taxable income from prior periods, we will be subject to a nondeductible 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed, plus
(ii) the amounts of income we retained and on which we have paid corporate income tax.
We may be able to rectify a
failure to pay sufficient dividends for any year by paying deficiency dividends to stockholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge
would be imposed upon us for the delay in distribution.
In addition to the other distribution requirements above, to preserve
our qualification for taxation as a REIT we are required to timely distribute all C corporation earnings and profits that we inherit from acquired corporations, as described below.
Acquisitions of C Corporations
We have engaged and may in the future
engage in transactions where we acquire all of the outstanding stock of a C corporation. Except to the extent we have made or do make an applicable TRS election, each of our acquired entities and their various corporate and noncorporate subsidiaries
have become or will become our QRSs. Thus, after the acquisition, all assets, liabilities and items of income, deduction and credit of the acquired and then disregarded entities have been and will be treated as ours for purposes of the various REIT
qualification tests described above. In addition, we generally have been and will be treated as the successor to the acquired and then disregarded entities federal income tax attributes, such as those entities (a) adjusted tax bases
in their assets and their depreciation schedules; and (b) earnings and profits for federal income tax purposes, if any. The carryover of these attributes creates REIT implications such as built-in gains tax exposure and additional distribution
requirements, as described below. However, where we make an election under Section 338(g) of the Code with respect to corporations that we acquire, we generally will not be subject to such attribute carryovers in respect of attributes existing
prior to such election.
In addition, where we liquidate a TRS, convert a TRS to a QRS, or combine a TRS with an existing QRS,
this generally constitutes a tax-free liquidation of the TRS into us, and we generally succeed to the former TRSs tax attributes such as adjusted tax bases, depreciation schedules, and earnings and profits. The carryover of these attributes
creates REIT implications such as built-in gains tax exposure and additional distribution requirements, as described below.
Built-in Gains from C Corporations. Notwithstanding our qualification and taxation as a REIT, we may be subject to corporate
taxation if we dispose of assets previously held by a C corporation. Specifically, if we acquire an asset from a corporation in a transaction in which our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of that
asset in the hands of a C corporation (including, for example, if we were to liquidate a TRS), and if we subsequently recognize a gain on the disposition of that asset during the five-year period beginning on the date on which the asset ceased to be
owned by the C corporation, then we will generally pay tax at the highest regular corporate tax rate on the lesser of (a) the excess, if any, of the assets fair market value over its adjusted tax basis, each determined as of the time the
asset ceased to be owned by the C corporation, or (b) our gain recognized in the disposition. Accordingly, any taxable disposition of an asset so acquired during such five-year period could be subject to this built-in gains tax. Comparable
rules will apply if we recognize gain on or before December 31, 2016 on the disposition of any REIT asset that was held by us on January 1, 2012. We currently do not expect to sell any asset if that sale would result in the imposition of a
material tax liability. We cannot, however, provide assurance that we will not change our plan in this regard.
and Profits. If we acquire a corporation or liquidate a TRS, we must generally distribute all of the C corporation earnings and profits inherited in that transaction, if any, no later than the end of our taxable year in which the transaction
occurs, in order to preserve our qualification for taxation as a REIT. However, if we fail to do so, relief provisions would allow us to maintain our qualification for taxation as a REIT provided we distribute any subsequently discovered C
corporation earnings and profits and pay an interest charge in respect of