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Qualified REIT Dividends Paid by RICs are Eligible for the Code Section 199A Deduction

On January 18, 2019, the Department of the Treasury published proposed regulations that would allow shareholders of regulated investment companies (RICs) to take advantage of the deduction under Section 199A of the Internal Revenue Code of 1986, as amended (the “Code”) with respect to qualified real estate investment trust (REIT) dividends. In general, Code Section 199A provides a deduction of up to 20 percent of qualified business income from certain U.S. trades or businesses that are operated in a pass-through entity. Code Section 199A also allows certain taxpayers to deduct up to 20 percent of their combined qualified REIT dividends (defined in Code Section 199A(e)(3) as any dividend from a REIT that is not a capital gain dividend or qualified dividend income) and qualified publicly traded partnership (PTP) income (as defined in Code Section 199A(e)(4)), including qualified REIT dividends and qualified PTP income earned from a pass-through entity.

Under certain circumstances, if a RIC has certain items of income or gain, the RIC may pay dividends that a shareholder of the RIC can treat in the same or a similar manner as the manner in which the shareholder would treat the underlying item of income or gain as if the shareholder realized it directly. The preamble to the proposed regulations refer to this tax treatment as “conduit treatment.” The proposed regulations extend this conduit treatment to qualified REIT dividends received by a RIC by permitting the RIC to pay “Section 199A Dividends” to its shareholders. A Section 199A Dividend is “any dividend or part of such dividend that a RIC pays to its shareholders and reports as a section 199A dividend in written statements furnished to its shareholders.” Non-corporate shareholders receiving Section 199A Dividends would treat such dividends as qualified REIT dividends as defined in Code Section 199A(e)(3), provided the shareholder meets the holding period and certain other requirements for its shares in the RIC. The amount of a RIC’s Section 199A Dividends for a taxable year would be limited to the excess of the RIC’s qualified REIT dividends for the taxable year over allocable expenses. Importantly, the proposed regulations provide only for conduit treatment of a RIC’s qualified REIT dividends. The Department of the Treasury is still reviewing whether a RIC’s qualified PTP income also should receive conduit treatment.

The proposed regulations will apply to taxable years ending after the date the Treasury decision adopting the regulations as final regulations is published in the Federal Register. However, taxpayers may rely on the regulations as proposed until they are adopted as final.

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About this Author

Stephen Hamilton, Tax Lawyer, Drinker Biddle

Stephen D. D. Hamilton assists clients with the tax aspects of major business transactions. He focuses on helping clients avoid tax pitfalls and finding creative and practical structural solutions to their tax problems.

Steve's practice includes mergers and acquisitions, representing both buyers and sellers, both public companies and owners of closely held businesses, in numerous transactions every year. He has facilitated many substantial transactions by enabling the parties to achieve significant tax savings with his tax...

Thomas Gray Tax Attorney Faegre Drinker Biddle & Reath New York, NY

Thomas Gray advises clients on the tax aspects of corporate and partnership transactions including mergers and acquisitions, reorganizations, restructuring, spin-offs and equity and debt financings. He also counsels clients on the special tax considerations related to regulated investment companies and real estate investment trusts.

Tom also advises domestic and offshore clients on cross-border tax matters and represents hedge funds on fund structuring and the tax consequences of investments. His practice includes advising private equity fund investors, including university endowments; negotiating, reviewing and drafting the tax aspects of stock and asset purchase agreements, partnership agreements and credit agreements; advising clients on the restructuring of financially troubled entities. He also works with clients on resolving federal, state and local tax controversies.

Tom is a certified public accountant.

Matthew Meltzer Lawyer Drinker Biddle Philadelphia

Matthew J. Meltzer is an attorney who works with businesses on federal, state and local tax matters. He regularly assists both buyers and sellers in planning for the tax aspects of corporate transactions, including mergers, stock and asset acquisitions, and like-kind exchanges. In addition to his transactional work, Matt advises on the income tax consequences of a variety of business ventures, structured litigation settlements, taxable and tax-deferred real property transactions, and the tax treatment of financial products and employee compensation...