[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[S. 342 Introduced in Senate (IS)]

103d CONGRESS
  1st Session
                                 S. 342

 To amend the Internal Revenue Code of 1986 to encourage investment in 
                  real estate and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

             February 4 (legislative day, January 5), 1993

Mr. Boren (for himself, Mr. Packwood, Mr. Danforth, Mr. Bryan, and Mr. 
    Harkin) introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to encourage investment in 
                  real estate and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; REFERENCE.

    (a) Short Title.--This Act may be cited as the ``Real Estate 
Stability and Recovery Amendments of 1993''.
    (b) Reference.--Except as otherwise expressly provided, whenever in 
this Act an amendment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference shall be 
considered to be made to a section or other provision of the Internal 
Revenue Code of 1986.

              TITLE I--MODIFICATION OF PASSIVE LOSS RULES

SEC. 101. APPLICATION OF PASSIVE LOSS RULES TO RENTAL REAL ESTATE 
              ACTIVITIES.

    (a) Rental Real Estate Activities of Persons in Real Property 
Business Not Automatically Treated as Passive Activities.--Subsection 
(c) of section 469 (defining passive activity) is amended by adding at 
the end thereof the following new paragraph:
            ``(7) Special rules for taxpayers in real property 
        business.--
                    ``(A) In general.--If this paragraph applies to any 
                taxpayer for a taxable year--
                            ``(i) paragraph (2) shall not apply to any 
                        rental real estate activity of such taxpayer 
                        for such taxable year, and
                            ``(ii) this section shall be applied as if 
                        each interest of the taxpayer in rental real 
                        estate were a separate activity.
                Notwithstanding clause (ii), a taxpayer may elect to 
                treat all interests in rental real estate as one 
                activity. Nothing in the preceding provisions of this 
                subparagraph shall be construed as affecting the 
                determination of whether the taxpayer materially 
                participates with respect to any interest in a limited 
                partnership as a limited partner.
                    ``(B) Taxpayers to whom paragraph applies.--This 
                paragraph shall apply to a taxpayer for a taxable year 
                if more than one-half of the personal services 
                performed in trades or businesses by the taxpayer 
                during such taxable year are performed in real property 
                trades or businesses in which the taxpayer materially 
                participates.
                    ``(C) Real property trade or business.--For 
                purposes of this paragraph, the term `real property 
                trade or business' means any real property development, 
                redevelopment, construction, reconstruction, 
                acquisition, conversion, rental, operation, management, 
                leasing, or brokerage trade or business.
                    ``(D) Special rules for subparagraph (b).--
                            ``(i) Closely held c corporations.--In the 
                        case of a closely held C corporation, the 
                        requirements of subparagraph (B) shall be 
                        treated as met for any taxable year if more 
                        than 50 percent of the gross receipts of such 
                        corporation for such taxable year are derived 
                        from real property trades or businesses in 
                        which the corporation materially participates.
                            ``(ii) Personal services as an employee.--
                        For purposes of subparagraph (B), personal 
                        services performed as an employee shall not be 
                        treated as performed in real property trades or 
                        businesses. The preceding sentence shall not 
                        apply if such employee is a 5-percent owner (as 
                        defined in section 416(i)(1)(B)) in the 
                        employer.''
    (b) Conforming Amendments.--
            (1) Paragraph (2) of section 469(c) is amended by striking 
        ``The'' and inserting ``Except as provided in paragraph (7), 
        the''.
            (2) Clause (iv) of section 469(i)(3)(E) is amended by 
        inserting ``or any loss allowable by reason of subsection 
        (c)(7)'' after ``loss''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1992.

  TITLE II--PROVISIONS RELATING TO REAL ESTATE INVESTMENTS BY PENSION 
                                 FUNDS

SEC. 201. REAL ESTATE PROPERTY ACQUIRED BY A QUALIFIED ORGANIZATION.

