On June 7, the Treasury Department released temporary regulations (the “Temporary Regulations”) that expand the types of spinoff transactions subject to the rules under Section 337(d)2 requiring gain recognition where either the distributing or distributed corporation elects to be treated as a real estate investment trust (REIT). The Regulations also modify the built-in gain rules applicable to REIT conversions.

BACKGROUND -

The Protecting Americans from Tax Hikes Act (“PATH Act”) was signed into law last December. The PATH Act introduced rules that eliminated tax-free treatment under Section 355 for REIT spinoffs, except in certain transactions where one REIT spins off another REIT or where a REIT spins off a taxable REIT subsidiary (TRS). These rules also prohibit the distributing or distributed corporation from electing REIT status within 10 years of a spinoff. Congress viewed such REIT spinoffs as an inappropriate means of removing assets from corporate solution without incurring a corporate-level tax on gain from those assets, and the provisions within the PATH Act were meant as a means to counteract this perceived abuse.