In Revenue Procedure 2017-45, the IRS established a new safe harbor allowing distributions of stock to be treated as a distribution of property under Sections 301 and 305(b) for publicly offered real estate investment trusts (REITs) or publicly owned regulated investment company (RICs), as long as certain conditions are met. Under the safe harbor, the distributor may not limit the amount of cash received by shareholders (cash limit) to less than 20% of the total distribution. Previously, many taxpayers sought a private letter ruling when the shareholders' ability to elect to receive cash in lieu of stock was limited.

Revenue Procedure 2017-45 is effective for distributions declared on or after August 11, 2017.

Background

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 that allowed a publicly traded REIT or RIC, under certain conditions, to claim a dividends paid deduction for elective cash/stock dividends. The safe harbor allowed for a cash limit as low as 10%. The safe harbor under Revenue Procedure 2010-12, however, was available only through tax years ending on or before December 31, 2011.

Since the expiration of Revenue Procedure 2010-12, REITs considering the use of elective cash/stock dividends (with a cash limit), either to obtain a dividends-paid deduction or to purge C corporation earnings and profits, sought their own rulings because, among other reasons, Section 305(b) does not directly address "cash limitations."

Revenue Procedure 2017-45

Revenue Procedure 2017-45 generally permits publicly traded REITs and RICs to treat distributions of their stock as dividends, to the extent of their earnings and profits, provided shareholders have the option to elect to receive those distributions in either stock or cash. The amount of such stock distributions are treated as equaling the amount of cash that could have been otherwise received.

One of the requirements that must be met in Revenue Procedure 2017-45 is that each shareholder may elect to receive its entire distribution in either cash or stock of the distributing corporation of equivalent value, subject to a limitation on the amount of cash to be distributed in the aggregate to all shareholders. The cash limit cannot be less than 20% of the aggregate declared distribution. If too many shareholders elect to receive cash, each shareholder electing to receive cash will receive a pro rata amount of cash corresponding to the shareholder's respective entitlement under the declaration. Any shareholder electing to receive all cash, however, must not receive less than 20% of the declaration in cash.

Additionally, if a shareholder participates in a dividend reinvestment plan (DRIP), the stock received by the shareholder is treated as received in exchange for cash received in the distribution.

Implications

Since the expiration of the safe harbor in Revenue Procedure 2010-12, REITs and RICs have had to seek private letter rulings to confirm that elective cash/stock distributions will be treated as dividends. See, for example, PLRs 201709011, 201631005, 201629003, 201550017, 201544015, 201537020, 201516050, 201505035, 201448016, 201446013, 201431020, 201426019, 201320007, 201312028, 201252012, and 201247004.

Unlike the previous revenue procedures, Revenue Procedure 2017-45 does not have an expiration date. The revenue procedure raises a number of interpretive questions. In addition, the revenue procedure is not intended to, and does not, cover all circumstances in which a corporation may wish to have Section 305(b) apply to an elective cash/stock distribution. Accordingly, the facts of each distribution will need to be analyzed to determine if they are consistent with the revenue procedure and, if not, whether a private letter ruling may be obtained.

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