    (a) Modifications of Exceptions.--Paragraph (9) of section 514(c) 
(relating to real property acquired by a qualified organization) is 
amended by adding at the end thereof the following new subparagraphs:
                    ``(G) Special rules for purposes of the 
                exceptions.--Except as otherwise provided by 
                regulations--
                            ``(i) Small leases disregarded.--For 
                        purposes of clauses (iii) and (iv) of 
                        subparagraph (B), a lease to a person described 
                        in such clause (iii) or (iv) shall be 
                        disregarded if no more than 25 percent of the 
                        leasable floor space in a building is covered 
                        by the lease and if the lease is on 
                        commercially reasonable terms.
                            ``(ii) Commercially reasonable financing.--
                        Clause (v) of subparagraph (B) shall not apply 
                        if the financing is on commercially reasonable 
                        terms.
                    ``(H) Qualifying sales by financial institutions.--
                            ``(i) In general.--In the case of a 
                        qualifying sale by a financial institution, 
                        except as provided in regulations, clauses (i) 
                        and (ii) of subparagraph (B) shall not apply 
                        with respect to financing provided by such 
                        institution for such sale.
                            ``(ii) Qualifying sale.--For purposes of 
                        this clause, there is a qualifying sale by a 
                        financial institution where--
                                    ``(I) a qualified organization 
                                acquires property described in clause 
                                (iii) from a financial institution and 
                                any gain recognized by the financial 
                                institution with respect to the 
                                property is ordinary income,
                                    ``(II) the stated principal amount 
                                of the financing provided by the 
                                financial institution does not exceed 
                                the amount of the outstanding 
                                indebtedness (including accrued but 
                                unpaid interest) of the financial 
                                institution with respect to the 
                                property described in clause (iii) 
                                immediately before the acquisition 
                                referred to in clause (iii) or (v), 
                                whichever is applicable, and
                                    ``(III) the value (determined as of 
                                the time of the sale) of the amount 
                                pursuant to the financing that is 
                                determined by reference to the revenue, 
                                income, or profits derived from the 
                                property does not exceed 30 percent of 
                                the value of the property (determined 
                                as of such time).
                            ``(iii) Property to which subparagraph 
                        applies.--Property is described in this clause 
                        if such property is foreclosure property, or is 
                        real property which--
                                    ``(I) was acquired by the qualified 
                                organization from a financial 
                                institution which is in conservatorship 
                                or receivership, or from the 
                                conservator or receiver of such an 
                                institution, and
                                    ``(II) was held by the financial 
                                institution at the time it entered into 
                                conservatorship or receivership.
                            ``(iv) Financial institution.--For purposes 
                        of this subparagraph, the term `financial 
                        institution' means--
                                    ``(I) any financial institution 
                                described in section 581 or 591(a),
                                    ``(II) any other corporation which 
                                is a direct or indirect subsidiary of 
                                an institution referred to in subclause 
                                (I) but only if, by virtue of being 
                                affiliated with such institution, such 
                                other corporation is subject to 
                                supervision and examination by a 
                                Federal or State agency which regulates 
                                institutions referred to in subclause 
                                (I), and
                                    ``(III) any person acting as a 
                                conservator or receiver of an entity 
                                referred to in subclause (I) or (II) 
                                (or any government agency or 
                                corporation succeeding to the rights or 
                                interest of such person).
                            ``(v) Foreclosure property.--For purposes 
                        of this subparagraph, the term `foreclosure 
                        property' means any real property acquired by 
                        the financial institution as the result of 
                        having bid on such property at foreclosure, or 
                        by operation of an agreement or process of law, 
                        after there was a default (or a default was 
                        imminent) on indebtedness which such property 
                        secured.''.
    (b) Conforming Amendment.--Paragraph (9) of section 514(c) is 
amended--
            (1) by adding the following new sentence at the end of 
        subparagraph (A): ``For purposes of this paragraph, an interest 
        in a mortgage shall in no event be treated as real property.'', 
        and
            (2) by striking the last sentence of subparagraph (B).
    (c) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to acquisitions on or after January 1, 1993.
            (2) Small leases.--The provisions of section 
        514(c)(9)(G)(i) of the Internal Revenue Code of 1986 shall, in 
        addition to any leases to which the provisions apply by reason 
        of paragraph (1), apply to leases entered into on or after 
        January 1, 1993.

SEC. 202. SPECIAL RULES FOR INVESTMENTS IN PARTNERSHIPS.

    (a) Modification to Anti-Abuse Rules.--Paragraph (9) of section 
514(c) (as amended by section 201) is amended by adding at the end 
thereof the following new subparagraph:
                    ``(J) Partnerships not involving tax avoidance.--
                            ``(i) De minimis rule for certain large 
                        partnerships.--The provisions of subparagraph 
                        (B) shall not apply to an investment in a 
                        partnership having at least 250 partners if--
                                    ``(I) interests in such partnership 
                                were offered for sale in an offering 
                                registered with the Securities and 
                                Exchange Commission,
                                    ``(II) at least 50 percent of each 
                                class of interests in such partnership 
                                is owned by individuals who are not 
                                disqualified persons, and
                                    ``(III) the principal purpose of 
                                partnership allocations is not tax 
                                avoidance.
                        The Secretary may disregard inadvertent 
                        failures to meet the requirements of subclause 
                        (II). For purposes of subclause (II), interests 
                        owned by individual retirement plans (as 
                        defined in section 7701(a)(37)) shall not be 
                        taken into account.
                            ``(ii) Disqualified persons.--For purposes 
                        of this subparagraph, the term `disqualified 
                        person' means any person described in clause 
                        (iii) or (iv) of subparagraph (B) and any 
                        person who is not a United States person.''.
    (b) Repeal of Special Treatment of Publicly Traded Partnerships.--
Subsection (c) of section 512 is amended--
            (1) by striking paragraph (2),
            (2) by redesignating paragraph (3) as paragraph (2), and
            (3) by striking ``paragraph (1) or (2)'' in paragraph (2) 
        (as so redesignated) and inserting ``paragraph (1)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to partnership years ending after December 31, 1992.

SEC. 203. TITLE-HOLDING COMPANIES PERMITTED TO RECEIVE SMALL AMOUNTS OF 
              UNRELATED BUSINESS TAXABLE INCOME.

