REIT spillover distributions take priority over stock repurchases

Plain-English summary

A real estate investment trust planned to issue a new class of stock, make spillover distributions treated as paid in the preceding tax year, and repurchase common or new shares. The REIT represented that the spillover distributions would be ordinary distributions under IRC § 301, that current earnings and profits would exceed the distributions, and that it would not claim a dividends-paid deduction for the repurchases. The IRS ruled that the spillover distributions would take priority over repurchases treated as exchanges under § 302 when both accessed the REIT's current earnings and profits for the preceding year. The ruling did not decide whether § 305 applied to the new stock or whether the taxpayer otherwise qualified as a REIT.

Ruling snapshot

• Question: Do section 301 spillover distributions or section 302 stock repurchases first access a REIT's current earnings and profits for the preceding year?
• Outcome: Approved, the spillover distributions take priority.
• Key authorities: IRC §§ 301, 302, 312(n)(7), 316(a)(2), 858(a); Rev. Rul. 74-339.

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201637010                                            Third Party Communication: None
Release Date: 9/9/2016                                       Date of Communication: Not Applicable
Index Number: 301.02-01, 302.00-00,
              312.00-00, 316.09-03                           Person To Contact:
                                                             ----------------------, ID No. ------------------
----------------                                             Telephone Number:
--------------------------------                             ----------------------
-----------------------------                                Refer Reply To:
------------------------                                     CC:CORP:B04
----------------------------------------------------------   PLR-140419-15
                                                             Date:
                                                             June 13, 2016



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

Operating           = ---------------------------------------------------------------------------------------------
Partnership           ---------------------------------------------------------------------------------------------
                      --------------------------

Business            = ---------------------------------------------------------------------------------------------
                      -------------

Group 1             = ----------------

Group 2             = -----------------

New Stock           = ---------------------------------------------------------------------------------------------
                      ------------------------

Date A              = ----------------------

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

       This letter responds to your December 9, 2016, letter requesting a ruling on
certain federal income tax consequences of a proposed transaction. The information
submitted in that letter and in later correspondence is summarized below.

        The ruling contained in this letter is based upon facts and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. This office has not verified any of the material
PLR-140419-15                                   2   ASBWCZ




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 has made a valid election to be treated as a real estate investment
trust (“REIT”) under section 856 for federal income tax purposes, and has outstanding
shares of common stock and several series of preferred stock (“Preferred Stock”). The
common stock and certain shares of Preferred Stock are publicly traded. Taxpayer is
the sole general partner of Operating Partnership and conducts substantially all of its
activities through Operating Partnership. Operating Partnership is primarily engaged in
Business, which consists of Group 1 and Group 2.

                                   PROPOSED TRANSACTION

       For what are represented to be valid business reasons, Taxpayer proposes the
following series of steps (collectively, the “Proposed Transaction”):

(i)     Taxpayer will distribute shares of New Stock.

(ii)    Taxpayer will make a valid election under section 858(a) to treat certain
        dividends distributed after the close of its taxable year (“Spillover Distributions”)
        as having been paid during the taxable year (the “Preceding Year”). The
        Spillover Distributions will be made on shares of common stock, New Stock, or
        both.

(iii)   Taxpayer will repurchase shares of common stock, New Stock, or both (the
        “Repurchases”). The Repurchases will be made through open market
        purchases, accelerated stock repurchase programs, or through an issuer tender
        offer.

                                    REPRESENTATIONS

      Taxpayer has made the following representations in connection with the
Proposed Transaction:

(a)     Taxpayer is indifferent to the identity of the shareholders that will participate in
        the Repurchases and will not make any Repurchases with a purpose to increase
        or decrease the ownership percentage of any particular shareholder or group of
        shareholders.

(b)     No Spillover Distribution will be made by way of a repurchase or redemption of
        any of taxpayer’s stock.

(c)     All Spillover Distributions will be made as distributions within the meaning of
        section 301 on or before Date A.
PLR-140419-15                                3   ASBWCZ




(d)    The amount of current earnings and profits in the Preceding Year (taking into
       account all other applicable rules, including Treas. Reg. § 1.858-1, but
       disregarding the impact of any section 302(a) redemptions in such Preceding
       Year) will exceed the amount of the Spillover Distribution considered paid (under
       section 858(a)) in such Preceding Year.

(e)    Taxpayer will not claim a deduction for dividends paid with respect to the
       Repurchases.

(f)    Taxpayer anticipates that most of the shareholders of the common stock and of
       the New Stock that will dispose of their stock as part of the Repurchases will be
       eligible to treat the dispositions as exchanges under section 302(a).

                                             RULING

      Based solely on the information submitted and on the representations set forth
above, we rule as follows:


(1)    The section 301 Spillover Distributions are ordinary distributions in the Preceding
       Year and will take priority over the section 302 Repurchases made in the
       Preceding Year in accessing Taxpayer’s available current earnings and profits.
       See section 316(a)(2), section 312(n)(7), section 858(a), and Rev. Rul. 74-339,
       1974-2 C.B. 103.

                                           CAVEATS

        No opinion is expressed or implied as to whether section 305(a) applies to the
Proposed Transaction or about the federal tax treatment of any other aspect of any
transaction or item discussed or referenced in this letter, or about the tax treatment of
any condition existing at the time of, or effects resulting from, any transaction or item
that is not specifically covered by the above ruling. In addition, no opinion is expressed
or implied concerning whether Taxpayer qualifies as a REIT under part II of Subchapter
M of Chapter 1 of the Code.

                             PROCEDURAL STATEMENTS

       The ruling in this letter is based upon information and representations submitted
by the taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. While this office has not verified any of the material submitted in
support of the request for a ruling, it is subject to verification on examination.

       This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Internal Revenue Code provides that it may not be used or cited as precedent.
PLR-140419-15                                 4   ASBWCZ




      A copy of this letter must be attached to any income tax return to which it is
relevant.


        In accordance with the Power of Attorney on file with this office, copies of this
letter are being sent to your authorized representatives.

                                       Sincerely,



                                       _________________________________
                                       Benjamin M. Willis
                                       Senior Technician Reviewer, Branch 5
                                       Office of Associate Chief Counsel (Corporate)