Tax News Update    Email this document    Print this document  

Shareholder demand letter requirements must be satisfied within 30 days after the close of the tax year. This year, shareholder demand letters for calendar-year real estate investment trusts (REITs) for the year ended December 31, 2023, should be mailed no later than January 30, 2024.

Treas. Reg. Section 1.857-8 requires every REIT to keep certain records, including records showing information that will disclose the actual owners of its stock. To obtain this information, a REIT must annually demand that certain of its shareholders provide written statements regarding the actual and constructive ownership of the REIT's stock. See Treas. Reg. Section 1.857-8(a), (b) and (c) for information that must be included in shareholder demand letters.

Treas. Reg. Section 1.857-8(d) specifies that written statements must be demanded from shareholders of record as follows:

1. For a REIT having 2,000 or more shareholders of record of its stock on any dividend record date, from each record holder of 5% or more of its stock
2. For a REIT having fewer than 2,000 and more than 200 shareholders of record of its stock on any dividend record date, from each record holder of 1% or more of its stock
3. For a REIT having 200 or fewer shareholders of record of its stock on any dividend record date, from each record holder of 0.5% or more of its stock

Because shareholder demand letters are required to assist in determining compliance with share ownership tests in IRC Section 856(a)(5) and (6), taxpayers are advised to use the smallest number of shareholders of record on any dividend record date for purposes of determining the ownership percentage requiring a shareholder demand letter. Once the ownership percentage has been determined, a demand for a written statement must be made of any shareholder holding the requisite percentage of stock on any dividend record date.

Treas. Reg. Section 1.857-8(e) requires REITs to demand written statements from shareholders within 30 days after the close of their tax year. When making demand for such written statements, REITs must inform each such shareholder of its duty to submit the statements required by Treas. Reg. Section 1.857-9 at the time the shareholder files its income tax return if the shareholder fails or refuses to comply with such demand.

An entity that does not issue demand letters, and thereby fails to maintain records in accordance with Treas. Reg. Section 1.857-8, will be subject to a $25,000 penalty, which can be increased to $50,000 if the failure to comply is due to intentional disregard. If the entity does not issue the required demand letters or comply with the related regulations, the IRS may require the entity to take appropriate steps, including the issuance of "curative" demand letters, to determine its actual ownership. An entity failing to undertake the steps outlined by the IRS will be subject to an additional $25,000 or $50,000 penalty, whichever applies. No penalty shall be imposed, however, if the failure to meet the shareholder demand requirement is due to reasonable cause and not willful neglect. See IRC Section 857(f)(2).

———————————————

ATTACHMENT

Sample REIT Shareholder Demand Letter