IRS provides clarity on gain recognized by corporations on certain property transfers to REITs

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The U.S. Department of the Treasury and the Internal Revenue Service (IRS) recently issued proposed regulations that would limit the gain recognized by a C corporation that engages in a spinoff transaction and then subsequently transfers property to a real estate investment trust (REIT).

The IRS previously issued proposed regulations issued in 2016 which provided that if a C corporation engaged in a tax-free spinoff transaction under Section 355 of the Internal Revenue Code and subsequently engaged in a “conversion transaction” (generally, a transfer of property to a REIT or a conversion to a REIT) within 10 years of the spinoff transaction, then such C corporation would be treated as if it sold all of its property at fair market value.

The 2019 proposed regulations modify their 2016 precursor by limiting the amount of gain recognized by the C corporation. Specifically, the new proposed regulations provide that a C corporation that engages in a conversion transaction within 10 years after engaging in a spinoff transaction will be treated as selling only the property owned by such C corporation at the time of the spinoff transaction.

The IRS acknowledged that the 2019 proposed regulations were issued to address the public’s concerns that C corporations that engaged in conversion transactions could have been treated as recognizing too much gain under the 2016 proposed regulations. As a result of the 2019 proposed regulations, a C corporation that engages in a spinoff transaction now has more clarity as to the amount of potential gain it could recognize if it later elects to engage in a conversion transaction involving a REIT.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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