On May 4, 2020, the IRS issued Revenue Procedure 2020-19, which temporarily allows a publicly-offered REIT or RIC to pay as much as 90% of a distribution in its own stock (rather than cash or other property) and still have the entire amount treated as a dividend for US federal income tax purposes. As a result, the distribution will qualify for purposes of the REIT or RIC’s dividend distribution requirement and the dividend paid deduction, so long as certain requirements are satisfied.  Revenue Procedure 2020-19 closely follows the format of similar guidance issued during the 2008 financial crisis and applies to distributions declared on or after April 1, 2020, and on or before December 31, 2020.

A REIT or RIC generally must distribute at least 90% of its REIT or RIC taxable income on an annual basis in the form of qualifying dividends in order to maintain its status as a REIT or RIC for US federal income tax purposes. To avoid all corporate-level tax, a REIT or RIC must distribute all of its REIT or RIC taxable income each year.

Under Revenue Procedure 2020-19, a publicly-offered REIT or RIC may pay up to 90% of a distribution in its own stock (and the remaining 10% in cash (or other property)) and still have the entire amount of the distribution qualify as a dividend for US federal income tax purposes, so long as certain conditions are satisfied.[1] After December 31, 2020, a publicly-offered REIT or RIC will be permitted to pay up to 80% of the distribution in the REIT or RIC’s stock and still have the entire amount treated as a dividend for US federal income tax purposes.

In order for a distribution paid by a publicly-offered REIT or RIC partially in its own stock to be treated as a dividend for US federal income tax purposes, the distribution must be payable at the election of each shareholder in cash (or other property) or stock of the REIT or RIC (or a combination of the two), but may have a “cash cap” that limits the total amount of cash paid to not less than 10% of the entire distribution (or 20% for dividends declared after December 31, 2020).  If shareholders in the aggregate elect to receive an amount of cash greater than the REIT or RIC’s cash cap, then each shareholder who elected to receive cash receives a pro rata share of the cash and the rest of their distribution in stock of the REIT or RIC. The amount of the dividend for US federal income tax purposes will be the value of the stock distributed plus the amount of cash distributed to a shareholder. Shareholders will be subject to tax on the entire amount they receive, even though a portion of the distribution will be in stock.

[1] A “publicly offered RIC” is a RIC whose shares are either: i) continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933), (ii) regularly traded on an established securities market, or (iii) held by or for no fewer than 500 persons at all times during the taxable year. IRC § 67(c)(2)(B). A “publicly offered REIT” is a real estate investment trust which is required to file annual and periodic reports with the SEC under the Securities Exchange Act of 1934. IRC § 562(c)(2).

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Photo of David S. Miller David S. Miller

David Miller is a partner in the Tax Department. David advises clients on a broad range of domestic and international corporate tax issues. His practice covers the taxation of financial instruments and derivatives, cross-border lending transactions and other financings, international and domestic mergers…

David Miller is a partner in the Tax Department. David advises clients on a broad range of domestic and international corporate tax issues. His practice covers the taxation of financial instruments and derivatives, cross-border lending transactions and other financings, international and domestic mergers and acquisitions, multinational corporate groups and partnerships, private equity and hedge funds, bankruptcy and workouts, high-net-worth individuals and families, and public charities and private foundations. He advises companies in virtually all major industries, including banking, finance, private equity, health care, life sciences, real estate, technology, consumer products, entertainment and energy.

David is strongly committed to pro bono service, and has represented more than 200 charities. In 2011, he was named as one of eight “Lawyers Who Lead by Example” by the New York Law Journal for his pro bono service. David has also been recognized for his pro bono work by The Legal Aid Society, Legal Services for New York City and New York Lawyers For The Public Interest.

Photo of Martin T. Hamilton Martin T. Hamilton

Martin T. Hamilton is a partner in the Tax Department. He primarily handles U.S. corporate, partnership and international tax matters.

Martin’s practice focuses on mergers and acquisitions, cross-border investments and structured financing arrangements, as well as tax-efficient corporate financing techniques and the tax…

Martin T. Hamilton is a partner in the Tax Department. He primarily handles U.S. corporate, partnership and international tax matters.

Martin’s practice focuses on mergers and acquisitions, cross-border investments and structured financing arrangements, as well as tax-efficient corporate financing techniques and the tax treatment of complex financial products. He has experience with public and private cross-border mergers, acquisitions, offerings and financings, and has advised both U.S. and international clients, including private equity funds, commercial and investment banks, insurance companies and multinational industrials, on the U.S. tax impact of these global transactions.

In addition, Martin has worked on transactions in the financial services, technology, insurance, real estate, health care, energy, natural resources and industrial sectors, and these transactions have involved inbound and outbound investment throughout Europe and North America, as well as major markets in East and South Asia, South America and Australia.

Photo of Martine Seiden Agatston Martine Seiden Agatston

Martine Seiden Agatston is an associate in the Tax Department in the Los Angeles office. Her practice focuses on general tax matters, including domestic and international transactions. Representative matters have included U.S. and cross-border financings, debt and equity capital markets transactions, complex mergers…

Martine Seiden Agatston is an associate in the Tax Department in the Los Angeles office. Her practice focuses on general tax matters, including domestic and international transactions. Representative matters have included U.S. and cross-border financings, debt and equity capital markets transactions, complex mergers and acquisitions and corporate restructurings, as well as representation before the tax authorities. She also has acted for REITs, RICs (including BDCs) and other regulated investment entities on transactional matters.