On November 30, 2021, the IRS issued Revenue Procedure 2021-53, which temporarily allows publicly offered RICs and REITs to make distributions that are treated as dividends of up to 90% stock and the remainder in cash. Revenue Procedure 2020-19 closely follows the format of similar guidance issued during the 2008
RIC (BDCs)
“Passthrough Deduction” Regulations for RICs Finalized with No Major Changes
On June 24, 2020, the Internal Revenue Service (the “IRS”) and the U.S. Department of Treasury (“Treasury”) issued final regulations (the “Final Regulations”) on the application of the “passthrough deduction” under Section 199A[1] to regulated investment companies (“RICs”) that receive dividends from real estate investment trusts (“REITs”). The Final Regulations broadly allow a “conduit” approach, through which RIC shareholders who would have been able to benefit from the deduction on a dividend directly received from a REIT can take the deduction on their share of such dividend received by the RIC, so long as the shareholders meet the holding period requirements for their shares in the RIC. This confirms the approach of proposed regulations issued in February 2019 (the “Proposed Regulations”), on which RICs and their shareholders were already able to rely. Additionally, the preamble to the Final Regulations (the “Preamble”) notes that the IRS and Treasury continue to decline to extend conduit treatment to qualified publicly traded partnership (“PTP”) income otherwise eligible for the deduction. Please read the remainder of this post for background, a description of the technical provisions of the Final Regulations, and a brief discussion of policy issues discussed in the Preamble.
New Guidance Allows Publicly-Offered REITs and RICs to Issue up to 90% of Qualifying Dividends in the REIT or RIC’s Own Stock Through the End of the Year.
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.
“Passthrough Deduction” Regulations Finalized
On January 18, 2019, the U.S. Department of Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) released final regulations (the “Final Regulations”) regarding the “passthrough deduction” for qualified trade or business income under section 199A of the Internal Revenue Code.[1] The Final Regulations modify proposed regulations (the “Proposed Regulations”) that were released in August 2018. The Final Regulations apply to tax years ending after February 8, 2019, but taxpayers may rely on the Proposed Regulations for taxable years ending in calendar year 2018.
Section 199A was enacted in 2017 as part of the tax reform act.[2] Generally, section 199A provides a deduction (the “passthrough deduction”) of up to 20% for individuals and certain trusts and estates of certain of the income from certain trades or businesses that are operated as a sole proprietorship, or through certain passthrough entities. The passthrough deduction provides a maximum effective rate of 29.6%.
This post provides background and summarizes some of the most important changes from the Proposed Regulations to the Final Regulations. For more information, please contact any of the Proskauer tax lawyers listed on this post or your regular Proskauer contact.
New Repatriation Tax Relief for RICs and Foreign Income Guidance for REITs
On September 6, the Internal Revenue Service (“IRS”) released Revenue Procedure 2018-47 (the “RIC Rev Proc”), which provides that a repatriation deemed to have been received by a registered investment company (a “RIC”) under Section 965 (enacted as part of the 2017 tax reform act, commonly known as the “Tax Cuts and Jobs Act” or “TCJA”) is treated as a “specified gain.” As a result, the amount of the deemed repatriation need not be distributed by the RIC until 2018 in order for the RIC to avoid the 4 percent excise tax imposed under Section 4982(a).
On September 13, the IRS released Revenue Procedure 2018-48, which provides that “global intangible low-taxed income” (“GILTI”), Subpart F income and “passive foreign investment company” (“PFIC”) inclusions of a real estate investment trust (a “REIT”) are treated as qualifying income for purposes of the 95 percent gross income test, and that certain REIT foreign exchange gains relating to distributions of previously taxed earnings and profits (“PTI”) are not included in gross income for purposes of the 95 percent gross income test.
Read further for additional background and more detail on these developments.