In Private Letter Ruling 201709011, the IRS ruled that a REIT's proposed distribution to its shareholders, who may elect to receive the distribution in the form of cash, stock, or a combination of the two (subject to an overall 20% cash limit), will be treated as a distribution of property to which Section 301 applies. The IRS further ruled that the amount of the distribution of stock received by a shareholder will be considered to equal the amount of money which could have been received instead. Accordingly, the proposed distribution will constitute dividends to the extent of the REIT's earnings and profits under Section 316, thus positioning the REIT to obtain a dividends paid deduction to reduce its taxable income.

Facts

Taxpayer is a publicly traded real estate investment trust (REIT) with one class of common stock outstanding. Taxpayer regularly distributes its earnings and profits in connection with making distributions to its shareholders as required to satisfy the REIT distribution requirement of Section 857(a)(1). Taxpayer has no outstanding warrants or convertible debt.

Taxpayer intends to make a special dividend distribution to its shareholders with respect to its common stock during Year [ ] (Proposed Distribution). The Proposed Distribution will be payable, at the election of the shareholders, either in (i) 100% common stock of Taxpayer, (ii) 100% cash or (iii) a combination of cash and common stock that includes between 20% to 80% cash and the remainder in common stock. If a shareholder fails to make a valid election, the shareholder will be deemed to have made one of elections at the sole discretion of Taxpayer. In addition, Taxpayer retains the right to make the Proposed Distribution entirely in cash up to the payment date.

If shareholder elections would result in the payment of cash in an aggregate amount that is less than or equal to the total amount of cash available in the Proposed Distribution (Cash Limit), then each shareholder electing to receive entirely cash or a combination of cash and common stock will receive its cash portion of the Proposed Distribution in cash in the amount elected. If shareholder elections would result in the payment of cash in an aggregate amount that exceeds the Cash Limit, then each shareholder electing to receive cash will receive a prorated amount of cash and the remainder of its portion of the Proposed Distribution in common stock. In no event will the total amount of the Cash Limit be less than 20% of the aggregate value of the Proposed Distribution. Further, no shareholder electing to receive cash will receive less than 20% of its portion of the Proposed Distribution in cash.

Taxpayer will determine the number of shares to be received by any shareholder over a period of up to two weeks ending as close as practicable to the payment date of each Proposed Distribution, using a formula designed to equate in value the number of shares to be received with the amount of money that could be received instead.

Holding

The IRS ruled that the cash and common stock distributed in the Proposed Distribution shall be treated as a distribution of property with respect to the common stock to which Section 301 applies, citing Sections 301 and 305(b)(1). In addition, the IRS ruled that the amount of the distribution of the stock received by a shareholder will be considered to equal the amount of money that could have been received, instead citing Regulation Section 1.305-1(b)(2).

Implications

It appears that the REIT in PLR 201709011 desired to use "elective cash/stock dividends" to obtain a dividends paid deduction to reduce its taxable income and to satisfy the 90% REIT distribution requirement of Section 857(a)(1). Other publicly traded REITs (including C corporations electing REIT status) have obtained private letter rulings on the use of elective cash/stock dividends to purge C corporation earnings and profits to satisfy the REIT distribution requirement of Section 857(a)(2).

It is good news to see that the IRS continues to issue private letter rulings on the use of elective cash/stock dividends by publicly traded REITs for the purpose of either obtaining a dividends paid deduction or purging C corporation earnings and profits, since the expiration of the safe harbor in Revenue Procedure 2010-12. See, for example, PLRs 201631005, 201629003, 201550017, 201544015, 201537020, 201516050, 201505035, 201448016, 201431020, 201426019, 201446013, 201320007, 201312028, 201252012, and 201247004. PLR 201709011, as well as the additional PLRs cited above, provided for a "20% cash limitation," which suggests that the IRS ruling policy is to allow for a cash limitation of no lower than 20%, which was the ruling standard prior to the issuance of the revenue procedures described below.

Of historical note, Revenue Procedure 2010-12 (published in connection with the credit crisis/recession, along with predecessor Revenue Procedures 2009-15 and 2008-52) provided a safe harbor for the use of elective cash/stock dividends by a publicly traded REIT or RIC to obtain a dividends paid deduction, including the use of a cash limitation as low as 10%. However, the safe harbor under Revenue Procedure 2010-12 was available only through tax years ending on or before December 31, 2011, and, thus, has expired.

REITs considering the use of elective cash/stock dividends (with a cash limitation), either to obtain a dividends-paid deduction or to purge C corporation earnings and profits, will likely want to seek their own rulings because, among other reasons, Section 305(b) does not directly address "cash limitations."

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