REIT Spinoffs : Passive REITs, Active Businesses

This report argues that traditional REIT spinoffs are fairly well supported by current law and that the common criticisms of these transactions generally miss the mark. It concludes that (1) Treasury and the IRS over time have adopted a fairly comprehensive definition of real property for REIT purposes, and the current ruling practice reflects an application of this preexisting standard to contemporary circumstances; (2) although Congress has repeatedly expanded the scope of a REIT group's permitted activities, REITs remain largely restricted from running non-real-estate businesses; (3) based on available information, REIT spinoffs are not a tremendous drain on government revenues, may provide important benefits, and are likely worth their relatively small cost to the fisc; and (4) if properly structured, REIT spinoffs generally should satisfy section 355 and do not contravene the underlying policies of that section