Today, Treasury and the IRS issued temporary (TD 9770) and proposed regulations (REG-126452-15) that address certain transfers of property to regulated investment companies (RICs) and real estate investment trusts (REITs). The temporary regulations impose corporate level tax on certain transactions in which property of a C corporation becomes the property of a REIT. According to Treasury and the IRS, these regulations are necessary to prevent abuses of sections 355(h) and 856(c)(8) and to further the purposes of the repeal of the General Utilities doctrine by the Tax Reform Act of 1986.
The temporary regulations provide that a C corporation engaging in a conversion transaction involving a REIT within the 10-year period following a related section 355 distribution will be treated as making an election to recognize gain and loss as if it had sold all of the converted property to an unrelated party at fair market value on the deemed sale date. In addition, the temporary regulations provide that a REIT that is a party to a section 355 distribution occurring within the 10-year period following a conversion transaction for which a deemed sale election has not been made will recognize any remaining unrecognized built-in gains and losses resulting from the conversion transaction (after taking into account the impact of section 1374 in the interim period). For the taxable year in which the related section 355 distribution occurs, the REIT’s net recognized built-in gain is the amount of its net unrealized built-in gain limitation for such taxable year.
The proposed regulations also include a modification to the definition of converted property. Such modification would treat as converted property any property the basis of which is determined, directly or indirectly, in whole or in part, by reference to the basis of property owned by a C corporation that becomes the property of a RIC or a REIT.
The temporary regulations are effective June 7. Comments on the proposed regulations and requests for a public hearing must be received by August 7.