Windstream plan to reduce taxes approved by IRS

The Internal Revenue Service recently issued a generally positive private letter ruling regarding Windstream’s plan to spin part of its company into a real estate investment trust. In an unusual move, the company will move its fiber optics and copper networks along with real estate into the REIT and then lease these assets.

REIT’s do not need to pay federal income taxes, because they distribute 90 percent of taxable earning as dividends to shareholders. The structure allows greater returns for investors and lower taxes.

Shares in the telecommunications company climbed higher on news of separation.

The new company should be operational by the first quarter of next year and will be able to invest in additional infrastructure. The REIT will employ 25, but will not involve significant operational changes.

It is yet unclear if other larger telecom or cable companies will follow the lead and make similar changes in their structure.

Companies may be able to use tax planning strategies to lower their tax burden. Another strategy is an ‘inversion’ deal where a merger with a foreign company allows a U.S. company to move its domicile to the lower tax country.

Recently, various news sources have reported that Walgreen’s decided not to move its headquarters to Britain, as a part of a merger with a British pharmacy chain. The decision was likely prompted in part over worries of a long IRS review and negative responses from consumers. The news, however, angered some investors who have encouraged the retailer to cut costs.

When a business plans a complex transaction, such as a novel use of an REIT, requesting an IRS private letter ruling can help predict the tax consequences. An experienced tax attorney can provide valuable guidance through the process.

Source: Bloomberg, “Windstream to Spin Off Networks Into Publicly Traded REIT,” Cecile Daurat and Caitlin McCabe, July 29, 2014.