Internal Revenue Service Issues Regulations Affecting REIT Conversions and Spinoffs: IRS and Treasury Issue Regulations to Extend the Period During Which a REIT Is Subject to Corporate Tax on Built-in Gains and Impose Corporate-Level Tax on Corporations That Transfer Property to a REIT Within 10 Years of a Spinoff

Sullivan & Cromwell LLP - June 8, 2016

Yesterday, the Treasury Department and the Internal Revenue Service (the “IRS”) issued temporary and proposed regulations (collectively, the “new regulations”) to extend to 10 years the period during which a real estate investment trust (“REIT”) is subject to corporate-level tax on recognized built-in gain after a REIT conversion.  In addition, the new regulations impose immediate corporate-level tax on corporations that either become REITs or transfer assets to REITs in certain carryover basis transactions within 10 years of a tax-free spinoff.  Legislation enacted in 2015 limited the ability of corporations to elect REIT status within 10 years of a spinoff.  The new regulations are intended to impose immediate tax on transactions in which the assets of either the distributing or the controlled corporation are transferred to an entity that qualifies as a REIT, or in which a REIT engages in a tax-free spinoff after receiving assets from a corporation.