The Internal Revenue Service (the “IRS”) recently issued Revenue Procedure 2009-15 (the “Revenue Procedure”), which indicates that a cash option stock dividend will satisfy the distribution requirements for a publicly traded RIC or REIT (each, a “Company”) for 2008 and 2009 so long as shareholders can elect to take at least 10% of the dividend in cash. (A RIC or REIT is “publicly traded” if its stock is publicly traded on an established securities market in the United States.) The Revenue Procedure supersedes substantially identical guidance previously provided solely to REITs in Revenue Procedure 2008-68.
The Revenue Procedure provides that the IRS will treat a capped cash option stock dividend paid by a Company as a taxable dividend, and will consider the amount of stock distributed to be equal to the amount of cash which stockholders could have received instead, if:
- the dividend is made by the Company to its shareholders with respect to its stock;
the terms of the dividend allow each shareholder the right to elect to receive its entire distribution in either cash or stock of the Company of equivalent value, provided that the Company may impose a limitation on the amount of cash to be distributed in the aggregate to all shareholders of not less than 10% of the aggregate distribution; and
the number of shares to be distributed is determined as close as practicable to the payment date based upon a formula utilizing market prices, designed to equate in value the number of shares to be received with the amount of money that could be received instead.
The Revenue Procedure further provides that, to the extent a shareholder participates in a Company’s dividend reinvestment plan (a “DRIP”), only the cash portion of a dividend paid in accordance with the Revenue Procedure is subject to the DRIP. The guidance in the Revenue Procedure applies only to distributions with respect to taxable years ending on or before December 31, 2009.