President Eisenhower's 1956 Prediction Becomes a Reality: The New Art of the REIT Spin

35 Pages Posted: 2 Jun 2015

Date Written: May 29, 2015


On September 14, 1960, President Eisenhower signed into law the Real Estate Investment Trust Act (“REIT Act”) , and thus creating a new conduit vehicle which enabled investors from all walks of life to benefit and take advantage of commercial real estate investments by giving REITs preferential tax treatment similar to mutual funds (RIC). However, President Eisenhower just four years earlier vetoed the REIT Act, explains that "[i]t is by no means clear how far a new provision of this sort might be applied. Though intended to be applicable only to a small number of trusts, it could, and might well become, available to many real-estate companies which were originally organized and have always carried on their activities as fully taxable corporations." President Eisenhower’s premised on concern was likely because the REIT Act, as newly enacted tax legislation, would be impossible to limit to the intended interest; thus, it was preferable to maintain the status quo. It is doubtful that President Eisenhower in 1956 could have known that his words would predict the future as the universe of the REIT has expanded beyond the interest it was intended to serve.

Currently, The IRS through Revenue Rulings and Private Letter Rulings has not only expanded the universe of the REIT by providing an extensive definition of what real property is for purposes of the REIT’s 75 percent asset requirement test but also by providing C Corporation easily accessible mechanisms for REIT conversions. These rulings have shifted the balance between tax base erosion and investment incentive granted by REITs to the realm of abuse and tax shelter that President Eisenhower feared, and the Congress intended to prevent by providing a passivity requirement for REIT pass-through tax treatment.

Part II and Part III of this article detail through the origins and expansion of the REIT as a conduit entity by analyzing and exploring the position and rulings promulgated by the IRS since the REIT Act enactment until today. Part III concludes with a brief explanation of the proposed regulations promulgated in 2014 by the IRS to clarify the meaning of real property for purposes of the REIT requirements. Part IV then considers the innovation in REIT conversions by C Corporations that, instead of using a Taxable REIT subsidiary to provide the real estate investment with active management, split into two corporations (OpCo-ProCo transaction) in a tax-free spin-off under Section 355 of the Internal Revenue Code (“IRC” or “Code”). The end result of this transaction is that the C Corporation drops its real estate assets to a newly-created subsidiary, which is converted into a REIT, while the parent corporation retains the business historical trade or business.

Part V begins with a review of proposed amendments to the current law by the IRS and lawmakers, the Camp proposals and it provides the author’s proposed solutions to the expansion of the REIT universe. First, the author proposes going back, by embracing the policy behind the enactment of the REIT Act of 1960, and reconciling such policy with the basic and intended definition real property investment assets for purposes of the REIT qualifications. Second, whether or not the definition of real property investment assets is modified, the author proposes a halt to the current trend of the spin-off REIT. Finally, if there is no change in the current expansion of the REIT, the author proposes taxation mechanism to the spin-off REIT similar to the one currently in place for C Corporation inversions.

Finally, Part VI concludes by exposing some of the negative effects that inaction from Congress and IRS will have on the current expansion of the REIT universe.

Keywords: REIT

Suggested Citation

Riano, Katherine, President Eisenhower's 1956 Prediction Becomes a Reality: The New Art of the REIT Spin (May 29, 2015). Available at SSRN: or

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics