United States: IRS Issues Guidance On RIC And REIT Stock Distributions

The IRS has issued Revenue Procedure 2017-45, which provides that certain distributions of stock by a publicly offered RIC or publicly offered REIT made pursuant to a "cash or stock election" will be treated as a taxable distribution of property under Section 301 through the application of Section 305(b).

During the financial crisis, the Internal Revenue Service (IRS) issued similar guidance in Revenue Procedure (Rev. Proc.) 2008-68 (for real estate investment trusts (REITs)) and Rev. Proc. 2009-15 (for regulated investment companies (RICs)) that applied to distributions made during specified years, and extended that guidance in Rev. Proc. 2010-12. Rev. Proc. 2017-45 makes permanent the previous guidance, but with the requirement that at least 20% (as opposed to 10% in the previous guidance) of the aggregate declared distributions consist of cash.


In order to qualify for the tax treatment afforded under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code), RICs and REITs must, among other requirements, satisfy a distribution requirement.1 The distribution requirement refers to the dividends-paid deduction that is allowed in computing a RIC's or REIT's taxable income.2 A distribution will qualify for the dividends-paid deduction if the distribution is treated at the shareholder level as a dividend under Sections 301 and 316.3 Although the Code provides that a distribution by a RIC or REIT of its own stock to its shareholders generally is not treated as a distribution subject to Section 301, the Code also provides that a distribution by a RIC or REIT of its own stock is treated at the shareholder level as a distribution subject to Section 301 if shareholders may elect to receive cash in lieu of shares.4 A distribution will also be subject to Section 301 if the distribution (or a series of distributions of which such distribution is a part) results in the receipt of cash by some shareholders and an increase in the percentage interests of other shareholders in the distributing RIC or REIT.5

Since 2003, the IRS has issued a number of private letter rulings wherein a stock distribution qualified under Section 305(b)(1) for treatment as a distribution subject to Section 301 where the taxpayer represented that distributions of cash made up at least a fixed percentage (generally 20%) of the aggregate declared distributions.6 Those rulings allowed the issuers to limit their cash distribution exposure while still allowing the full dividends-paid deduction. In response to the 2008 financial crisis, Rev. Proc. 2008-687 (for REITs) and Rev. Proc. 2009-158 (for RICs) provided a safe harbor with a cash distribution requirement of 10%, but such guidance applied only to distributions made in 2008 and 2009. In Rev. Proc. 2010-12,9 the IRS extended the relief to distributions made in 2010 and 2011. For distributions declared for a tax year ending after December 31, 2011, the IRS informally stated that taxpayers seeking Section 305(b)(1) private letter rulings would have to meet the 20% cash distribution requirement.10

Revenue Procedure 2017-45

Rev. Proc. 2017-4511 provides definitive, permanent guidance to Publicly Offered RICs12 and Publicly Offered REITs13 seeking to qualify stock distributions with cash component limitations for the dividends-paid deduction. If the distribution satisfies the requirements of the revenue procedure, then the IRS will treat the full amount of the distribution of stock as a distribution of property to which Section 301 applies, and thus the full amount of the distribution will qualify for the dividends-paid deduction. If the revenue procedure applies, then the value of the stock received in lieu of cash will be deemed to equal the amount of cash that could have been received instead.14 Furthermore, stock received pursuant to a dividend reinvestment plan will be treated as received in exchange for cash received in the distribution.15 The federal income tax treatment of any portion of the RIC's or REIT's declared dividend that is not subject to a cash or stock election will not be affected by the existence of such an election for any other portion of the declared dividend.16

A declaration of a distribution of stock that is declared on or after August 11, 2017 qualifies under Rev. Proc. 2017-45, provided that

  • the distribution is made by a Publicly Offered RIC or Publicly Offered REIT to its shareholders with respect to its stock;
  • pursuant to the declaration of the distribution, each shareholder may elect to receive its distribution, in part or entirely, in either money or stock of the distributing Publicly Offered RIC or Publicly Offered REIT;
  • at least 20% of the aggregate declared distribution consists of money (the Cash Limitation Percentage);
  • if the Cash Limitation Percentage is not exceeded, every shareholder receives cash in accordance with its election;
  • if shareholders elect to receive cash in excess of the prescribed limitation, each shareholder electing to receive cash will receive a pro rata amount of cash corresponding to its respective entitlement under the declaration, but in no event will any shareholder electing to receive cash receive less in cash than the Cash Limitation Percentage of its entire entitlement under the dividend declaration; and
  • the calculation of the number of shares to be received by a shareholder is determined by a formula using market prices that is designed to equate in value the number of shares to be received with the amount of cash that could be received instead. The data used in such formula is from a period of no more than two weeks ending as close as practicable to the payment date.17


The ability of a RIC or REIT to use a distribution of its own stock to satisfy distribution requirements can be a crucial tool when the entity is unable to practically make a cash distribution in the full amount of the distribution requirement. In the absence of IRS guidance, a taxpayer would have to seek a private letter ruling to approve the use of a distribution of cash and stock with a limitation on the cash component. The open-ended guidance provided in this revenue procedure provides relief from applying for what is in most instances a straightforward private letter ruling.

Although the guidance does not specifically provide an explanation for limiting the relief to Publicly Offered RICs and Publicly Offered REITs, there can be differences between Publicly Offered RICs and REITs and other RICs and REITs. Shares of Publicly Offered RICs and REITs may generally be sold on the market or redeemed at net asset value, while shares of other RICs and REITs may generally be somewhat less liquid. Publicly Offered RICs and REITs are also exempt from the preferential dividend rule, while other RICs and REITs are not. In any event, it appears that non-publicly offered RICs and REITs will need to seek private letter rulings from the IRS to receive clarity on this legal issue; however, it is not clear whether the IRS will provide relief to non-publicly offered RICs and REITs. Furthermore, the guidance does not offer an explanation for raising the cash distribution requirement to 20% from the 10% cash distribution requirement set forth in the financial crisis Revenue Procedures.


1 Code Sections 852(a) (for a RIC) and 857(a) (for a REIT).

2 Code Sections 852(b)(2) (for a RIC) and 857(b)(2) (for a REIT) (referring to Code Section 561).

3 Code Sections 561(a)(1) and 562(a).

4 Code Section 305(b)(1).

5 Code Section 305(b)(2).

6 See, e.g., I.R.S. Priv. Ltr. Rul. 201552011 (Dec. 24, 2015); I.R.S. Priv. Ltr. Rul. 200935013 (Aug. 28, 2009); I.R.S. Priv. Ltr. Rul. 200615024 (Apr. 14, 2006); and I.R.S. Priv. Ltr. Rul. 200348020 (Nov. 28, 2003).

7 2008-2 C.B. 1373.

8 2009-4 I.R.B. 356.

9 2010-3 I.R.B. 302.

10 See Elliott, Amy S., IRS May Need to Cut Back on Letter Rulings, Official Says, 133 Tax Notes 514, 515 (Oct. 31, 2011) (quoting Bill Alexander, IRS Associate Chief Counsel (Corporate)).

11 2017-35 I.R.B.

12 As defined in Code Section 67(c)(2)(B)(i).

13 As defined in Code Section 562(c)(2).

14 Rev. Proc. 2017-45, sections 4 and 5.07.

15 Rev. Proc. 2017-45, section 4.

16 Rev. Proc. 2017-45, section 5.02.

17 Rev. Proc. 2017-45, section 5.

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