7978 / How are REIT stock dividends taxed?

In a private letter ruling, the IRS concluded that shareholders who received all or part of a REIT’s special stock dividend would be treated as having received a distribution to which IRC Section 301 applies through the application of IRC Section 305(b)(1). The amount of the stock distribution would be equal to the value of the stock on the valuation date rather than on the date of the distribution. The special dividend qualifies for the dividends paid deduction under IRC Sections 561, 562 and 857 provided the REIT has sufficient earnings and profits.¹

The Service determined in a private letter ruling that a distribution of earnings and profits from a newly established REIT (arising from earnings and profits accumulated during the pre-REIT years), in which shareholders could elect to receive cash, stock, or a combination of both, should be treated as a distribution of property to which IRC Section 301 applies.²

Temporary Guidance Regarding Certain Stock Distributions after 2009 and before 2013. Recognizing the difficulty faced by publicly traded REITs and mutual funds in preserving liquidity in a capital-constrained environment,³ the Service issued a revenue procedure providing temporary guidance concerning the tax treatment of REIT and mutual fund distributions when shareholders had the ability to elect to receive either cash or stock.⁴ (The guidance formalized the conclusion reached by the Service in several earlier private letter rulings.)⁵ The Service stated that it will treat a distribution of stock by either a publicly traded REIT or mutual fund as a distribution of property to which IRC Section 301 applies by reason of IRC Section 305(b). The amount of the stock distribution was considered to equal the amount of the money that could have been received instead if:

(1)  the distribution was made by the corporation to its shareholders with respect to its stock;

(2)  stock of the corporation was publicly traded on an established securities market in the United States;

(3)  the distribution was 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 whether declared and distributed pursuant to provisions of IRC Sections 855, 852(b)(7), 868, 857(b)(9), or 860;

(4)  pursuant to such declaration, each shareholder could elect to receive his or her entire entitlement under the declaration in either money or stock of the distributing corporation of equivalent value subject to a limitation on the amount of money to be distributed in the aggregate to all shareholders (the “cash limitation”), provided that:

(a)  such cash limitation was not less than 10 percent of the aggregate declared distribution, and

(b)  if too many shareholders elected to receive money, each shareholder electing to receive money would receive a pro rata amount of money corresponding to his respective entitlement under the declaration, but in no event would any shareholder electing to receive money receive less than 10 percent of his entire entitlement under the declaration in money;

(5)  The calculation of the number of shares to be received by any shareholder would 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 was 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 item (4), the value of the shares to be distributed was required to 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 applied only to the extent that, in the absence of the DRIP, the shareholder would have received the distribution in money under item (4).⁶

Revenue Procedure 2010-12 was effective with respect to distributions declared on or after
January 1, 2008 and before January 1, 2013.