxpayer Stock using the election described above shall
         be treated as a distribution of property with respect to the Taxpayer Stock
         to which section 301 applies (sections 301 and 305(b)(1)).

PLR-117298-13 4

   (2)    The amount of the distribution of Taxpayer Stock shall be the fair market
          value of such stock on the date of distribution if such Purging Distribution
          occurs during the taxable years ending on Date 3 and Date 4 (section
          1.305-1(b)(1)).

   (3)    Provided that cash is distributed during the taxable years ending on Date
          3 and Date 4 according to the election described above in a Purging
          Distribution by Taxpayer to any holders of Taxpayer Stock, then the
          Adjustments made in connection with that distribution to the Convertible
          Debt shall constitute a deemed distribution of Taxpayer Stock to the
          Holders to which section 301 applies by reason of section 305(b)(2) and
          (c) (Rev. Rul. 75-513, 1975-2 C.B. 114). The amount of the deemed
          distribution of stock shall be measured by the fair market value, as of the
          date of the Adjustments, of the number of shares of Taxpayer Stock
          deemed distributed to the Holders (sections 1.305-1(b)(3) and 1.305-3(e)
          (Examples (6), (8), (9), and (15)); Rev. Rul. 75-513).

                                      Caveats

Rulings concerning each Purging Distribution are void, and we do not express any
opinion on the tax consequences of such distributions, if they are not completed during
the taxable years ending on Date 3 and Date 4. Further, except as expressly provided
herein, no opinion is expressed or implied concerning the tax treatment of these
proposed distributions under other provisions of the Code and regulations or the tax
treatment of any condition existing at the time of, or effects resulting from these
distributions that is not specifically covered by the above rulings. In particular, no
opinion is expressed with regard to whether Taxpayer will qualify as a REIT under
Subchapter M of the Code; the validity of the valuation methodology chosen by
Taxpayer in determining the number of shares issued in a distribution; or any tax
consequences resulting from the establishment of a DRIP.

                             Procedural Statements

The rulings contained in this letter are based upon facts and representations submitted
by the taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. This office has not verified any of the materials submitted in support
of the request for rulings. Verification of the information, representations, and other data
may be required as part of the audit process.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
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attaching a statement to their return that provides the date and control number of this
letter ruling.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                    Sincerely,



                                    Filiz A. Serbes
                                    Branch Chief, Branch 3
                                    Office of Associate Chief Counsel (Corporate)

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