The IRS ruled in a private letter ruling (PLR 201408014) that having more than one class of common stock with different fee structures did not cause preferential dividends by a real estate investment trust (REIT) as defined under Section 856(a).
In the private letter ruling, released Feb. 21, a REIT intended to issue up to eight classes of common stock to attract investors who would invest through different placement channels. Specifically, the REIT intended to issue shares designed for investors who purchase shares through registered representatives of participating broker-dealers; investors who purchase shares through a registered investment adviser; employee benefit plans and separate accounts of investment companies supporting variable annuities, variable life insurance products and 401(k) plans; and institutional investors and high-net-worth individuals.
Each class of stock would have different fee structures suited for a particular placement channel, and fees and expenses would be allocated on a class-specific basis governed by the REIT's articles of incorporation.
Section 857(a)(1) provides for a REIT's "deduction for dividends paid" during a tax year. Section 561(a) defines the deduction for dividends paid to include dividends paid during the taxable year.
Section 562(c) provides that the amount of a distribution will not be considered in computing the dividends' paid deduction unless the distribution is pro rata, that the distribution must not prefer any shares of stock of a class over other shares of stock of that same class and that the distribution must not prefer one class of stock over another class except to the extent that one class is entitled to that preference.
Rev. Proc. 99-40, 1999-2 C.B. 565, provides conditions under which distributions made to a shareholder of a regulated investment company (RIC) may vary and be deductible as dividends under Section 562. Specifically, Rev. Proc. 99-40 holds that variations in distributions to shareholders that exist solely as a result of certain allocations of fees and expenses described in the revenue procedure do not prevent the distributions from being dividends under Section 562.
The IRS ruled that the REIT's issuance of the stock will not cause dividends paid with respect to each class of the stock to be considered as preferential dividends under Section 562(c). Notwithstanding that Rev. Proc. 99-40 did not apply to the REIT, the IRS stated that Congress and the IRS have acknowledged the similarity between RICs and REITs, and accordingly treat them similarly in many cases. The legislative history underlying the tax treatment of REITs indicates that Congress generally intended to equate the tax treatment of REITs and RICs.
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