REIT stock-and-cash dividend is a property distribution

Plain-English summary

A publicly traded REIT planned a special dividend in which shareholders could elect cash, common stock, or a combination of the two. Cash elections would be prorated if they exceeded the available cash pool, but the cash pool would equal at least 20 percent of the distribution's total value. The IRS ruled that the cash and stock would be treated as a property distribution under IRC §§ 301 and 305(b)(1). For a shareholder receiving stock, the distribution amount would equal the cash that the shareholder could have received instead. The ruling did not address the taxpayer's continued REIT qualification or whether the distribution would satisfy the required-distribution rules.

Ruling snapshot

• Question: How should a REIT's elective stock-and-cash special dividend be treated for federal income tax purposes?
• Outcome: Approved, the dividend is a property distribution and stock is valued by the cash alternative
• Key authorities: IRC §§ 301 and 305(b)(1); Treas. Reg. § 1.305-1(b)(2)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201505035 Third Party Communication: None
Release Date: 1/30/2015 Date of Communication: Not Applicable
Index Numbers:301.00-00, 305.00-00,
305.03-00 Person To Contact:
---------------------, ID No. ------------------
------------------- Telephone Number:
----------------------------------------------- ----------------------
----------------------------------- Refer Reply To:
---------------------------------------------------- CC:CORP:B03
--------------------------------- PLR-128984-14
Date:
October 27, 2014

Legend

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

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

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

Dear ----------------

  This letter responds to a July 18, 2014, letter requesting rulings under sections

301 and 305. The information provided in that request and in later correspondence is
summarized below.

  The rulings contained in this letter are based upon facts and representations

submitted on behalf of 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.

FACTS

  Taxpayer, incorporated in State A, is an accrual basis taxpayer that files federal

income tax returns as a real estate investment trust (“REIT”) on a calendar year basis.
Taxpayer, for all relevant periods, qualifies as a REIT and intends to maintain such

PLR-128984-14 2

qualification. Taxpayer regularly distributes its earnings and profits as required under
section 857(a)(1). Taxpayer has one class of common stock outstanding (the “Common
Stock”) that is publicly traded and listed on the Exchange.

   Taxpayer intends to make a special dividend distribution to its shareholders with

respect to its Common Stock during the year 2014 (“Proposed Distribution”). Taxpayer
will make the Proposed Distribution in the form of a combination of Common Stock and
cash. Each shareholder will have the right to elect to receive its portion of the Proposed
Distribution in the form of (1) 100 percent Common Stock, (2) 100 percent cash, or (3) a
combination of stock and cash with between 20 to 80 percent in cash and the rest in
stock. If a shareholder fails to make a valid election, that shareholder will be deemed to
have made an election to receive 100 percent cash.

   If, the total number of shares of Common Stock for which an election to receive

cash is made would result in the payment of cash in an aggregate amount that is less
than or equal to the total amount of cash available in the Proposed Distribution (the
“Cash Amount”), then each shareholder electing to receive cash will receive its portion
of the Proposed Distribution entirely in cash. If the total number of shares of Common
Stock for which an election to receive cash is made would result in the payment of cash
in an aggregate amount that is in excess of the Cash Amount, then each shareholder
electing to receive cash will receive a prorated amount of cash and will receive the
remainder of its portion of the Proposed Distribution in Common Stock. In no event will
the total amount of the Cash Amount be less than 20 percent of the aggregate value of
the Proposed Distribution. Accordingly, no shareholder electing to receive cash will
receive less than 20 percent of its portion of the Proposed Distribution in cash. Any
cash paid in lieu of fractional shares of Common Stock will not count towards the Cash
Amount.

   The calculation of the number of 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.

   For any shareholder participating in the Common Stock dividend reinvestment

plan (“DRIP”), the DRIP will apply only to the extent of the cash which the shareholder
would have received in the Proposed Distribution in the absence of the DRIP. Taxpayer
has no plan or intention to undergo any corporate reorganization or other business
combination in connection with or contemporaneously with the Proposed Distribution,
although Taxpayer may have stock offerings that are unrelated to the Proposed
Distribution.

PLR-128984-14 3

RULINGS

   Based solely upon the information submitted and the representations made, we

rule as follows on the Proposed Distribution:

(1) The cash and Common Stock distributed in the Proposed Distribution shall be
treated as a distribution of property with respect to the Common Stock to which section
301 applies (sections 301 and 305(b)(1)).

(2) The amount of the distribution of the stock received by any holder of Common Stock
electing to or otherwise receiving stock will be considered to equal the amount of money
which could have been received instead (section 1.305-1(b)(2)).

CAVEATS

    Except as expressly provided herein, no opinion is expressed or implied

concerning the tax treatment of the proposed transaction under other provisions of the
Code and regulations or the tax treatment of any condition existing at the time of or
effects resulting from the Proposed Distribution that are not specifically covered by the
above rulings. In particular, no opinion is expressed with regard to whether Taxpayer
qualifies as a REIT under subchapter M of the Code or whether the distributions made
pursuant to the ruling will satisfy the “required distribution” requirement under section
4981(b)(1).

PROCEDURAL STATEMENTS

   This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the

Code provides that it may not be used or cited as precedent. In accordance with the
Power of Attorney on file with this office, a copy of this letter is being sent to your
authorized representative.

   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 attaching a statement to their return that provides the date and control
number of the letter ruling.

                                      Sincerely,

                                       Isaac W. Zimbalist
                                      Isaac W. Zimbalist
                                      Senior Technician Reviewer, Branch 1
                                      Office of Associate Chief Counsel (Corporate)