IRS guidance: Section 355 and distributions to RICs, REITs

Section 355 and distributions to RIC, REIT

The IRS released guidance relating to transactions that the IRS believes some taxpayers may be using as a device for the distribution of earnings and profits, but that do not have an adequate business purposes.


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An advance version of Notice 2015-59 states that the IRS is studying issues under sections 337(d) and 355 relating to certain distributions, in which property becomes the property of a regulated investment company (RIC) or a real estate investment trust (REIT), and in which the active business is small relative to other assets, or in which there is a substantial amount of investment assets.  The IRS notice describes the transactions and requests comments concerning those transactions.

An advance version of Rev. Proc. 2015-43 provide new “no-rule areas”—topics on which the IRS will not ordinarily issue letter rulings or determination letters. Specifically, the IRS is adding two new “no-rule” paragraphs to the annual “no-rule” revenue procedure—Rev. Proc. 2015-3. Both new “no-rule” provisions related to certain distributions in which property becomes the property of a RIC or REIT in which the active business is small relative to other assets, or in which there is a substantial amount of investment assets.

Notice 2015-59, Rev. Proc. 2015-43

Notice 2015-59 [PDF 173 KB] states that the IRS and Treasury Department are studying issues under sections 337(d) and 355 relating to transactions having one or more of the following characteristics: 

  • Ownership by the distributing corporation or the controlled corporation of investment assets, within the meaning of section 355(g)(2)(B), with modifications (Investment Assets), having substantial value in relation to (1) the value of all of such corporation’s assets, and (2) the value of the assets of the active trade(s) or business(es) on which the distributing corporation or the controlled corporation relies to satisfy the requirements of section 355(b) (a Qualifying Business or Qualifying Business Assets)
  • A significant difference between the distributing corporation’s ratio of Investment Assets to assets other than Investment Assets and such ratio of the controlled corporation
  • Ownership by the distributing corporation or the controlled corporation of a small amount of Qualifying Business Assets in relation to all of its assets
  • An election by the distributing corporation or the controlled corporation (but not both) to be a regulated investment company (RIC) or a real estate investment trust (REIT)

Comments are requested concerning whether these transactions are to be treated differently from other transactions, and whether other classes of transactions should be subject to similar exceptions. 

Rev. Proc. 2015-43 [PDF 162 KB] adds two types of these transactions to the list of no-rule areas. 

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