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As expected, IRS provides REIT relief

May 6, 2020

On May 4, the IRS released temporary guidance that modifies in taxpayers’ favor the safe harbor under Revenue Procedure 2017-45 for REIT distributions. Revenue Procedure 2020-19 temporarily reduces the safe harbor requirement that a stock dividend with an election by shareholders to receive a portion of the stock dividend in cash (in the aggregate) must comprise at least 20% cash to only 10% cash, which provides relief to cash-strapped companies during the COVID-19 crisis. As portended in Waller’s prior blog post “Cash Crunch: COVID-19 may prompt REITs to explore non-cash distributions,” the IRS’s response due to the current financial downturn is identical to its reaction to the 2008 financial crisis. Provided the requirements of Revenue Procedure 2017-45 are otherwise met (as discussed in the prior post), a stock dividend with a shareholder election to receive cash that is capped, in the aggregate, to 10% cash will be treated as a “distribution of property” that is eligible for the distributions paid deduction. This guidance is crucial for accrual method REITs that are required to distribute 90% of their taxable income, including accrued rent, to maintain REIT status, despite not actually collecting cash from lessees due to coronavirus-related financial hardship. Revenue Procedure 2020-19 is effective for all distributions made by REITs on or after April 1, 2020 and on or before December 31, 2020.

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