IRS says a consolidated REIT subsidiary is publicly offered, so a corrected overdistribution is not a preferential dividend

Plain-English summary

A REIT controlled by a publicly traded parent made a distribution that was intended to be pro rata, but rounding in ownership records caused one partnership to receive too much. The excess was later returned and paid to the other partnership. The subsidiary REIT's financial information was included in the parent's consolidated annual and periodic SEC reports, rather than reported separately. The IRS concluded that this reporting made the subsidiary a publicly offered REIT under § 562(c)(2). Because the preferential-dividend restriction in § 562(c)(1) does not apply to publicly offered REITs, the distribution was not a preferential dividend. The IRS did not decide whether the taxpayer otherwise qualified as a REIT or whether its distributions otherwise qualified as dividends.

Ruling snapshot

• Question: Does inclusion in a publicly traded parent REIT's required consolidated SEC reports make a controlled REIT publicly offered, so an uneven distribution is not disqualified as preferential?
• Outcome: approved (the taxpayer is a publicly offered REIT and the distribution is not a preferential dividend)
• Key authorities: IRC §§ 316, 561, 562(c), 565, 856, 857(b)(2)(B); Treas. Reg. § 1.562-2(a)

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202051005                                            [Third Party Communication:
 Release Date: 12/18/2020                                     Date of Communication: Month DD, YYYY]
 Index Number: 562.03-00
                                                              Person To Contact:
 ----------------------                                       -------------------, ID No. -----------------
 -----------------------------                                Telephone Number:
 ---------------------------------------                      --------------------
 ---------------------------                                  Refer Reply To:
                                                              CC:FIP:B01
                                                              PLR-109707-20
                                                              Date:
                                                              September 18, 2020




Legend:

Taxpayer                           =       ------------------------------
                                           -----------------------
Parent REIT                        =       ----------------------------------------
Operating Partnership              =       -----------------
Partnership X                      =       -------------------------
Partnership Y                      =       ------------------------
Partnership Z                      =       ----------------------
State A                            =       -------------
Exchange                           =       -------------
Date 1                             =       --------------------------
Date 2                             =       --------------------------
Date 3                             =       ----------------------
Date 4                             =       ---------------------
Date 5                             =       ---------------------
a                                  =       ---
b                                  =       --------
c                                  =       --------
d                                  =       -----------
e                                  =       -----------
f                                  =       --------
g                                  =       -----
h                                  =       -------------
j                                  =       -------------
PLR-109707-20                                2

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

       This is in reply to a letter dated March 27, 2020, requesting rulings on behalf of
Taxpayer. Taxpayer requests a ruling that it is a publicly offered REIT as defined in
section 562(c)(2) of the Internal Revenue Code and that the distribution described
below therefore was not a preferential dividend under section 562(c)(1).

                                          FACTS

      Taxpayer is a State A corporation that made an election to be a real estate
investment trust (“REIT”) under section 856 for its taxable year ended Date 1.

       Parent REIT is a State A corporation that made an election to be a REIT for its
taxable year ended Date 2. Parent REIT is listed on Exchange. Taxpayer represents
that Parent REIT has been a publicly offered REIT within the meaning of section
562(c)(2) at all times on and after Date 3.

       Parent REIT owns substantially all of its assets and conducts its operations
through Operating Partnership, a State A limited partnership classified as a partnership
for federal tax purposes. Parent REIT owns approximately a percent of Operating
Partnership.

       Operating Partnership owns substantially all its assets through two State A
limited liability companies classified as partnerships for federal tax purposes,
Partnership X and Partnership Y. Operating Partnership owns directly b percent and
indirectly c percent of each of Partnership X and Partnership Y. Partnership X owns d
percent of Partnership Z. Partnership Y owns e percent of Partnership Z. Therefore,
Operating Partnership owns, indirectly, f percent of Partnership Z. Partnership Z owns g
percent of the interests in Taxpayer, excluding certain preferred shares.

       Taxpayer represents that, at all times since Date 3, Parent REIT has had a
controlling interest in Taxpayer, and Taxpayer has been 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,
Operating Partnership, Partnership X, Partnership Y, and Partnership Z are included in
the consolidated financial statements that Parent REIT files with the SEC. For purposes
of the consolidated financial statements, Taxpayer is not presented separately. 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.
PLR-109707-20                                 3

       On Date 4, Taxpayer made a distribution on its common stock in the amount of
$h (the “Distribution”). At that time, Partnership X and Partnership Y owned their
interests in Taxpayer directly rather than through Partnership Z. The Distribution was
intended to be pro rata, but an overdistribution was paid to Partnership Y of $j due to
the rounding of the ownership percentages shown in the organizational charts
maintained by Operating Partnership. Upon learning of the error, on Date 5, the
overdistribution of $j was returned to Taxpayer and distributed to Partnership X.

                                    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
PLR-109707-20                                  4

Taxpayer meets the definitional requirements to be a publicly offered REIT pursuant to
section 562(c)(2).

                                       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 or whether Taxpayer’s distributions otherwise
qualify as dividends.

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



                                       Steven Harrison
                                       Branch Chief, Branch 1
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)




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