Morris Manning & Martin, LLP

IRS Guidance Provides Relief on Distribution Requirement for Publicly Offered REITs


On May 4, 2020, the Internal Revenue Service (IRS) issued Revenue Procedure 2020-19, which temporarily reduces, from 20 percent to 10 percent, the amount of cash that a publicly offered Real Estate Investment Trust (REIT) must distribute to shareholders for part stock, part cash distributions to qualify for the dividends-paid deduction. This guidance, which is virtually identical to the IRS' response to the 2008 financial crisis, provides welcome relief for many publicly offered REITs that are struggling with the challenge of reduced cash flow as a result of the COVID-19 pandemic.

Historically, a REIT must generally distribute at least 90 percent of its taxable income to shareholders to qualify as a REIT. REITs often satisfy this requirement with cash distributions, but a REIT also can satisfy this requirement with stock distributions as long as it meets certain technical requirements under the tax law.

In response to the 2008 financial crisis, the IRS issued temporary guidance that included a safe harbor to allow publicly offered REITs to satisfy the distribution requirement by distributing a combination of cash and stock to shareholders. To qualify under the safe harbor, each shareholder must elect to receive either cash or stock, and the aggregate cash component of the distribution to shareholders must represent at least 10 percent of the total distribution. In 2017, the IRS issued guidance that made the earlier relief permanent for publicly offered REITs, but also amended the safe harbor to increase the cash component requirement from 10 percent to 20 percent.

Rev. Proc. 2020-19 retains all of the requirements of the 2017 guidance, but once again lowers the cash component of the distribution to 10 percent for dividends declared between April 1, 2020, and December 31, 2020.

It is important to note that Rev. Proc. 2020-19 applies only to publicly offered REITs, which are defined as REITs that are required to file certain annual and periodic reports with the Securities and Exchange Commission (SEC), and does not apply to private REITs. The IRS, however, has extended the prior 2017 guidance to private REITs through private letter rulings. It is also important to note that many non-traded public REITs have charter provisions that would prevent the REIT from electing to make stock distributions unless the REIT's charter is amended.

While broader relief from the IRS would be welcome, Rev. Proc. 2020-19 provides much-needed relief for REITs with substantially reduced income as a result of the COVID-19 pandemic.

If you have any questions about this legal update, please reach out to any of your contacts at Morris, Manning & Martin, LLP.