- Extension of Stock Dividend Safe Harbor for US REITs and RICs
- February 16, 2010 | Authors: Jeffrey M. Bruns; Anne Marie Konopack; William A. Levy
- Law Firm: Mayer Brown LLP - Chicago Office
On December 23, 2009, the US Treasury Department published Revenue Procedure 2010-12 (the “Revenue Procedure”), extending to 2011 a safe harbor for certain stock distributions by publicly-traded real estate investment trusts (REITs) and regulated investment companies (RICs).
Under the Internal Revenue Code of 1986, as amended (the “Code”), a domestic corporation that meets the requirements for either REIT or RIC status, and is taxed as either a REIT or a RIC, is entitled to a dividends paid deduction for distributions made to its shareholders (effectively eliminating corporate level taxation). In order to maintain REIT or RIC status, such entities must distribute at least 90 percent of their “taxable income” (other than capital gains) to their shareholders on an annual basis. For purposes of this requirement, these distributions must constitute dividends under section 301 of the Code.
Under section 305(a) of the Code, stock distributions by a corporation to its shareholder with respect to its stock are not treated as dividends under section 301 of the Code unless certain exceptions apply. One exception under section 305(b)(1) of the Code provides that a distribution by a corporation of its stock shall be treated as a distribution of property to which section 301 of the Code applies if the distribution is, at the election of any of the shareholders, payable either in stock or in property. Further, under section 562(c) of the Code, a dividend will not qualify for the dividends paid deduction if it is “preferential,” that is, if it is other than strictly pro rata to all shareholders of a particular class, or if it violates any preference that one class has over another class.
Revenue Procedures 2008-68 (2008-52 IRB 1373) and 2009-15 (2009-4 IRB 356) provide a safe harbor under which certain stock distributions declared by a REIT or a RIC on or after January 1, 2008, with respect to a tax year ending on or before December 31, 2009, will be treated as a distribution of property which is eligible for dividend treatment under section 301 of the Code by reason of section 305(b)(1) of the Code. The amount of such distribution will be considered to equal the amount of the money that instead could have been received. The Revenue Procedure extends this relief to distributions made with respect to taxable years 2010 and 2011.
The Revenue Procedure also provides that if some shareholders receive a combination of stock and money that differs from the combination received by other shareholders, and if the fair market value of the stock on the date of distribution differs from the amount of money which could have been received instead, those differences do not cause the distribution to be a preferential dividend under section 562(c) of the Code.
Safe Harbor Requirements
The requirements necessary to meet the Revenue Procedure safe harbor are as follows:
(1) The distribution is made by the REIT or RIC to its shareholders with respect to its stock;
(2) Stock of the REIT or RIC is publicly traded on an established securities market in the United States;
(3) The distribution is declared on or before December 31, 2012, with respect to a taxable year ending on or before December 31, 2011, whether declared and distributed prior to the close of the taxable year or pursuant to one of the provisions of the Code that allow distributions made in a subsequent taxable year to relate back to a prior taxable year;
(4) Each shareholder may elect to receive the shareholder’s entire entitlement under the declaration either in money or in the equivalent value of stock of the distributing REIT or RIC, subject to a limitation on the amount of money to be distributed in the aggregate to all shareholders (the “Cash Limitation”), provided that (i) such Cash Limitation is not less than 10 percent of the aggregate declared distribution, and (ii) if too many shareholders elect to receive money, each shareholder electing to receive money will receive a pro rata amount of money corresponding to the shareholder’s respective entitlement under the declaration, but in no event will any shareholder electing to receive money receive less than 10 percent of the shareholder's entire entitlement under the declaration in money;
(5) 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 purposes of applying requirement (4) above, the value of the shares to be distributed shall be determined by using the formula described in the preceding sentence; and
(6) With respect to any shareholder participating in a dividend reinvestment plan (DRIP), the DRIP applies only to the extent that, in the absence of the DRIP, the shareholder would have received the distribution in money under requirement (4) above.
The Revenue Procedure is effective for distributions declared on or after January 1, 2008.