IRS provides temporary relief for REITs with option of paying dividends in stock

In order to qualify as a REIT for federal income tax purposes, generally a REIT must distribute at least 90% of its net taxable income to its stockholders. If a REIT is unable to distribute 90% of its net taxable income then it will be subject to federal income tax at the applicable corporate rate. Only taxable distributions may be counted towards satisfying the 90% requirement.

A stock dividend will not generally be treated by the IRS as a taxable distribution. However, in December, the IRS issued Revenue Procedure 2008-68, which provided that a stock dividend issued in lieu of cash dividend by a publicly-traded REIT will be treated as a taxable distribution that may satisfy the 90% requirement.

Revenue Procedure 2008-68 states that a distribution of stock by a REIT will be treated as a taxable distribution equal to the value of the cash that could have been received by the stockholder, provided that the following requirements are satisfied:

• The stock is publicly traded on an established securities market in the U.S.
• The distribution is declared with respect to a taxable year ending on or before December 31, 2009.
• Each shareholder may elect to receive its dividend in either cash or stock of the REIT of equivalent value, provided that any limitation instituted by the REIT on the amount of total cash available is not less than 10% of the aggregate distribution.
• If too many shareholders elect to receive cash, each shareholder electing to receive cash is entitled to a pro rate share of the cash corresponding to their respective dividend, but in no event will any shareholder electing to receive cash receive less than 10% of their dividend in cash.
• For shareholders participating in dividend reinvestment plans (DRIP), the DRIP applies only to the amount of cash the shareholder would have received absent the DRIP.

This new revenue procedure will permit cash-strapped, publicly-traded REITs an opportunity to preserve capital in 2009. Already, a handful of multifamily REITs have announced plans to distribute stock as part of their dividends.

Sources: NYTimes, IRS Revenue Procedure 2008-68

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