SOS Forests

Weyco Goes REIT

Presto! Weyerhaeuser’s a REIT

To remain a qualified REIT, however, the forest products company must take care to meet technical rules, especially related to its non-REIT assets.

by Robert Willens, CFO.com, January 4, 2010 [here]

It has finally happened. In December, Weyerhaeuser Company announced that its board of directors “determined that conversion to a real estate investment trust (REIT) would best support the company’s strategic direction.” The most likely date for conversion of the forest products and real estate development company, which owns extensive timberland, is the taxable year ending December 31, 2010.

From what we can gather, the conversion will not be accompanied by a spin-off of Weyerhaeuser’s non-qualifying assets. Instead, those non-REIT qualified assets will be lodged in one or more subsidiaries which will operate as “taxable REIT subsidiaries” (TRSs). That said, a later spin-off, along the lines employed by Potlatch Corporation in 2008, should not be ruled out.

Related Web Sites:

Section 301 of the Internal Revenue Code [here]
Section 305 of the Internal Revenue Code [here]
IRS Revenue Procedure 2009-15 [here]
U.S. Treasury Regulation Section 1.305-2(a) [here]
IRS Revenue Rule 2001-50 [here]

Once the conversion (to REIT status) becomes “old and cold”, we fully expect that the stock of the TRSs will be distributed to Weyerhaeuser’s shareholders. Such a distribution may be necessitated by the REIT qualification rules. Among other requirements, to remain a qualified REIT, not more than 25% of the value of the REIT’s total assets may be represented by securities of TRSs. Accordingly, if the securities of the TRSs appreciate too rapidly, Weyerhaeuser’s REIT status would be imperiled.

Indeed, to qualify as a REIT, the corporation must eliminate the “earnings and profits” it has accumulated in non-REIT years by the close of the first taxable year for which REIT status is desired. In Weyerhaeuser’s case, the amount to be excised is nearly $6 billion. Therefore, to eliminate this balance, Weyerhaeuser must undertake distributions of property “to which Section 301 [of the tax code] applies.”

As many companies have done before, Weyerhaeuser will satisfy this dividend payment obligation largely with its stock. Ordinarily, a distribution by a corporation of its stock is not a distribution of property to which Section 301 applies. However, such a distribution can easily be transformed into a qualifying distribution. To be sure, Section 305(b)(1) provides that a distribution by a corporation of its stock shall be treated as a distribution of property to which Sec. 301 applies if the distribution is, at the election of any of the shareholders, payable either in its stock or in property. …

A recognized built-in gain is, with certain exceptions, any gain recognized on the disposition of an asset during the recognition period. Fortunately, the Internal Revenue Service has ruled that where a REIT: (1) holds timber property on the date its election becomes effective; and (2) during the recognition period cuts the timber and sells the resulting wood products, the income on the sale is “normal operating business income in the nature of rent or royalties” which is not subject to Section 1374.3

As a result, as long as it does not undertake any “extraordinary” sales of assets (owned on the conversion date) during the recognition period, Weyerhaeuser will not be liable for the “BIG” tax. …

And this is after they received a $182 million tax break to NOT become a REIT [here].

See also [here, here, here, here].

Actually, all in all, this is great news. It is time to break up this monopoly, something many of us have been predicting would happen for years.

The next step is to stifle any more taxpayer bailouts and to ensure that the properties remain private and are NOT acquired by government. I predict that will be a difficult scam to repel — already the anti-private-property types are salivating like dogs at the backdoor of the butcher shop.