January 30 Deadline Approaching for Calendar Year REIT Shareholder Demand Letters

January 2022

BY

Robert SchachatTax Managing Director, Partnership Taxation

Julie RobinsTax Managing Director, Partnership Taxation

Internal Revenue Code Section 857(f)(1) requires a real estate investment trust (REIT) to demand certain information regarding stock ownership from certain large shareholders (shareholder demand letters) within 30 days after the close of the REIT’s taxable year, i.e., January 30, 2022 for the calendar 2021 taxable year.
 
A REIT is required to keep records sufficient to enable the IRS to determine the actual ownership of the REIT’s shares, which is required to determine whether the REIT has satisfied the statutory requirement that it is not “closely held.” The Treasury regulations specify the information to be requested in the shareholder demand letter, as well as the following REIT stock ownership thresholds:
  •  A REIT with 2,000 or more shareholders of record on any dividend record date must request the information of each record holder of 5% or more of the REIT stock.
  • A REIT with between 200 and 2,000 shareholders of record on any dividend record date must request the information of each record holder of 1% or more of the REIT stock.
  • A REIT with 200 or fewer shareholders of record on any dividend record date must request the information of each record holder of 0.5% of the REIT stock.
 
Because the number of shareholders of record is determined based on any dividend record date during the taxable year, REITs generally use the dividend record date with the fewest shareholders of record to ensure the correct stock ownership threshold.
 
A shareholder who fails or refuses to comply with a shareholder demand letter must provide ownership information on his or her tax return. The shareholder demand letter must inform the shareholder of such obligation if the shareholder fails or refuses to supply the REIT with the required information. The REIT is required to maintain a list of shareholders who fail or refuse to supply the REIT with the required information.
 
No penalty is imposed if the REIT can show that its failure to comply with the requirements is due to reasonable cause and not willful neglect. Otherwise, a $25,000 penalty is imposed ($50,000 if the failure was due to intentional disregard of the rules), and the IRS can require that the REIT take curative steps to ascertain its stock ownership.