A Revenue Procedure effective August 11, 2017 (Rev. Proc. 2017-45) establishes guidelines for a real estate investment trust (“REIT”) to issue elective cash/stock distributions as part of a dividend qualifying for the dividends paid deduction. The Revenue Procedure will allow REITs to conserve cash without enduring the time and expense associated with obtaining a private letter ruling from the Internal Revenue Service. To qualify for this treatment, the REIT must be “publicly offered” (i.e., a REIT that is required to file annual and periodic reports under the Exchange Act). The Revenue Procedure makes permanent financial crisis-era published guidance that had expired, but requires a greater cash percentage (i.e., at least 20 percent) than was required under the prior published guidance.
All REITs are required to distribute 90 percent of their “REIT taxable income” on an annual basis. Under the Revenue Procedure, if a REIT gives shareholders the option of receiving a distribution in either cash or stock and satisfies the requirements of the Revenue Procedure, the portion of the distribution that is a dividend under Code Section 301 will be (i) treated as a dividend for purposes of the dividends paid deduction applicable to REITs and (ii) included in the recipient’s gross income. The value of the stock distributed in lieu of cash will be treated as equal to the amount of cash for which the stock is substituted.
Scope of the Revenue Procedure
To fall within the new Revenue Procedure’s purview, a publicly offered REIT must declare a distribution, on or after August 11, 2017, with a cash-or-stock election attached to all or part of it and:
- the declaration must entitle each shareholder to elect to receive part or all of its distribution in either cash or stock;
- the cap on the cash amount of the declared distribution (the “Cash Limitation Amount,” and, expressed as a percentage of the declared distribution, the “Cash Limitation Percentage”) must be 20 percent or greater;
- if the aggregate cash amount to be distributed is not limited by the Cash Limitation, then each shareholder must receive cash equal to the elected amount;
- If the cash election is oversubscribed (i.e., the aggregate cash amount is limited by the Cash Limitation), then each shareholder electing to receive a percentage of cash over and above the Cash Limitation Percentage must instead receive an amount of cash which is as close in amount as practicable to the sum of:
- the product of the Cash Limitation Percentage and the shareholder’s entire dividend entitlement (to the extent subject to a cash/stock election) under the declaration, and
- the shareholder’s pro rata portion, based on its elected cash amount, of available cash above the Cash Limitation;
- regardless of whether the cash election is oversubscribed, every shareholder electing to receive a percentage of cash less than or equal to the Cash Limitation Percentage must receive the elected amount of cash; and
- the number of shares received by any shareholder receiving property must be determined by a formula which:
- utilizes the market value of the shares,
- is designed to link the value of the shares distributed as closely as practicable to the amount of cash otherwise paid, and
- uses data from a period of more than two weeks, ending as close as practicable to the payment date.
The cash or stock election will not affect any portion of the declared dividend not subject to the election.
Lastly, for purposes of Rev. Proc. 2017-45, if a shareholder participates in a dividend reinvestment plan, stock received by that shareholder under such plan will be treated as received in exchange for cash received in the distribution.