There was an interesting article in yesterday’s Wall Street Journal about the difficulties facing an overhaul of the tax system. The article can be found here.
By: Amanda Wilson
Earlier this year, I discussed the IRS’s recent no rule policy on spin-offs, and how that would likely have a chilling impact on spin-offs, particularly the common practice of businesses spinning off their real estate in a REIT (discussed here). My prediction is coming true as this week Yahoo announced that it was cancelling its Alibaba spin-off since it could not get an IRS private letter ruling that the spin-off would be tax-free.
Well, REITs are being further targeted. Yesterday, a two-year tax extenders bill was introduced in the House. This was not a surprise. The surprise was that the bill includes two provisions that will have major impacts on REITs. First, the bill provides that a spin-off of a REIT will only be tax free if, immediately after the distribution, both the distributing and controlled corporations were REITs (the IRS no rule policy had a similar provision). So a REIT can divide and spin-off its assets, but existing C corporations would no longer be able to spin-off their real estate in a REIT. If enacted, this provision would currently apply to deals in progress. In other words, any spin-offs currently in the planning stage wouldnot be grandfathered in and would be killed by this bill.
The bill also introduces a new rule that targets fixed percentage rent and interest income received from a related party. If a REIT receives such rent or income from a single C corporation tenant and it exceeds 25% of the combined rent and interest income received by the REIT, the new bill would provide that this income no longer qualifies as rents from real property and interest (i.e., is no longer good REIT income).
Stay tuned to see what happens!