Safe harbor eliminates need for private letter ruling for some REIT and RIC distributions of stock and cash

By Larry M. Garrett, J.D.; Thayne Needles, CPA; Jonathan Silver, J.D.; and Andrea Whiteway, J.D., LL.M., Washington

Editor: Michael Dell, CPA

In Rev. Proc. 2017-45, the IRS established a safe harbor allowing distributions of stock to be treated as a distribution of property under Secs. 301 and 305(b) for publicly offered real estate investment trusts (REITs) or publicly owned regulated investment companies (RICs), as long as certain conditions are met. Under the safe harbor, the distributor may not limit the amount of cash received by shareholders (cash limit) to less than 20% of the total distribution. Previously, many taxpayers sought a private letter ruling when the shareholders' ability to elect to receive cash in lieu of stock was limited.

Rev. Proc. 2017-45 is effective for distributions declared on or after Aug. 11, 2017.


Rev. Proc. 2010-12 (published in connection with the credit crisis/Great Recession, along with predecessor Rev. Procs. 2009-15 and 2008-52) provided a safe harbor that allowed a publicly traded REIT or RIC, under certain conditions, to claim a dividends-paid deduction for elective cash/stock dividends. The safe harbor allowed for a cash limit as low as 10%. The safe harbor under Rev. Proc. 2010-12, however, was available only through tax years ending on or before Dec. 31, 2011.

Since Rev. Proc. 2010-12 expired, REITs considering the use of elective cash/stock dividends (with a cash limit) either to obtain a dividends-paid deduction or to purge C corporation earnings and profits sought their own rulings because, among other reasons, Sec. 305(b) does not directly address "cash limitations."

Rev. Proc. 2017-45

Rev. Proc. 2017-45 generally permits publicly traded REITs and RICs to treat distributions of their stock as dividends, to the extent of their earnings and profits, provided shareholders have the option to elect to receive those distributions in either stock or cash. The amount of the stock distributions are treated as equaling the amount of cash that could have been otherwise received.

One of the requirements that must be met in Rev. Proc. 2017-45 is that each shareholder may elect to receive its entire distribution in either cash or stock of the distributing corporation of equivalent value, subject to a limitation on the amount of cash to be distributed in the aggregate to all shareholders. The cash limit cannot be less than 20% of the aggregate declared distribution. If too many shareholders elect to receive cash, each shareholder electing to receive cash will receive a pro rata amount of cash corresponding to the shareholder's respective entitlement under the declaration. Any shareholder electing to receive all cash, however, must not receive less than 20% of the declaration in cash.

Additionally, if a shareholder participates in a dividend reinvestment plan, the stock the shareholder received is treated as received in exchange for cash received in the distribution.


Since the expiration of the safe harbor in Rev. Proc. 2010-12, REITs and RICs have had to seek private letter rulings to confirm that the IRS will treat the elective cash/stock distributions as dividends. See, for example, IRS Letter Rulings 201709011, 201631005, 201629003, 201550017, 201544015, 201537020, 201516050, 201505035, 201448016, 201446013, 201426019, 201320007, 201312028, 201252012, and 201247004.

Unlike the previous revenue procedures, Rev. Proc. 2017-45 does not have an expiration date. The revenue procedure raises several interpretive questions. In addition, it is not intended to, and does not, cover all circumstances in which a corporation may wish to have Sec. 305(b) apply to an elective cash/stock distribution. Accordingly, taxpayers and their advisers will need to analyze the facts of each distribution to determine if they are consistent with the revenue procedure and, if not, whether the taxpayer should obtain a private letter ruling.


Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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