To retain their tax status, mutual funds and REITs generally
must dividend out at least 90% of their ordinary taxable
income each year. In practice, most of these entities try to
dividend out 100% of their income each year. This is because they
are entitled to a deduction for dividends paid, and generally can
eliminate corporate-level tax by paying out all of their income as
dividends each year.
Under U.S. tax law, an all-stock dividend generally is not
treated as a dividend, and therefore cannot be used to satisfy the
90% distribution requirement. However, in 2017, the IRS
created a permanent safe harbor under which a part-stock, part-cash
distribution would be treated as a dividend for purposes of the 90%
distribution requirement for public mutual funds and public REITs
if shareholders could elect to receive at least 20% of the
distribution in cash and certain other requirements were
satisfied.
