Dive Brief:

• The Internal Revenue Service Tuesday released new guidance that could curb the current enthusiasm for real estate spin-offs by companies with major land and property holdings.

• The IRS said that it’s concerned that some deals could violate rules that prevent businesses from hiding dividends and other taxable transactions in spin-offs to avoid taxes.

• The agency said it was essentially hitting pause on its pre-approval of such proposals and would scrutinize them more closely.

Dive Insight:

Many of America’s major retailers, especially department stores like Macy’s and Sears that have been acquiring property nationwide for more than 100 years, are formidable landowners. Spinning off those properties into Real Estate Investments Trusts (REITs) of late has seemed like a smooth move, a way to unlock the value of those holdings rather than just loading and unloading goods.

Sears and Hudson’s Bay Company, parent of Saks Fifth Avenue and Lord & Taylor in the U.S., have completed REITs, and Macy’s is under pressure from activist investors to make a similar move.

But it seems the IRS is thinking it’s all a little too smooth. If it turns out that retail companies (this is also an issue for restaurant and casino companies, among others) are avoiding the spirit of laws governing REITs, these deals may become less attractive.

For one thing, the IRS requires that a spin-off company must be conducting “active trade or business” — known as the active trade or business (“ATB”) requirement — beyond collecting rent from their former owners. In some cases, the companies that REITs shore up to make good on this rule are too small for the size of their holdings. Or upon further scrutiny the IRS may find that the former owner of the property is essentially sheltering earnings and profits. 

The new guidance from the IRS, plus rising interest rates, which could come this quarter or next, could make the clamoring on the part of activist investors settle down significantly.