REIT stock-and-cash distributions qualify as property distributions

Plain-English summary

A public corporation planned to elect REIT status and distribute its accumulated pre-REIT earnings and profits through a mix of cash and common stock. Shareholders could elect cash or stock of equivalent value, subject to an aggregate cash cap of at least 20 percent and pro rata allocation if cash elections exceeded the cap. The IRS ruled that the purging distribution and similar distributions during the first two REIT years would be property distributions under sections 301 and 857 by reason of section 305(b). Stock received in a distribution would be valued at the amount of cash the shareholder could have elected instead. The ruling did not decide whether the corporation otherwise qualified as a REIT.

Ruling snapshot

• Question: How would elective stock-and-cash distributions used for REIT qualification and annual distribution requirements be treated?
• Outcome: approved, as property distributions with stock valued at the cash alternative
• Key authorities: IRC §§ 301, 305(b), 857(a)(1), and 857(a)(2); Treas. Reg. § 1.305-1(b)(2)

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201717005                                                Third Party Communication: None
Release Date: 4/28/2017                                          Date of Communication: Not Applicable
Index Number: 301.00-00, 305.03-00,
              305.04-00, 857.01-00                               Person To Contact:
                                                                 -----------------------, ID No. -------------------
----------------                                                 ---------------------------------------------------
-----------------------------------                              Telephone Number:
-------------------------                                        ----------------------
---------------------------                                      Refer Reply To:
                                                                 CC:CORP:B04
                                                                 PLR-123942-16
                                                                 Date:
                                                                 January 23, 2017


                  Legend


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

Year 1            =                   ---------------------------------------------------------------------------------

Year 2            =                   ---------------------------------------------------------------------------------

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

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

Common Stock =                        ---------------------------------------------------------------------------------
                                      ---------------------------------------------------------------------------------
                                      ---------------------------------------------------------------------------------
                                      -------------------------


Dear ---------:

This letter responds to your letter dated August 1, 2016, requesting two rulings with
respect to the Taxpayer’s stock and cash distributions in connection with its election to
be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code.
The information submitted in that letter, as well as other supplemental correspondence,
is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the Taxpayer, its representatives, and accompanied by a penalty of
perjury statement executed by an appropriate party. While this office has not verified
PLR-123942-16                                  2

any of the material submitted in support of the request for rulings, it is subject to
verification on examination.

                                    Summary of Facts

Taxpayer is a State A corporation. It intends to elect to be subject to tax as a REIT
commencing with its Year 1 taxable year (the “First REIT Year”). The Taxpayer has one
class of Common Stock outstanding. The Common Stock is publicly traded and listed
on the Exchange. The Taxpayer is an accrual method taxpayer that files federal income
tax returns on a calendar year basis.

Pursuant to its REIT election, the Taxpayer intends to declare a dividend to its
shareholders in an amount equal to its accumulated earnings and profits, as determined
for federal income tax purposes (“E&P”), during the First REIT Year, and distribute such
amount no later than January in Year 2 (the “Purging Distribution”). The Taxpayer
intends to make the Purging Distribution with a combination of cash and shares of
Common Stock. The Taxpayer may also make other cash and stock distributions in the
two years following the effective date of the REIT election that qualify for the deduction
for dividends paid under section 857(b)(2)(B) in such amounts as will permit the
Taxpayer to satisfy its distribution requirements under section 857(a)(1) (the “Other
Distributions” and together with the Purging Distribution, the “REIT Distributions”).

The Taxpayer intends, with respect to some or all of the REIT Distributions, to allow
each shareholder to elect to receive such distribution in either cash or stock of
equivalent value (the “Stock and Cash Distributions”), subject to a limitation on the
amount of cash to be distributed in the aggregate to all shareholders (the “Cash
Limitation”) in each distribution declaration. With respect to any Stock and Cash
Distribution, the Taxpayer expects to provide that each shareholder may elect to receive
its dividend in the form of: (a) cash (the “Cash Option”), or (b) Common Stock (the
“Stock Option”). If a shareholder fails to make a valid election by the election deadline,
that shareholder will be deemed to have made an election to be determined by the
Taxpayer in its sole discretion. To the extent necessary, the Taxpayer will issue cash in
lieu of fractional shares of stock. Although the Taxpayer has not yet determined the
amount of the Cash Limitation, it will not be less than 20 percent of each distribution
declaration (without regard to any cash that may be paid in lieu of fractional shares).
The Stock and Cash Distributions will be made by the Taxpayer to the holders of its
Common Stock with respect to the Common Stock.

If the total number of shares of Common Stock with respect to which an election to
receive the dividend in cash is made (“Cash Election Shares”) would result in the
payment of cash in an aggregate amount that is less than or equal to the Cash
Limitation, then all holders of Cash Election Shares will receive the Stock and Cash
Distribution on all Cash Election Shares in cash. If the number of Cash Election Shares
would result in the payment of cash in an aggregate amount that is greater than the
PLR-123942-16                               3

Cash Limitation, then shareholders electing to receive the Stock and Cash Distribution
in cash will receive the Stock and Cash Distribution on their Cash Election Shares as
follows:

   (a) cash on each shareholder’s Cash Election Shares equal to the proportion that
       such shareholder’s Cash Election Shares bear to the total Cash Election Shares
       of all shareholders, multiplied by an amount equal to the Cash Limitation; plus
   (b) shares of Common Stock in payment of the Stock and Cash Distribution on each
       shareholder’s remaining Cash Election Shares.

As a result, if too many shareholders elect to receive the Stock and Cash Distribution in
cash, the shareholder may instead receive a pro rata amount of cash, but in no event
will any shareholder electing the Cash Option receive less than 20 percent of the
shareholder’s entire entitlement under the distribution declaration in cash.

