REIT's elective cash-and-stock distributions receive property-distribution treatment

Plain-English summary

A publicly traded corporation planning to elect real estate investment trust status proposed distributions in which shareholders could choose cash or common stock. Cash would equal at least 20 percent of each total distribution, and shareholders choosing cash would receive a prorated mix if the cash option was oversubscribed. The IRS ruled that both the cash and shares would be treated as property distributions under IRC § 301 through § 305(b)(1). It also ruled that anti-dilution adjustments to outstanding convertible debt would be deemed § 301 distributions to the debt holders when the corporation distributed some cash. The ruling did not decide whether the corporation would qualify as a REIT or meet the REIT distribution requirements.

Ruling snapshot

• Question: How will elective cash-and-stock distributions and related convertible-debt adjustments be treated for federal income tax purposes?
• Outcome: Approved, with the distributions and qualifying anti-dilution adjustments treated under IRC § 301
• Key authorities: IRC §§ 301, 305(b)(1), and 305(b)(2) and (c)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201629003                                              Third Party Communication: None
Release Date: 7/15/2016                                        Date of Communication: Not Applicable
Index Number: 301.00-00, 305.03-00
                                                               Person To Contact:
------------------------------------------------------------   ----------------------------,
-------------                                                  ID No. ------------------
-----------------                                              Telephone Number:
--------------------------------------------                   ----------------------
----------------------------------------                       Refer Reply To:
                                                               CC:CORP:B02
                                                               PLR-134270-15
                                                               Date:
                                                               April 14, 2016



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

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

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

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

Year 2          = ------------------------------------------------------------------------------------------------
                  ------------------------------------------------------------------------------------------------
Year 3          = -------

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

       We respond to your October 7, 2015, request for rulings under sections 301 and
305 of the Internal Revenue Code of 1986, as amended (the “Code”). The information
received in that request is summarized below.

                                             Summary of 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 (the Common
Stock), which is publicly traded and listed on the Exchange.
PLR-134270-15                                2

       Taxpayer intends to elect under section 856 of the Code to be treated as a real
estate investment trust (REIT), effective Date 1 (First REIT Taxable Year) and expects
to make one or more distributions during Year 2 and Year 3 to its Common Stock
shareholders in a combination of cash and Common Stock (Stock and Cash
Distributions).

        With respect to each Stock and Cash Distribution, Taxpayer will give each
Common Stock shareholder an election to receive its portion of the distribution (i)
entirely in cash (the Cash Option) or (ii) entirely in Common 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.

        In no event will the total amount of cash available in a Stock and Cash
Distribution (the Cash Amount) be other than a specified percentage of the aggregate
value of each Stock and Cash Distribution, which will not be less than 20 percent of the
aggregate value of each Stock and Cash Distribution. If the number of Common Stock
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; however, if the
number of Common Stock shareholders that elect the Cash Option would result in the
payment of cash in an aggregate amount that would exceed the Cash Amount, then
each shareholder electing the Cash Option will receive a pro rata 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 the Common Stock. A Common Stock
shareholder electing the Equity Option will receive its full entitlement in the Common
Stock, except possibly with regard to fractional shares. Taxpayer may pay cash in lieu
of issuing fractional shares of the Common Stock, although any cash paid in lieu of
fractional shares will not count against the Cash Amount.

       Taxpayer currently has outstanding one convertible security (the Year 2
Convertible Debt), which contains anti-dilution provisions in its indenture. Thus, in
connection with each Stock and Cash Distribution and pursuant to the terms of the Year
2 Convertible Debt, the conversion rate applicable to the Year 2 Convertible Debt will be
increased (the Adjustment), which will entitle each holder of the Year 2 Convertible Debt
(a Holder) to receive upon conversion a greater number of the Common Stock (and thus
a greater proportionate interest in the assets or E&P of Taxpayer) than it otherwise
would receive if the Adjustment were not made.

                                  Representations

Taxpayer makes the following representations:
PLR-134270-15                              3

     a. Each Stock and Cash Distribution will be made by Taxpayer to its
        shareholders with respect to the Common Stock, which is publicly traded on
        the Exchange.

     b. Each Stock and Cash Distribution will be made during Taxpayer’s Year 2 or
        Year 3 taxable year.

     c. With respect to each Stock and Cash Distribution, each Common Stock
        shareholder will have the right to elect to receive the Cash Option or the
        Equity Option, provided that (i) the available Cash Amount will not be less
        than 20 percent of the aggregate declared distribution, and (ii) in the event
        that the Cash Option is oversubscribed, each oversubscribing shareholder
        electing the Cash Option will receive a pro rata amount of cash corresponding
        to its entitlement under the declaration, but in no event will any shareholder
        electing the Cash Option receive less than 20 percent of its entire entitlement
        under the declaration in cash.

     d. The total number of shares of the Common Stock to be issued in each Stock
        and Cash Distribution will be determined by dividing (i) the product of the total
        amount of the Stock and Cash Distribution per share multiplied by the number
        of outstanding shares of Common Stock, less the amount of cash used in the
        distribution (which shall not be not greater than the Cash Amount), by (ii) the
        volume-weighted average trading price of a share of the Common Stock on
        the Exchange as of the close of trading during a specified period before the
        Stock and Cash Distribution’s payment date, the average closing price of a
        share of the Common Stock on the Exchange during a specified period before
        the Stock and Cash Distribution’s payment date, or a similar formula.

     e. The calculation of the number of shares of the Common Stock to be received
        by each shareholder in each Stock and Cash Distribution 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 on the Exchange
        that is designed to equate in value the number of shares to be received with
        the amount of cash that could be received instead.

     f. The Adjustments for each Convertible Security are typical for comparable
        convertible securities, in accordance with market practices and norms, and
        are designed to adjust the conversion rates so that each Holder receives
        value comparable to the distribution it would have received had it previously
        converted its holding of the Convertible Security into the Common Stock and
        then received the Stock and Cash Distribution paid on that Common Stock.
PLR-134270-15                                4

       g. The actual distribution of the cash and the Common Stock in each Stock and
          Cash Distribution will be made as soon as reasonably practicable following
          the date of the election deadline for such Stock and Cash Distribution.

                                         Rulings

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

       (1)    Any and all cash and the Common Stock distributed in each Stock and
              Cash Distribution by Taxpayer to holders of the Common Stock pursuant
              to the election described above 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)    Provided that, pursuant to the election described above, Taxpayer
              distributes some cash to holders of the Common Stock in a Stock and
              Cash Distribution, then the Adjustment to the Year 2 Convertible Debt
              required as a result of the distribution shall constitute a deemed
              distribution, to which section 301 applies by reason of sections 305(b)(2)
              and (c), to the Holders of the Year 2 Convertible Debt.

                                         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 transaction that is not specifically covered by the
above rulings. Moreover, no opinion is expressed as to whether Taxpayer will qualify as
a REIT under subchapter M, part II of Chapter 1 of the Code. Furthermore, no opinion
is expressed as to whether any distribution will satisfy the distribution requirements of
section 857(a)(1) of the Code.

                                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 letter is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.
PLR-134270-15                                  5

       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 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 representatives.


                                           Sincerely,



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