January 09, 2009
New guidance issued by the IRS (Rev. Proc. 2008-68) provides that a real estate investment trust may in certain circumstances treat distributions of its stock to its shareholders as a distribution pursuant to Section 301.
Section 305(a) generally provides that a shareholder of a corporation does not have income for a distribution by such corporation of its stock if such distribution was made with respect to such corporation’s stock. Pursuant to Section 305(a), such a distribution of stock would generally not be a distribution under Section 301. Section 305(b) provides the following exceptions to Section 305(a):
• Distributions in lieu of money — Section 305(b)(1);
• Disproportionate distributions — Section 305(b)(2);
• Distributions of common and preferred stock — Section 305(b)(3);
• Distributions of preferred stock — Section 305(b)(4); and
• Distributions of convertible preferred stock — Section 305(b)(5).
With respect to distributions in lieu of money, Treas. Reg. Sec. 1.305-2(a) provides that a distribution of stock is treated as a distribution under Section 301 if a shareholder has the right to elect whether a distribution is made in: (i) money or property; or (ii) stock of the distributing corporation or rights to acquire such stock.
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Treas. Reg. Sec. 1.305-1(b)(2) also provides that a corporation that regularly distributes earnings and profits, such as a regulated investment company, may treat the amount of the stock distributed to shareholders as the equivalent amount of the money if shareholders may elect to receive money or stock for the equivalent value.
Rev. Proc. 2008-68 provides guidance for REITs to treat a distribution of stock as a Section 301 distribution. Under the revenue procedure, a REIT may treat a distribution of its stock as a Section 301 distribution if:
• Such distribution is made by the REIT to its shareholders with respect to its stock;
• Stock of the REIT is publicly traded on an established securities market in the U.S.;
• Such distribution is declared with respect to a taxable year ending on or before Dec. 31, 2009;
• Pursuant to such declaration each shareholder may elect, subject to a limitation on the amount of money to be distributed in the aggregate to all shareholders (the Cash Limitation), to receive its entire entitlement in either: (i) money or (ii) stock of the distributing REIT in the equivalent value;
• The Cash Limitation of such declared distribution is not less than 10 percent;
• Shareholders elect to receive money in excess of the amount of money to be distributed, each shareholder electing to receive money will receive a pro rata amount of money but will not receive less than 10 percent of money;
• The calculation of the number of shares to be received by any shareholder will be determined based upon a formula utilizing market prices to equate the value of the number of shares to be received with the amount of money that could be received; and
• Any shareholder participating in a dividend reinvestment plan applies the DRIP only to the extent that the shareholder would have received the distribution in money.