- 6.01 Distributions Generally
December 28, 2009
Compendium Memorandum 2009-27On December 23, 2009, the IRS issued an advance copy of
Rev. Proc. 2010-12, extending for two years
Rev. Proc. 2009-15, relating to elective stock dividends. Rev. Proc. 2010-12 extends the IRS guidance for REITs first issued in
Rev. Proc. 2008-68 and expanded to mutual funds in Rev. Proc. 2009-15 so that, for dividends declared on or after January 1, 2008 and on or before December 31, 2012 (for taxable years ending on or before December 31, 2011) by publicly
traded REITs, the IRS will treat the entire value of the declared amount (including the stock portion) as a dividend, and thereby eligible for the dividends paid deduction so long as the specific calculation formula in Rev. Proc. 2010-12
is met, including that the total amount of cash available for the distribution is not less than 10%.
2) Stock of the corporation is publicly traded on an established securities market in the United States; 3) The distribution is declared on or before December 31, 2012, with respect to a taxable year ending on or before December 31, 2011, whether declared and distributed prior to the close of the taxable year or whether declared and distributed pursuant to the provisions of § 855, § 852(b)(7), § 858, § 857(b)(9), or § 860 (and thus the distribution includes "spillover dividends" declared with respect to the 2010 and 2011 tax years and/or deficiency dividends declared with respect to the relevant tax years and not declared until December 31, 2012); 4) Pursuant to such declaration, each shareholder may elect to receive its entire entitlement in either money or stock of the distributing corporation of equivalent value subject to a limitation on the amount of money to be distributed in the aggregate to all shareholders (the Cash Limitation), provided that: a) the Cash Limitation is a minimum of 10% of the aggregate declared distribution; and, b) if too many shareholders elect to receive money, each shareholder electing to receive money will receive a pro rata amount of money corresponding to their respective entitlement under the declaration not less than 10% of their entire entitlement under the declaration in money; 5) The calculation of the number and value 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; and, 6) With respect to any shareholder participating in a dividend reinvestment plan (DRIP), the DRIP applies only to the extent that, in the absence of the DRIP, the shareholder would have received the distribution in money under subsection (4). OBSERVATIONS NAREIT appreciates that the Treasury Department and IRS responded to its request to issue Rev. Proc. 2010-12 prior to the end of 2009, and confirmed that the calculation of the stock dividend may be determined by reference to a formula calculated over a two-week period.The minimum cash threshold in Rev. Proc. 2010-12 remains at 10%. Of particular note with respect to the Treasury Department and IRS' agreement to permit the calculation of the number of shares of distributed stock to be determined in advance through a calculation based on a multi-day trading average over up to a two-week period is Rev. Proc. 2010-12's specific statement that an elective stock dividend within its scope will not be a preferential dividend "if some shareholders receive a combination of stock and money that differs from the combination received by other shareholders and if the fair market value of the stock on the date of distribution differs from the amount of money which could have been received instead." (Emphasis added.) This conclusion provides additional clarification to the requirement in Rev. Proc. 2008-68 and Rev. Proc. 2009-15 that the "calculation of the number of shares to be received by any shareholder be determined, 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." Unfortunately, the IRS apparently continues to believe that the per share trading price of stock on the particular date of distribution (although it is not clear which trading price at which time during that day) represents the "fair market value" of the stock notwithstanding an agreed-upon formula in advance for calculating the "fair market value" of the stock. Finally, NAREIT is disappointed that Rev. Proc. 2010-12 did not address NAREIT's requests that the Treasury Department and IRS: 1) not apply the "disguised sale" rules of § 707(a)(2)(B) to elective stock dividends distributed by those REITs that own and operate their properties through the UPREIT structure and that an operating partnership (OP) which receives REIT stock from its REIT, whether purchased by the OP from the REIT for cash (which the REIT reinvests in OP units), or contributed by the REIT for OP units obtains a fair market value basis in the stock so that the other limited partners who receive REIT stock from the OP will have a fair market value basis in the stock; and, 2) extend the guidance to non-traded REITs. While there are methods through which to mitigate any adverse tax consequences resulting from the issuance of REIT stock to OP partners in connection with an elective stock dividend, the ideal resolution of any questions would have been through an explicit declaration in Rev. Proc. 2010-12. Further, although the IRS has issued a private letter ruling extending the guidance to non-traded REITs, PLR 200942030, it would have been preferable for the new revenue procedure to extend its terms to non-traded REITs so that they need not have to go through the time and expense of obtaining a private ruling. With that said, NAREIT is very appreciative of the Treasury Department and IRS' efforts in extending and expanding Rev. Proc. 2009-15 by issuing Rev. Proc. 2010-12. |
Compendium ReferenceContact
If you have any questions regarding this ruling, please contact
Dara Bernstein at dbernstein@nareit.com.
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