Elective REIT stock dividend is a section 301 distribution

Plain-English summary

A publicly traded REIT planned a special dividend that let shareholders choose all stock, all cash, or a combination of the two. Cash elections could be prorated if they exceeded the available cash, but the cash component would be at least 20 percent of the total distribution and each shareholder electing cash would receive at least 20 percent in cash. The IRS ruled that both the cash and stock were property distributions governed by section 301 because shareholders could elect cash instead of stock. For shareholders receiving stock, the distribution amount would equal the cash amount they could have received. The IRS did not decide whether the company otherwise qualified as a REIT or whether the distribution met the REIT required-distribution rules.

Ruling snapshot

• Question: How would the cash and stock components of the elective special dividend be treated for federal income tax purposes?
• Outcome: approved
• Key authorities: IRC §§ 301 and 305(b)(1); Treas. Reg. § 1.305-1(b)(2)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201709011 Third Party Communication: None
Release Date: 3/3/2017 Date of Communication: Not Applicable
Index Number: 301.00-00, 305.00-00,
305.03-00 Person To Contact:
-----------------, ID No. ------------------
--------------------------- Telephone Number:
----------------------------- ----------------------
----------------------------------- Refer Reply To:
-------------------------------------------------- CC:CORP:B02
--------------------------------------------- PLR-120527-16
Date:
November 14, 2016

Legend

Taxpayer = -------------------------------------

Exchange = -------------------------------------

State A = --------------

Year 1 = -------

Dear ------------------:

This letter responds to a June 15, 2016 letter from your authorized representative
requesting rulings under sections 301 and 305 of the Internal Revenue Code (the
“Code”). The information provided in that request and in additional correspondence is
summarized below.

The rulings contained in this letter are based upon facts and representations submitted
on behalf of the Taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the materials submitted in
support of the request for rulings. Verification of the information, representations, and
other data may be required as part of the audit process.

FACTS

Taxpayer, incorporated in State A, is publicly traded and files federal income tax returns
as a real estate investment trust (“REIT”).
PLR-120527-16 2

Taxpayer, for all relevant periods, qualifies as a REIT and intends to maintain such
qualification. Taxpayer regularly distributes its earnings and profits as required under
section 857(a)(1) of the Code. Taxpayer has one class of common stock outstanding
(the “Common Stock”). Taxpayer has no outstanding warrants or convertible debt. The
Common Stock is publicly traded on Exchange.

Taxpayer intends to make a special dividend distribution to its shareholders with respect
to its Common Stock during Year 1 (the “Proposed Distribution”). Taxpayer will make
the Proposed Distribution in the form of a combination of Common Stock and cash.
Each shareholder will have the right to elect to receive its portion of the Proposed
Distribution in the form of (1) 100 percent Common Stock, (2) 100 percent cash, or (3) a
combination of cash and Common Stock that includes between 20 to 80 percent cash
and the remainder Common Stock. If a shareholder fails to make a valid election, the
shareholder will be deemed to have made one of the preceding 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 the total number of shares of Common Stock for which an election to receive cash is
made 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 (the “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 the total number of shares of Common Stock for which an
election to receive cash is made would result in the payment of cash in an aggregate
amount that is in excess of the Cash Limit (i.e. the cash component is oversubscribed),
then each shareholder electing to receive cash will receive a prorated amount of cash
and will receive 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 percent of the
aggregate value of the Proposed Distribution. Further, no shareholder electing to
receive cash will receive less than 20 percent of its portion of the Proposed Distribution
in cash. Any cash paid in lieu of fractional shares of Common Stock will not count
towards the Cash Limit.

The calculation of the number of shares to be received by any shareholder will be
determined, over a period of up to two weeks ending as close as practicable to the
payment date, based upon a formula utilizing market prices that is designed to equate in
value the number of shares to be received with the amount of money that could be
received instead.

For any shareholder participating in the Common Stock dividend reinvestment plan
(“DRIP”), the DRIP will apply only to the extent of the cash which the shareholder would
have received in the Proposed Distribution in the absence of the DRIP. Taxpayer has
no plan or intention to undergo any corporate reorganization or other business
combination in connection with or contemporaneously with the Proposed Distribution,
PLR-120527-16 3

although Taxpayer may have stock offerings that are unrelated to the Proposed
Distribution.

                                     RULINGS

Based solely upon the information submitted and the representations made, we rule as
follows on the Proposed Distribution:

(1) 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 of the Code applies (sections 301 and 305(b)(1)).

(2)The amount of the distribution of the stock received by any holder of Common
   Stock electing to or otherwise receiving stock will be considered to equal the
   amount of money which could have been received instead (section 1.305-
   1(b)(2)).

                                     CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the proposed transaction under other provisions of the Code and
regulations or the tax treatment of any condition existing at the time of or effects
resulting from the Proposed Distribution that are not specifically covered by the above
rulings. In particular, no opinion is expressed with regard to whether Taxpayer qualifies
as a REIT under part II of subchapter M of Chapter 1 of the Code or whether the
distributions made pursuant to the ruling will satisfy the “required distribution”
requirement under section 4981(b)(1) of the Code.

                         PROCEDURAL STATEMENTS

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.
PLR-120527-16 4

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                   Sincerely,



                                   William W. Burhop
                                   Assistant to the Branch Chief, Branch 2
                                   Office of Associate Chief Counsel
                                   (Corporate)

cc: