The release is not a financial results announcement. It is a tax disclosure focused on the company’s REIT status and the federal tax rules that would apply to the business and its stockholders.
Key facts from the filing:
- The company says it elected to be taxed as a REIT starting with its short taxable year ending December 31, 2009.
- If it qualifies as a REIT, it generally will not owe U.S. federal income tax on income it distributes to stockholders.
- Income kept inside domestic taxable REIT subsidiaries would still be subject to regular corporate income tax.
- Individual stockholders generally pay ordinary-income rates on REIT dividends, rather than the lower rate applied to qualifying corporate dividends.
- Those dividends also come with a deduction equal to 20% of the dividend amount, unless the dividend is treated as qualified dividend income or capital gain dividends.
The filing lists a series of tax costs and penalties the company could face if it misses REIT rules:
- It would owe corporate tax on taxable income, including net capital gain, that it does not distribute in the required period.
- It would owe the highest corporate tax rate on certain foreclosure-property income and other non-qualifying foreclosure-property income.
- It would owe a 100% tax on net income from sales of property held primarily for sale to customers in the ordinary course of business.
- If it misses the 75% gross income test or the 95% gross income test but still qualifies as a REIT, it would owe a 100% tax on the shortfall, multiplied by a profitability factor.
- If it fails asset tests by more than a de minimis amount and the failure is not due to willful neglect, it would owe the greater of $50,000 or corporate tax on the net income from the non-qualifying assets.
- If it fails other REIT qualification requirements due to reasonable cause, it would owe a $50,000 penalty for each failure.
- If it misses the annual distribution requirement, it would owe a 4% nondeductible excise tax on the excess required distribution.
- If transactions with taxable REIT subsidiaries are not at arm’s length, it would face a 100% excise tax.
- If excess inclusion income is allocated to disqualified organizations, it would owe tax at the highest corporate rate on that portion.
- If it sells certain assets acquired from a C corporation within five years, it could owe tax at the highest corporate rate on the gain.
The REIT qualification rules in the filing are specific and measurable:
- At least 100 persons must own the shares.
- No more than 50% in value of outstanding shares can be owned, directly or indirectly, by five or fewer individuals during the last half of the taxable year.
- The company says it believes it has always had enough ownership diversity to satisfy those tests.
- It also says its charter restricts stock ownership and transfer to help maintain compliance.
The filing also says:
- The company has received a private letter ruling from the IRS on certain hedging matters, but not on other matters discussed in the document.
- It does not anticipate owning REMIC residual interests.
- It may own 100% of the equity interests in one or more trusts formed in securitization transactions that could be classified as taxable mortgage pools.
If you want, I can turn this into a tighter newsroom-style brief or extract just the numbers and tax thresholds into a bullet list. The market has reacted to these announcements by moving the company's shares 0.87% to a price of $16.27. For more information, read the company's full 8-K submission here.
