WASHINGTON, DC—Earlier this week, Robert Willens of Robert Willens LLC published a client note alerting readers that the US Treasury Department was going to amend the recently-announced regulations that would require companies that engaged in a REIT conversion, or merged with an existing REIT, after a corporate spin off within 10 years of that event to recognize the gain as though the assets had been sold at their fair market value on the sale date.

This amendment, according to Willens, would “give effective date relief” for conversions that relate back to a spin-off that occurred before Dec. 7, 2015.

It is a major development that could potentially make or break billions of dollars of potential transactions, especially as this “conversion” option was the only play left standing for companies after Congress passed the PATH Act last year, requiring that companies that elect a REIT status for assets that have been spun off within 10 years to take the same medicine.

Indeed, Willens wrote that the slight change will save Colony Capital, NorthStar Realty Finance and NorthStar Asset Management's $58 billion proposed equity REIT, which fit the initial criteria.

Questions arose almost immediately from interested parties. Where is the announcement? When will it go into effect? Is there any else the IRS might consider changing in their original regulations, which published last week in the Federal Register?

GlobeSt.com sat down with Willens to answer these and other questions. We also are waiting for a response from the IRS on this issue, and will update the article accordingly.

In the meantime, here is what Willens has to say.

GlobeSt.com: You said the comments were made at a Texas Bar Association seminar. Can you tell us who at the Treasury Department said it and when?

Willens: The speaker was Krishna Vallabhaneni, US Treasury Deputy Tax Legislative Council in the Office of Tax Policy. The remarks were made on June 9.

GlobeSt.com: That was right after the rules were published in the Federal Register. Why so soon a correction?

Willens: I think they were quick to realize the error they made about grandfathering in spin offs that occurred before Dec. 7, 2015, which was an important date in the legislation passed by Congress. Hence, the statement.

GlobeSt.com: When will this become official? And how?

Willens: How is, the IRS will certainly publish an amended notice in the Federal Register. Whe— I would imagine any day now. It takes a little while to move things through the bureaucracy.

GlobeSt.com: Are there any other spin offs that could be affected?

Willens: That is the biggest one probably, but yes—basically any spin-off that occurred before Dec 7,- if they were thinking about merging with a REIT they would be eligible to do so now. I would bet we will hear about some more in the coming days.

GlobeSt.com: How so?

Willens: I am sure investment bankers are looking at these spin-offs now and probably screening for companies that would be good candidates to merge with a REIT. If I still were in investment banking that is what I would be doing. [Willens was a managing director with Lehman Bros. for 20 years. Prior to that, he was a tax partner with KPMG Peat Marwick for 15 years).

It is not often you get such a clear directive from Treasury giving you a free pass to do something they would prefer you not to do.

GlobeSt.com: Is there any other unfinished business with REITs and spinoffs, as it relates to the PATH Act?

Willens: No, I think we are done.

Instant Insights /

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