REIT subsidiary's distribution was not a preferential dividend

Plain-English summary

A REIT subsidiary made a pro rata common-stock distribution while new management mistakenly believed no preferred shares remained outstanding. Management later discovered preferred stock entitled to accrued dividends and paid those dividends. Section 562 generally denies dividend treatment to a preferential distribution, but publicly offered REITs are excepted. Because the subsidiary's financial information was consolidated into its public parent REIT's required SEC reports, the IRS treated the subsidiary as a publicly offered REIT and ruled that the common-stock distribution was not preferential. The ruling did not decide whether the subsidiary otherwise qualified as a REIT or whether its distributions otherwise qualified as dividends.

Ruling snapshot

• Question: Was the REIT subsidiary's common-stock distribution a preferential dividend after it initially overlooked preferred-stock dividends?
• Outcome: No, because the subsidiary qualified as a publicly offered REIT for section 562(c).
• Key authorities: IRC §§ 561, 562(c), and 857; Treas. Reg. § 1.562-2.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201924003 Third Party Communication: None
Release Date: 6/14/2019 Date of Communication: Not Applicable
Index Number: 562.03-00
Person To Contact:
----------------------------------- -----------------, ID No. -----------
-------------------------------- Telephone Number:
----------------------------- ----------------------
-------------------- Refer Reply To:
----------------------------------------- CC:FIP:B02
PLR-102074-19
Date:
February 28, 2019

Legend:

Taxpayer = ---------------------------------------------------------
Parent REIT = ------------------------------
Operating Partnership = ----------------------------------
State A = ---------------------------
State B = --------------
Date 1 = ---------------------------
Date 2 = ---------------------------
Date 3 = ---------------------------
Date 4 = -------------------
Date 5 = -------------------
$a = ------------------
$b = --------------
x = -------
y = ------
z = ----
Exchange = -------------------------------------

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

PLR-102074-19 2

    This is in reply to a letter dated August 23, 2018, requesting a ruling on behalf of

Taxpayer. Taxpayer requests a ruling under section 562 of the Internal Revenue Code
that it did not issue a preferential dividend on Date 2.

                                      FACTS

   Taxpayer is a State A corporation that made an election to be taxed as a real

estate investment trust (“REIT”) under sections 856 through 859 effective for its taxable
year ended Date 1.

     Parent REIT is a State B REIT that is an Exchange listed company. Parent REIT

made an election to be taxed as a REIT under sections 856 through 859 effective for its
first taxable year ended Date 3. Taxpayer represents that Parent REIT is a publicly
offered REIT within the meaning of section 562(c)(2).

  Parent REIT owns substantially all of its assets and conducts all of its operations

through Operating Partnership, a partnership for federal income tax purposes in which
Parent REIT owns approximately y percent.

   Taxpayer is an indirect subsidiary of Operating Partnership. Parent REIT has a

controlling interest in Taxpayer, and Taxpayer represents that it is consolidated with
Parent REIT under generally accepted accounting principles for purposes of the annual
and periodic reports that Parent REIT is required to file with the Securities and
Exchange Commission (“SEC”) under the Securities Exchange Act of 1934. As such,
Taxpayer, its immediate parent, and Operating Partnership, are included in the
consolidated financial statements that Parent REIT files with the SEC. For purposes of
the consolidated financial statements, Taxpayer is disregarded as a separate entity.
The assets owned by Taxpayer are listed as assets of Parent REIT, and the income,
loss, and other activities of Taxpayer are included with those of Parent REIT and the
other consolidated entities.

   On Date 2, Taxpayer made a pro rata distribution on its common stock in the

amount of $a (“the Distribution”). At that time, Taxpayer’s new management team
believed the common stock was the only outstanding stock of Taxpayer. However, on
Date 4, the new management team learned that at the time of the Distribution, Taxpayer
also had x outstanding shares of Series A Preferred Stock. The Series A Preferred
Stock accrued dividends at z percent per annum and all accrued but unpaid dividends
on the Series A Preferred Stock were to be paid first, or simultaneously, with any other
dividends declared or distributed by Taxpayer. On Date 5, Taxpayer declared and paid
a $b dividend to the owner of the Series A Preferred Stock.

PLR-102074-19 3

                                LAW & ANALYSIS

   Section 857(b)(2)(B) provides that in determining real estate investment trust

taxable income, the deduction for dividends paid (as defined in section 561) shall be
allowed.

   Section 561(a) provides that the deduction for dividends paid shall be the sum of

the dividends paid during the taxable year, and the section 565 consent dividends for
the taxable year.

   Section 562(a) provides that the term “dividend” shall include only dividends

described in section 316.

   Section 562(c)(1) provides that, except in the case of a publicly offered REIT, the

amount of any distribution shall not be considered as a dividend for purposes of
computing the dividends paid deduction, unless such distribution is pro rata, with no
preference to any share of stock as compared with other shares of the same class, and
with no preference to one class of stock as compared with another class, except to the
extent that the former is entitled to such preference.

  Section 562(c)(2) defines a publicly offered REIT as a REIT that is required to file

annual and periodic reports with the SEC under the Securities and Exchange Act of
1934.

    Section 1.562-2(a) of the Income Tax Regulations further provides that a

preference exists if any rights to preference inherent in any class of stock are violated.
The disallowance of the dividends paid deduction, where any preference in fact exists,
extends to the entire amount of the distribution and not merely to a part of such
distribution.

   Under the Securities and Exchange Act of 1934, Taxpayer’s accounting

information is required to be consolidated with Parent REIT’s periodic and annual
reports that are submitted to the SEC. Thus, Taxpayer’s assets, income, loss, and
other activities are reported to the SEC as part of Parent REIT’s consolidated reports.
The consolidation of the reports does not alter the information reported to the SEC in
the annual and periodic reporting required under the Securities and Exchange Act of
1934. Therefore, annual and periodic reporting to the SEC is required of Taxpayer, and
Taxpayer meets the definitional requirements to be a publicly offered REIT pursuant to
section 562(c)(2).

PLR-102074-19 4

                                   CONCLUSION

   Based on the facts and representations submitted, we rule that Taxpayer is a

publicly offered REIT as defined in section 562(c)(2), and, therefore, the Distribution is
not a preferential dividend under section 562(c)(1).

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

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed or implied on whether
Taxpayer otherwise qualifies as a REIT under subchapter M of the Code. Additionally,
no opinion is expressed or implied as to whether Taxpayer’s distributions otherwise
qualify as dividends.

  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 representatives.

                                   Sincerely,


                                   Andrea Hoffenson_____________________
                                   Andrea M. Hoffenson
                                   Chief, Branch 1
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)