I recently learned about a recent IRS Revenue Procedure from one of our custodians. The document is Revenue Procedure 2008-68 and addresses the concern REITs (Real Estate Investment Trusts) have regarding their ability to satisfy the taxable income distribution requirements.
A REIT is required to distribute 90% of its taxable income, including any net capital gains, to its shareholders each year. If it fails to do so, the REIT may lose its ability to reduce or eliminate its corporate income taxes. Due to the credit crisis affecting the economy, REITs are struggling to raise enough capital in order to distribute the mandatory 90% of taxable income in cash.
As a result of the procedure, the IRS will now allow REITs to distribute stock, in addition to cash, as a dividend and the entire amount will be treated as satisfying the REIT distribution requirements.
What does this mean for you and your clients?
For REIT distributions from now until December 31, 2009, shareholders may elect to receive their dividend in either cash or stock. Hmm, I wonder, how will shareholders communicate their election to the REIT?
My hope is that REITs will send letters directly to shareholders notifying them of their ability to elect cash or stock dividends (can sending letters be cost-effective?). I assume that by default, distributions will be made in the form of stock unless the shareholder selects the cash option.
My fear is the distribution election process will be handled either through a proxy system or via corporate reorganizations. This means advisers may receive the distribution election communications for all clients holding REITs and also may be responsible for sending the client’s choice back to the custodian. Ugh, what an administrative nightmare.
So I’m going to keep my eye out on this option for clients. I have yet to see a shareholder election option for REIT distributions, but if you have experience with this new procedure, I’d appreciate your comments and feedback.
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