IRS Scrutinizes Real Estate Spinoffs

The Internal Revenue Service has issued a notice and revenue procedure indicating it is studying issues related to the spinoff of real estate assets for tax reasons.

Notice 2015-59, which was issued concurrently with Revenue Procedure 2015-43 on Tuesday, announces that the Treasury Department and the IRS are studying issues relating to certain distributions in which real estate property becomes the property of a regulated investment company or a real estate investment trust, and the active business is small compared to the other assets, or there is a substantial amount of investment assets. The notice describes the transactions that concern the Treasury Department and the IRS and requests comments concerning those transactions.

Revenue Procedure 2015-43 describes areas of the Tax Code on which the IRS said it will not issue letter rulings or determination letters. The revenue procedure adds to the list of no-rule areas any issue relating to the qualification of certain distributions in which property becomes the property of a regulated investment company or a real estate investment trust, in which the active business is small relative to other assets, or in which there is a substantial amount of investment assets.

The notice and revenue procedure relate to plans by companies such as chain restaurants and retailers to spin off their real estate assets and split them from their operations for tax reasons. Darden Restaurants, which owns the Olive Garden and other popular chains, has plans for such a spinoff, while McDonald’s and Macy’s are also being urged by some of their investors to spin off their property into a separate entity, according to The Wall Street Journal.

In the notice, the IRS and the Treasury said they have become aware, in part through requests for letter rulings, that some taxpayers are taking the position that certain distributions from such deals would qualify for treatment under Section 355 of the Tax Code. Section 355 generally provides, according to the IRS, that if certain requirements are satisfied, a distributing corporation may distribute the stock and securities of a controlled corporation to its shareholders and security holders without the distributing corporation, its shareholders, or its security holders recognizing income, gain or loss on the distribution. However, Section 355 does not apply to a distribution if the transaction is mainly used as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation, or both.