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Taxes and Organizational Form: The Case of REIT Spin-Offs

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  • Goolsbee, Austan
  • Maydew, Edward

Abstract

In 2001, the IRS issued a ruling allowing firms to engage in nontaxable real estate investment trust (REIT) spin-offs. In a REIT spin-off, a corporation places real estate assets into a subsidiary, which it then distributes to shareholders as a REIT. A nontaxable spin-off triggers no immediate taxation of unrealized gains and the future earnings of the REIT generally are not subject to corporate level taxation; the earnings are instead taxed at the investor level. REIT spin-offs thus provide a means to avoid the double-taxation of at least some part of corporate earnings. The ruling was promptly followed by a large REIT spin-off of timber properties by Georgia-Pacific and there has been much speculation about how many and what kinds of firms will follow. Given that the total real estate held in the corporate sector is in the trillions of dollars, the potential revenue loss is of serious concern. This paper simulates the effects of the REIT spin-off ruling by analyzing the actual real estate holdings of over 4,000 publicly traded companies. Specifically, we estimate the potential tax benefits for each firm and for each industry, both in absolute terms and compared to market value, to determine the types of firms and industries most likely to restructure as a result of the ruling. The calculations take into account the related impact of likely reductions in debt levels on corporate taxes, as well as the likely increase in investor level taxes from the requirement that REITs pay out nearly all of their income each year as dividends. The results suggest that the benefits to REIT spin-offs are heavily concentrated in a few industries and that while there may be a subset of firms for which REIT spin-offs would provide substantial tax benefits, in the aggregate, revenue losses are likely to be modest.

Suggested Citation

  • Goolsbee, Austan & Maydew, Edward, 2002. "Taxes and Organizational Form: The Case of REIT Spin-Offs," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(3), pages 441-456, September.
    • Handle: RePEc:ntj:journl:v:55:y:2002:i:3:p:441-56
    DOI: 10.17310/ntj.2002.3.04
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    References listed on IDEAS

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    1. Gordon, Roger H. & MacKie-Mason, Jeffrey K., 1994. "Tax distortions to the choice of organizational form," Journal of Public Economics, Elsevier, vol. 55(2), pages 279-306, October.
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    3. Austan Goolsbee, 2002. "The Impact and Inefficiency of the Corporate Income Tax: Evidence from State Organizational Form Data," NBER Working Papers 9141, National Bureau of Economic Research, Inc.
    4. Merle Erickson & Austan Goolsbee & Edward Maydew, 2002. "How Prevalent is Tax Arbitrage? Evidence from the Market for Municipal Bonds," NBER Working Papers 9105, National Bureau of Economic Research, Inc.
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    8. William M. Gentry & Christopher J. Mayer, 2003. "What Can We Learn About the Sensitivity of Investment to Stock Prices with a Better Measure of Tobin's q?," Department of Economics Working Papers 2003-03, Department of Economics, Williams College.

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