How REIT Spinoffs Will Further Erode the Corporate Tax Base

While Congress has been obsessing about tax inversions, it turns out another—potentially more important–tax avoidance technique is getting increased attention from the business community: Spinning off tangible assets into Real Estate Investment Trusts (REITs).

If these deals become widespread, they’d be another nail in the coffin of the corporate income tax. Multinational firms already slash their U.S. tax liability on income from intellectual property by shifting patents and goodwill to affiliates in low-tax countries. These latest transactions would allow them to slash their corporate tax by spinning off land and structures to tax-free REITs. That would significantly reduce the corporate tax base.

Shifting assets to a REIT effectively eliminates the corporate-level tax. As long as a REIT earns 75 percent of its income from rent or sale of real property and distributes 90 percent of its earnings to shareholders, it is generally exempt from corporate tax. The only tax is owed by shareholders, who pay ordinary income tax rates on those distributions.

The spin-off itself is tax-free.

REITs have been around for decades, mostly as investment vehicles for office and apartment buildings, shopping malls, and the like. In recent years, operators of casinos and for-profit prisons have spun off their land and structures into REITs.

But until recently, the shift has been slow, in part because the IRS had not written updated regulations for decades. Because the rules were so unclear, a firm needed to go through the cumbersome process of getting a private letter ruling from the agency to complete a spin-off.

However, in May, the Service released detailed guidance on what assets could be included in a REIT. Since then, firms have announced a small wave of spin-offs. Tom Gara of The Wall Street Journal did a nice piece on July 29 describing one of them—by the telecom firm Windstream Corp. It recently got IRS approval to spin off its fiber and copper network into a REIT. Here is a Powerpoint describing the deal.

The potential tax savings from these transactions is enormous. According to the Federal Reserve Board’s Flow of Funds report, of the $35 trillion in assets held by non-financial corporations, more than $10 trillion is in real estate alone.

Utilities, telecoms, pipeline companies, railroads, ports, and data centers are all prime candidates for REIT-hood.

Politically, these deals are far less controversial than inversions. For instance, firms that do them are not likely to have their patriotism questioned (though the consequences for the national fisc could well be more severe).

House Ways & Means Committee Chair Dave Camp’s tax reform would bar tax-free spinoffs into REITs but his plan is going nowhere, and Congress is in no rush to impose free-standing limits on these transactions. And, under siege in the wake of its treatment of political non-profits, it is hard to imagine the IRS unilaterally reversing its new regs.

It isn’t likely corporations will rush to shift all of their real property to REITs. For instance, bondholders may demand that borrowers continue to hold some tangible assets as security for debt. But faced with a 35 percent corporate tax rate plus a second tax on dividends of as much as 23.8 percent, companies never stop looking for ways to minimize taxes. And REITs seem like an unmistakable opportunity.

What’s Love Got to Do with It? Not Much, in Congress

The Senate won’t “Bring Home Jobs…” at least not through the bill that would have denied tax deductions for costs of moving corporations out of the country. The Bring Home Jobs Act needed 60 votes to pass but received only 54. The House GOP may vote to put the estate tax to death. They’ve been […]

What Ronald Reagan Didn’t Say About the EITC

I like the Earned Income Tax Credit (EITC). It encourages work and allows millions of low-wage workers and their kids to escape a life of poverty. Democrats support it as a critical part of the safety net. Republicans back it because it rewards work and family. Just last week, House Budget Committee Chairman Paul Ryan […]

Reincorporation, Renunciation, and a Dose of Reality

There’s more than one way for a corporation to reduce taxes. It doesn’t have to reincorporate itself overseas. It could instead spin off a part of itself into a publicly traded real estate investment fund. As long as the new REIT distributes 90 percent or more of its income to investors as taxable dividends, it […]

Are Tax Inversions Really Unpatriotic?

President Obama and many congressional Democrats argue that U.S.-based multinational firms are being unpatriotic by moving their corporate addresses overseas in order to reduce their taxes. Obama even implied they are “corporate deserters.” These are powerful, emotionally-charged allegations. But are they fair? Is it unpatriotic to maximize tax savings? After all, companies and individuals do […]

How Do You Solve a Problem Like Inversions?

How do you catch a tax and pin it down? Can governments make corporations “stay and listen to all they say?” Treasury Secretary Jack Lew in his Washington Post op-ed called on Congress to immediately stop corporations from lowering taxes by incorporating overseas. Former Treasury official Steve Shay suggests the Administration doesn’t need to wait […]

The “Helping Working Families Afford Child Care Act” Would Help, but Doesn’t Solve the Timing Mismatch

The Child and Dependent Care Tax Credit (CDCTC) does not work for low-income families. It fails on three counts – the credit is nonrefundable, covers only a portion of expenses, and comes long after expenses have been incurred. Senators Jeanne Shaheen (D-NH), Barbara Boxer (D-CA), Patty Murray (D-WA), and Kristin Gillibrand (D-NY) have proposed the […]

A Showdown, Some Backlash and Big Bets

The Highway Trust Fund is almost out of gas. Congress leaves for its month-long recess on Friday, but without legislative action the fund will run out in August. The Senate is expected to vote on the amended bill this week, though it needs 60 votes to pass. Senate Majority Leader Harry Reid had scheduled a […]

There’s No Joy in Inversion-Ville

Corporate inversions: Not exactly a home-run campaign issue. But some Democrats are swinging for the fences anyway, including President Obama: “You shouldn’t get to call yourself an American company only when you want a handout from American taxpayers.” He reiterated a call for “economic patriotism” among corporations and a retroactive, speedy end to corporate inversions. […]

The Bring Jobs Home Act Won’t

The Bring Jobs Home Act is a classic message bill. Its Democratic sponsors have no interest in making it law, they merely see it as a way to boost the party’s Senate candidates in part by forcing Republicans to vote against something that sounds like a good idea. After all, who could be against bringing […]