United States

Darden receives favorable PLR; McDonald’s, Macy’s won’t pursue REITs


In a public filing on 11/10/15, Darden Restaurants, Inc. (Darden) confirmed that the IRS had issued a favorable private letter ruling (PLR) on its proposed tax free spin-off of some of its restaurants into a separate publicly traded REIT.  The confirmation comes less than two months after the IRS issued Rev. Proc. 2015-43 saying it wouldn’t rule on certain spin-offs with planned REIT/RIC elections or especially low value active trade or businesses (ATB), and Notice 2015-59 which officially announced a study into certain section 355 spin-offs and the recent uptick in activity.  The ruling also comes on the heels of the IRS’ refusal to rule on Yahoo’s proposed tax free spin-off of its stake in Alibaba. 

The active business relied upon by Darden was small in comparison to value of the real estate and was comprised of 6 restaurants that will be held in a taxable REIT subsidiary (TRS). What may be the distinguishing factor between Darden and Yahoo may be the fact that in Darden’s case there is real estate as opposed to appreciated publicly traded stock, as is the case for Yahoo.  While neither the real estate nor Alibaba stock are active assets for purposes of ATB, it is possible the IRS was more concerned about the clear investment nature of the Alibaba stock.  Notably, both requests were submitted prior to the IRS’ issuance of Rev. Proc. 2015-43 further limiting section 355 rulings, and the ruling in question likely would not be accepted today.  

In separate statements, McDonald’s and Macy’s, who have significant real estate holdings, and whose shareholders have pressured the companies to pursue similar spin-offs, declared that they will not be pursuing REIT spin-offs.  While it is impossible to say how much the tax uncertainty played a role in the decision, it certainly would seem to be a factor that influenced their decision.

It will not be a surprise to see more companies make the decision to stay away from section 355/REIT transactions in the near term as the issue is sorted out, and it would appear that the IRS and Treasury may have been successful in slowing the momentum of such transactions.


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