                                   Representations

Taxpayer makes the following representations:

      1. The Taxpayer intends to qualify as a REIT under the Code for the First REIT
         Year and to maintain such qualification as a REIT thereafter.

      2. The Taxpayer will regularly distribute its E&P as required by Section
         857(a)(1).

      3. The Common Stock of Taxpayer is publicly traded on an established
         securities market in the United States.

      4. Each Stock and Cash Distribution will be made by the Taxpayer to its
         shareholders with respect to their Common Stock.

      5. Each Stock and Cash Distribution will be made during the first two tax years
         as a REIT.

      6. The Taxpayer will report each Stock and Cash Distribution as a taxable
         dividend on all Forms 1099 that are distributed to holders of the Company’s
         Common Stock to the extent that the Stock and Cash Distributions are made
         out of the Company’s earnings and profits or to the extent the Stock and Cash
         Distributions are otherwise subject to Section 857(d)(2). The Taxpayer will
         withhold any required portion of such dividend in accordance with applicable
         law. Each Form 1099 will reflect either distributions as capital gain dividends
         designated by the Company or as a taxable dividend described above. Each
         such Form 1099 will reflect that the shareholder received an amount in the
         Stock or Cash Distribution equal to such shareholder's pro rata share of the
PLR-123942-16                               4

        Stock and Cash Distribution, in addition to other amounts distributed with
        respect to the relevant year.

     7. With respect to each Stock and Cash Distribution, each shareholder will have
        the right to elect to receive the Cash Option or the Stock Option, provided
        that: (a) the Cash Limitation will not be less than 20 percent of the aggregate
        declared distribution; and (b) in the event that the cash component is
        oversubscribed, each shareholder electing the Cash Option will receive a pro
        rata amount of cash corresponding to its entitlement under the declaration,
        but in no event will any shareholder electing the Cash Option receive less
        than 20 percent of its entire entitlement under the declaration in cash.

     8. In the event that the shareholders in the aggregate elect to receive cash in
        lieu of shares in an amount less than the Cash Limitation, then the Taxpayer
        would fully fund the cash component of the Stock and Cash Distribution. In
        such a case, all shareholders that elect the Cash Option would receive 100
        percent cash.

     9. The total number of shares of Common Stock to be issued in a Stock and
        Cash Distribution will be determined by dividing (i) the difference between (A)
        the total amount of such Stock and Cash Distribution, and (B) the total
        amount of cash to be paid as part of the Stock and Cash Distribution, by (ii)
        the average closing price of a share of Common Stock on the securities
        exchange over a period of up to two weeks ending as close as practicable to
        the payment date. The number of shares of Common Stock and the amount
        of cash received by any shareholder will depend on: (i) the average closing
        price of a share of Common Stock on the securities exchange over the
        valuation period; (ii) the shareholder’s own election; and (iii) the combined
        elections of other shareholders due to the Cash Limitation.

     10. The calculation of the number of shares of Common Stock to be received by
         any shareholder in each Stock and Cash Distribution will be determined, over
         a period of up to two weeks ending as close as practicable to the payment
         date, based on a formula that will use market prices to equate in value the
         number of shares of Common Stock to be received by the shareholder with
         the amount of money that could be received instead.

     11. The actual distribution of Cash and the Common Stock in each Stock and
         Cash Distribution will be made as soon as reasonably practicable following
         the date of the election deadline for such Stock and Cash Distribution.

     12. The Taxpayer does not currently have a dividend reinvestment plan (“DRIP”)
         in effect, but with respect to a REIT Distribution and any shareholder
         participating in any future DRIP, the DRIP will apply only to the extent that, in
PLR-123942-16                                 5

         the absence of the DRIP, the participating shareholder would have received
         the distribution in cash under the REIT Distribution election.

                                             Rulings

      Based solely on the information provided and the representations made, we rule
      as follows:

(1)   The distribution of cash and stock by the Taxpayer to its shareholders
      (determined at the election of each shareholder, subject to a limitation on the
      aggregate amount of cash distributed of not less than 20 percent of the total
      distribution and certain other limitations) to effect a distribution of all of the
      Taxpayer’s E&P accumulated in taxable years prior to its REIT election will be
      treated as a distribution of property with respect to the Taxpayer’s stock to which
      sections 301 and 857(a)(2) apply by reason of section 305(b). Moreover, cash
      and stock distributions by the Taxpayer to its shareholders in its first two taxable
      years as a REIT will be treated as distributions of property with respect to the
      Taxpayer’s stock to which sections 301 and 857(a)(1) apply by reason of section
      305(b).

(2)   The amount of any distribution of stock received by any shareholder as part of
      the REIT Distributions will be considered to equal the amount of cash that the
      shareholder could have elected to receive instead. See Treas. Reg. §1.305-
      1(b)(2).

                                             Caveats

      Except as expressly provided herein, no opinion is expressed or implied
      concerning the tax treatment of any aspect of any transaction or item discussed
      or referenced in this letter 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 transaction that is not specifically covered by the above rulings. In
      particular, we express no opinion on whether Taxpayer will qualify as a REIT
      under part II of Subchapter M of Chapter 1 of the Code.

                                    Procedural Statements

      This ruling letter 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 this letter ruling.
PLR-123942-16                                6

      In accordance with the power of attorney on file with this office, a copy of this
      letter is being sent to your authorized representatives.



                                                 Sincerely,



                                                 Douglas C. Bates
                                                 Chief, Branch 4
                                                 Office of the Associate Chief Counsel
                                                 (Corporate)




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