Elective stock-and-cash REIT dividends are taxable property distributions

Plain-English summary

A publicly traded real estate investment trust planned dividends allowing each shareholder to choose stock, cash, or a combination, subject to an aggregate cash limit of at least 20 percent of each distribution's value. If cash elections exceeded that limit, shareholders choosing cash would receive a prorated mix of cash and stock. The IRS ruled that the cash and stock together would be treated as a property distribution under IRC § 301 because shareholders could elect to receive cash instead of stock. For shareholders receiving stock, the distribution amount would equal the cash they could have received. The IRS did not rule on the company's continued REIT qualification or whether the dividends would satisfy other REIT distribution requirements.

Ruling snapshot

• Question: How should elective stock-and-cash dividends by the REIT be treated for federal income tax purposes?
• Outcome: Approved as a section 301 property distribution, with stock valued by the forgone cash amount
• 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: 201631005
Third Party Communication: None
Release Date: 7/29/2016
Date of Communication: Not Applicable
Index Number: 301.00-00, 305.00-00,
305.03-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:CORP:2
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PLR-105696-16
Date:
May 02, 2016

Legend

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

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

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

Year 1 = -------

Year 2 = -------

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

This letter responds to a February 17, 2016 letter requesting rulings under sections 301 and 305. The information provided in that request 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 publicly traded and files federal income tax returns as a real estate investment trust (“REIT”).

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Taxpayer, for all relevant periods, qualifies as a REIT and intends to maintain such 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”). It has no outstanding warrants or convertible debt. Taxpayer also has preferred stock and senior notes outstanding. The Common Stock, preferred stock, and senior notes are publicly traded on Exchange.

Taxpayer intends to make one or more dividend distributions to its shareholders with respect to its Common Stock during Year 1 and Year 2 (each a “Proposed Distribution, or, together, the “Proposed Distributions”). Taxpayer will make the Proposed Distributions 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 (the “Equity Option”), (2) 100 percent cash (the “Cash Option”), or (3) a combination thereof. If a shareholder fails to make a valid election, that shareholder will be deemed to have made an election to receive the Equity Option.

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 (i.e. the cash component is oversubscribed), 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. 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.

RULINGS

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

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(1) The cash and Common Stock distributed in the Proposed Distributions 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 Distributions 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
Chief (Acting), Branch 4
Office of Associate Chief Counsel (Corporate)