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To help publicly-offered real estate investment trusts (REITs) and regulated investment companies (RICs) conserve liquidity, the IRS in Revenue Procedure 2020-19 temporarily reduced the minimum amount of cash in cash-stock distributions that they must distribute to shareholders.

The new requirements apply to distributions declared on or after April 1 until December 31, 2020.

REITs and RICs must distribute 90% of taxable income annually as dividends. Unlike cash, stock distributions to shareholders generally do not qualify as dividends under IRC Section 301. Under IRC Section 305(b), however, stock distributions will qualify as IRC Section 301 dividends if the shareholders can elect to receive the distribution as a mixture of stock and cash.

Revenue Procedure 2017-45 created a safe harbor for publicly-offered REITs and RICs so their stock distributions qualify for IRC Section 301 if they offer shareholders at least 20% in cash, with the remainder in stock. The value of the stock received by any shareholder in lieu of cash is considered equal to the amount of cash that could have been received instead.

Revenue Procedure 2020-19 modifies this safe harbor to allow these entities to distribute 90% of their distributions in stock, with a minimum of 10% in cash. This temporary modification is to allow these entities "to conserve capital and thereby enhance their liquidity."

Implications

The reduced minimum cash requirement for REIT distributions is welcome relief for publicly-offered REITs. Notably, the modification, like Revenue Procedure 2017-45, provides a safe harbor only for publicly-offered REITs and RICs, although there is no clear policy rationale for distinguishing between public and private REITs and RICs. Presumably, as in Revenue Procedure 2017-45, Revenue Procedure 2020-19 treats stock that a shareholder receives from a dividend reinvestment plan as received in exchange for cash received in the distributions.

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