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Relief for Mutual Funds and REITs

To retain their tax status, mutual funds and REITs generally must dividend out at least 90% of their ordinary taxable income each year. In practice, most of these entities try to dividend out 100% of their income each year. This is because they are entitled to a deduction for dividends paid, and generally can eliminate corporate-level tax by paying out all of their income as dividends each year.

Under U.S. tax law, an all-stock dividend generally is not treated as a dividend, and therefore cannot be used to satisfy the 90% distribution requirement. However, in 2017, the IRS created a permanent safe harbor under which a part-stock, part-cash distribution would be treated as a dividend for purposes of the 90% distribution requirement for public mutual funds and public REITs if shareholders could elect to receive at least 20% of the distribution in cash and certain other requirements were satisfied.

The cash crunch created by the COVID-19 pandemic has made it harder for some mutual funds and REITs to satisfy their dividend distribution requirements in cash. Accordingly, revenue procedure 2020-19 lowers the 2017 safe harbor's required cash amount to 10% for distributions declared on or after April 1, 2020 and on or before December 31, 2020. 

Key Contacts

Adam Blakemore
T. +44 (0) 20 7170 8697

Linda Z. Swartz
T. +1 212 504 6062

Jon Brose
T. +1 212 504 6376

Andrew Carlon
T. +1 212 504 6378

Mark P. Howe
T. +1 202 862 2236

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