Rev. Rul. 83-117

ISSUE

Whether dividend distributions made by a real estate investment trust company (REIT) in cash or shares purchased under a dividend reinvestment plan will qualify for the dividends paid deduction under section 561 of the Internal Revenue Code under the circumstances described below?

FACTS

Situation 1

X, a widely-held REIT under subchapter M of the Internal Revenue Code, established a dividend reinvestment plan. Under the plan, all shareholders may elect to have cash dividends that would otherwise be distributed to them on their common stock reinvested in newly issued common stock of X at a price equal to 95 percent of the stock's fair market value on distribution date. The dividend reinvestment plan is designed as a means for X to raise capital, and the discount of 5 percent that is allowed under the plan approximates the underwriting and other costs that a REIT otherwise would expect to incur in issuing new stock.

Shareholders participate in the plan by completing an authorization card that designates T, a trust company bank, as the participating shareholders, agent to reinvest cash distributions that are first distributed to T, and designates T to hold and vote the shares as each participating shareholder directs. The authorization card must be received by T on or prior to the record date for the next dividend payment. There is no requirement to participate in the plan and shareholders who do not participate receive their cash dividend payments in full. While the plan continues in effect, a participant's dividends will continue to be invested without further notice to T.

Prior to the dividend payment date no cash dividend is available to either X's participating or nonparticipating shareholders. The dividend payment date is the date the participant's option to receive stock becomes effective and a participant receives written notification that T is acting to effectuate the participant's option to receive stock on that date.

Situation 2

The facts are the same as in Situation 1, except that under the dividend reinvestment plan, all shareholders may elect to have cash dividends that would otherwise be distributed to them on their common stock reinvested in newly issued common stock of X at a price less than 95 percent of the stock's fair market value on distribution date.

HELD

Situation 1

X will be entitled to a dividends paid deduction for the amount of any distribution in cash or stock of greater value under section 561 of the Code. The plan treats all shareholders with impartiality by giving all shareholders an equal opportunity to reinvest, and the plan's bargain spread directed at passing to the REIT's participating shareholders underwriting and other costs savings by issuing stock under the plan is relatively small resulting in relatively minor differences in distributions to similarly situated taxpayers.

Situation 2

X will not be entitled to a dividends paid deduction for any part of any distribution in cash or stock of greater value under section 561 of the Code. The plan's bargain spread directed at passing to the REIT's participating shareholders underwriting and other costs savings by issuing stock under the plan is not relatively small, and does not result in relatively minor differences in distributions to similarly situated shareholders.