2015-43, which added REIT-related OpCo/PropCo spin-off transactions under IRC Section 355 to the list of issues for which it will not ordinarily issue a PLR or other taxpayer specific guidance (i.e., the “no-rule area” list). More recently, on September 14, 2015, the IRS issued Rev. 2001-29, Georgia Pacific undertook a tax-free timber REIT spin-off transaction and led the charge into the post-ruling era of REIT conversions, during which time the IRS willingly issued numerous private letter rulings (PLRs) addressing a host of issues in relation to many REIT spin-off transactions. 2001-29, there was much uncertainty and therefore inherent risk in proceeding with these transactions.
Although some commentators believe that REIT spin-offs had reasonable merit to qualify for tax-free treatment prior to the issuance of Rev. The IRS reasoned that these changes to IRC Section 856 now allowed REITs to meet the IRC Section 355 active trade or business requirement. As a result of changes ushered in by the Tax Reform Act of 1986, the ability of REITs to conduct active and substantial management and operational functions was significantly enhanced. 73-236.įast forward to 2001, at which time the IRS issued Rev. At the time, limitations on a REIT’s ability to directly conduct active and substantial management and operational functions perhaps lent some credence to the published Internal Revenue Service (IRS) position in Rev. Such ruling was predicated on the fact that the leasing of real property by the spun-off REIT did not satisfy the active trade or business requirements of IRC Section 355(b). 73-236 and held that in a spin-off transaction qualifying for tax-free treatment under IRC Section 355, a corporation could not distribute to its shareholders stock of a company that would elect REIT status.
Irc 355 code#
As discussed in prior articles, but outside the scope of this edition, many other tax considerations may come into play.įor the shareholders to qualify for tax-deferred treatment upon the receipt of the distributed corporation stock, a number of requirements codified in Internal Revenue Code (IRC) Section 355 must be satisfied, including, but not limited to, the following: The distributor gets a deduction for the rent payments to the REIT, and the REIT avoids corporate-level income tax on the rent payments, assuming that the REIT distributes 100 percent of its taxable income to its shareholders (and many other organizational and operational conditions are met). In connection with the transaction, the controlled corporation makes a REIT election and the two companies typically enter into a long-term real property lease arrangement (i.e., a triple net lease). Generally speaking, in a REIT spin-off transaction, a company with an operating business and a significant amount of real property drops the real estate into a wholly owned subsidiary (a “controlled corporation”) and distributes the stock to its shareholders. In numerous high-profile cases, activist investors have effectively forced a split-up of real estate and non-real estate assets as a way to maximize shareholder returns.
REIT spin-off transactions have recently generated plenty of attention as many companies, including those with substantial holdings of real property in non-traditional asset classes, seek to determine whether they could benefit from a successful REIT spin-off transaction.
This edition of Tax Advisor Weekly revisits the history of REIT spin-offs by analyzing the PATH Act and the evolution of the Treasury’s position on such transactions. On December 18, 2015, Congress passed and the President signed into law an agreement on a comprehensive year-end tax extenders package, the Protecting Americans from Tax Hikes (PATH) Act of 2015, which contains impactful measures specifically targeting certain REIT conversion transactions in the form of so-called “OpCo/PropCo” spin-offs.
Structured Finance & Capital Equipment ValuationĢ016-Issue 4-In past articles, we have discussed the increased corporate interest in unlocking shareholder value via real estate investment trust (REIT) conversion transactions (see “REIT Conversions - A Primer on Key Business and Tax Considerations,” September 2, 2014), as well as the legislative landscape and current trends in corporate REIT conversions (see “2014 REIT Update: The Time Is Ripe for REITs,” November 20, 2014). Portfolio Company Performance Improvement Merger, Acquisition & Divestiture Services
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