Corporations restricted from tax-free REIT spinoffs.

• Author: Nevius, Alistair M.
• Position: Real estate investment trusts

Temporary and proposed regulations implement the amendments to the real estate investment trust (REIT) spinoff rules enacted in the Protecting Americans From Tax Hikes (PATH) Act of 2015 (enacted as part of the Consolidated Appropriations Act, 2016, P.L. 114-113) and prevent taxpayers from avoiding the effects of the REIT spinoff changes by requiring corporations that move assets to a REIT within 10 years of the spinoff to recognize gain as if the property had been sold at its fair market value (FMV) on the deemed sale date (T.D. 9770).

Before the PATH Act, the IRS was aware of transactions in which a C corporation that does not qualify as a REIT distributes the stock of a controlled corporation in a Sec. 355 transaction so that either the distributing corporation or the controlled corporation can qualify as a REIT. In many cases, a C corporation that owns both assets qualifying as REIT assets and nonqualifying assets transfers either the REIT assets or the nonqualifying assets to a controlled corporation in exchange for its stock and then distributes the stock to its shareholders. Then, the corporation holding the REIT assets elects to be a REIT. If the transaction satisfies the reorganization requirements of Secs. 368(a)(1)(D), 355, and 361, no gain is recognized on either the transfer of assets by the distributing corporation to the controlled corporation or the distribution of the controlled corporation stock to the shareholders of the distributing corporation.

Although the PATH Act amendments curtailed some of these transactions, the IRS is still concerned that taxpayers will use variations of the transactions previously described to circumvent those PATH Act changes. In particular, there is concern that corporations affiliated with the distributing corporation or the controlled corporation could be used to circumvent the congressional amendments.

The regulations therefore require a C corporation engaging in a conversion transaction involving a REIT within the 10-year period following a related Sec...