California Office of Tax Appeals Requires REIT to Add Back Dividends-Paid Deduction

The California Office of Tax Appeals (OTA) held—in a 2–1 vote—that a real estate investment trust (REIT) could not eliminate intercompany dividends received from its wholly owned, unitary REIT subsidiary and claim a dividends-paid deduction (DPD) for the same dividends paid to the REIT’s shareholders. According to the majority opinion, which is pending precedential designation, allowing both would produce an impermissible double tax benefit.¹  

On the combined California return, the REIT claimed a DPD pursuant to Internal Revenue Code (IRC) § 857(b)(2)(B), to which California conforms (Cal. Rev. & Tax Code § 24870). The REIT also eliminated those same dividends pursuant to Cal. Rev. & Tax Code § 25106.  

The Franchise Tax Board (FTB) denied the REIT’s dividend elimination under § 25106, and the REIT argued that the plain language of § 25106 expressly mandates the elimination of intercompany dividends that are paid out of the income of a unitary business. The OTA did not agree with the FTB’s denial of the dividend elimination. However, it reached the same result by requiring the REIT to add back the portion of the DPD attributable to the eliminated dividends. The OTA noted that the dividend elimination is mandatory. With regard to the DPD rules, the OTA opined that California does not fully conform to federal REIT tax rules, and the relevant REIT IRC sections are subordinated when they conflict with the state’s tax law. “While the law allows appellants to eliminate the qualified dividends, the law also bars appellants from simultaneously taking a DPD or otherwise taking into account those same qualified dividends to determine their tax.” A sharply worded dissent criticized the majority for imbuing § 25106 with “a power and purpose” unsupported by law, regulation, or case law. Under the majority’s interpretation, § 25106 becomes a sweeping mechanism for altering otherwise lawful tax consequences whenever the FTB finds them objectionable, according to the dissent.  

Ryan’s Take and Action Steps 

A dissenting opinion does not preclude precedential designation under 18 CCR § 30502, but the existence of a substantive dissent is particularly significant where the majority announces an expansive interpretation of California tax law. As such, the decision presents substantial unresolved questions of statutory construction, not only between § 25106 and California’s conformity to the federal REIT provisions but also in performing what should have been a straightforward conformity analysis. The OTA does not appear to have authority to effectively limit a deduction that the Legislature clearly chose to allow. Such a policy decision must come from the Legislature.  

Requests to reject a precedential designation of Kimco were submitted to the OTA by the California Taxpayers Association, the California Business Properties Association, the National Association of REITs, and the International Council of Shopping Centers on October 28, 2026. While the OTA must take submissions under consideration when determining whether to designate a decision as precedential, the requests are not a controlling factor. The OTA should decide whether this decision will be precedential by early December.     

REITs claiming a DPD that are members of a unitary group need to consider the implications of the decision and be on the lookout for any auditors who disallow the state’s mandatory dividend elimination. For questions regarding the state’s REIT dividend provisions, please contact a Ryan specialist. 

¹ In the Matter of: Kimco Realty Corporation and Subsidiaries, OTA Case No. 230713916 (January 27, 2026). 

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.