Source: https://www.ropesgray.com/en/newsroom/alerts/2019/01/Treasury-Issues-Proposed-Regulations-Permitting-RIC-Pass-Through-of-Qualified-REIT
Timestamp: 2019-04-19 17:11:11+00:00

Document:
On January 18, 2019, the Treasury Department and IRS issued proposed regulations (the “Proposed Regulations”) that generally permit regulated investment companies (“RICs”) to pass through to their non-corporate shareholders qualified REIT dividends eligible for the 20% deduction under Section 199A of the Internal Revenue Code of 1986, as amended (the “Code”).1 Taxpayers are entitled to rely on the portion of the Proposed Regulations permitting this “conduit treatment” for qualified REIT dividends immediately. The Proposed Regulations reserve on extending conduit treatment to qualified publicly traded partnership (“PTP”) income, citing as-yet-unaddressed complexities associated therewith, and solicit comments on whether and how future regulations could accommodate the extension of conduit treatment to qualified PTP income earned through RICs.
The legislation commonly known as the Tax Cuts and Jobs Act2 added Section 199A to the Code in December 2017. Section 199A(b)(1) generally allows individuals and certain trusts and estates a deduction for up to 20% of the taxpayer’s combined “qualified REIT dividends” and “qualified PTP income.” The statutory language does not make clear whether RIC distributions attributable to such amounts from the RIC’s investment in a REIT or PTP qualify for the deductions available in respect of such amounts received directly from a REIT or PTP.
The Proposed Regulations enact conduit treatment for qualified REIT dividends pursuant to the authority of Section 199A(f)(4), which directs the Secretary to adopt regulations necessary to carry out the purpose of Section 199A in the case of “tiered entities.” The preamble explains that conduit treatment is consistent with similar statutory provisions for interest-related, short-term capital gain, and exempt-interest dividends (among others), and with the broader purposes of the special tax treatment that Subchapter M accords RICs, which enables “small investors to gain benefits, such as professional management and broad diversification, that otherwise would be available only to investors with more resources.” According to the preamble, such treatment also furthers the goal of an economically efficient tax system, by correcting a “market distortion” that arises where qualified REIT dividends earned through RICs are taxed less favorably than such amounts received directly.
Whether and the extent to which non-U.S. shareholders and tax-exempt shareholders must treat qualified PTP income they receive through a RIC as ECI and UBTI, respectively.
How to apply conduit treatment for qualified PTP income in a way that is consistent with the policy goal of preserving the overall simplicity of the tax treatment of investors in RICs while still achieving the policy goals of Section 199A and Section 199A(b)(1)(B) in particular.
If you have any questions about the Proposed Regulations, please contact a member of the tax practice.
1 Unless otherwise stated, all “Section” references herein are to the Code.
2 Pub. L. No. 115-97.
3 Prop. Reg. § 1.199A-3(d)(4)(i)-(ii); Treas. Reg. § 1.199A-3(c)(2)(ii).
4 Prop. Reg. § 1.199A-3(d)(1).
5 Prop. Reg. § 1.199A-3(d)(2)(i); Prop. Reg. § 1.199A-3(d)(3)(v).
6 Prop. Reg. § 1.199A-3(d)(2)(ii); Prop. Reg. § 1.199A-3(d)(2)(iii)(A). In order to help RICs avoid the need to amend Forms 1099 and other shareholder reports, in the case of a non-calendar year-end RIC, any such excess reported amount is allocated solely to dividends paid after December 31. Prop. Reg. § 1.199A-3(d)(2)(iii)(B).
7 General Explanation of Public Law 115-97, JCS-1-18 (December 20, 2018).

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