Recently, the IRS provided a method for publicly offered real estate investment trusts (REITs) and publicly offered registered investment companies (RICs) to fulfill their distribution requirements while distributing stock as well as cash. Rev. Proc. 2017-45, 2017-35 IRB 1. This is significant for RICs and REITs because they are required to distribute a certain amount of their income as a dividend in order to retain their tax-preferred status and to avoid paying tax at the RIC or REIT level. Thus, even if they are short of cash, a stock distribution can, if it meets certain requirements, qualify for the dividends-paid deduction. Shareholders of the RICs or REITs that utilize this procedure must have appropriate elections regarding cash or stock already in place before making the relevant distribution. If the distribution meets the qualifications described under Revenue Procedure 2017-45, the shareholders will be taxed on the distribution as if all cash were distributed.

This new procedure includes detailed formulas and requirements for stock in lieu of cash distributions and is effective for distributions declared on or after August 11, 2017. Up until this latest procedure was issued, RICs and REITs had to either obtain a private letter ruling to treat a stock distribution as a dividend under the dividends-paid deduction or rely on previous temporary procedures that were implemented periodically. By contrast, the new Revenue Procedure does not include a termination date.

To fall within this procedure, at least 20 percent of the distribution must be cash. These rules apply to publicly traded RICs and REITs. For this purpose, a publicly traded REIT is one that is required to file annual and periodic reports with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. A publicly traded RIC is one that is continuously offered pursuant to a public offering (as defined in the Securities Act of 1933), regularly traded on an established securities market, or held by, or for, no fewer than 500 persons at all times during the taxable year. RICs and REITs that have liquidity issues may find this procedure very helpful.