    (a) General Rule.--Paragraph (25) of section 501(c) is amended by 
adding at the end thereof the following new subparagraph:
                    ``(G)(i) An organization shall not be treated as 
                failing to be described in this paragraph merely by 
                reason of the receipt of any otherwise disqualifying 
                income which is incidentally derived from the holding 
                of real property.
                    ``(ii) Clause (i) shall not apply if the amount of 
                gross income described in such clause exceeds 10 
                percent of the organization's gross income for the 
                taxable year unless the organization establishes to the 
                satisfaction of the Secretary that the receipt of gross 
                income described in clause (i) in excess of such 
                limitation was inadvertent and reasonable steps are 
                being taken to correct the circumstances giving rise to 
                such income.''
    (b) Conforming Amendment.--Paragraph (2) of section 501(c) is 
amended by adding at the end thereof the following new sentence: 
``Rules similar to the rules of subparagraph (G) of paragraph (25) 
shall apply for purposes of this paragraph.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1992.

SEC. 204. EXCLUSION FROM UNRELATED BUSINESS TAX OF GAINS FROM CERTAIN 
              PROPERTY.

    (a) General Rule.--Subsection (b) of section 512 (relating to 
modifications) is amended by adding at the end thereof the following 
new paragraph:
            ``(16)(A) Notwithstanding paragraph (5)(B), there shall be 
        excluded all gains or losses from the sale, exchange, or other 
        disposition of any real property described in subparagraph (B) 
        if--
                    ``(i) such property was acquired by the 
                organization from--
                            ``(I) a financial institution described in 
                        section 581 or 591(a) which is in 
                        conservatorship or receivership, or
                            ``(II) the conservator or receiver of such 
                        an institution (or any government agency or 
                        corporation succeeding to the rights or 
                        interests of the conservator or receiver),
                    ``(ii) such property is designated by the 
                organization within the 9-month period beginning on the 
                date of its acquisition as property held for sale, 
                except that not more than one-half (by value determined 
                as of such date) of property acquired in a single 
                transaction may be so designated,
                    ``(iii) such sale, exchange, or disposition occurs 
                before the later of--
                            ``(I) the date which is 30 months after the 
                        date of the acquisition of such property, or
                            ``(II) the date specified by the Secretary 
                        in order to assure an orderly disposition of 
                        property held by persons described in 
                        subparagraph (A), and
                    ``(iv) while such property was held by the 
                organization, the aggregate expenditures on 
                improvements and development activities included in the 
                basis of the property are (or were not) in excess of 20 
                percent of the net selling price of the property with 
                respect to such property.
            ``(B) Property is described in this subparagraph if it is 
        real property which--
                    ``(i) was held by the financial institution at the 
                time it entered into conservatorship or receivership, 
                or
                    ``(ii) was foreclosure property (as defined in 
                section 514(c)(9)(H)(v)) which secured indebtedness 
                held by the financial institution at such time.
        For purposes of this subparagraph, real property includes an 
        interest in a mortgage.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to property acquired on or after January 1, 1993.

SEC. 205. EXCLUSION FROM UNRELATED BUSINESS TAX OF CERTAIN FEES AND 
              OPTION PREMIUMS.

    (a) Loan Commitment Fees.--Paragraph (1) of section 512(b) 
(relating to modifications) is amended by inserting ``amounts received 
or accrued as consideration for entering into agreements to make 
loans,'' before ``and annuities''.
    (b) Option Premiums.--The second sentence of section 512(b)(5) is 
amended by inserting ``or real property'' before the period.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts received on or after January 1, 1993.

SEC. 206. TREATMENT OF PENSION FUND INVESTMENTS IN REAL ESTATE 
              INVESTMENT TRUSTS.

    (a) General Rule.--Subsection (h) of section 856 (relating to 
closely held determinations) is amended by adding at the end thereof 
the following new paragraph:
            ``(3) Treatment of trusts described in section 401(a).--
                    ``(A) Look-thru treatment.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), in determining whether the stock 
                        ownership requirement of section 542(a)(2) is 
                        met for purposes of paragraph (1)(A), any stock 
                        held by a qualified trust shall be treated as 
                        held directly by its beneficiaries in 
                        proportion to their actuarial interests in such 
                        trust and shall not be treated as held by such 
                        trust.
                            ``(ii) Certain related trusts not 
                        eligible.--Clause (i) shall not apply to any 
                        qualified trust if one or more disqualified 
                        persons (as defined in section 4975(e)(2), 
                        without regard to subparagraphs (B) and (I) 
                        thereof) with respect to such qualified trust 
                        hold in the aggregate 5 percent or more in 
                        value of the interests in the real estate 
                        investment trust and such real estate 
                        investment trust has accumulated earnings and 
                        profits attributable to any period for which it 
                        did not qualify as a real estate investment 
                        trust.
                    ``(B) Coordination with personal holding company 
                rules.--If any entity qualifies as a real estate 
                investment trust for any taxable year by reason of 
                subparagraph (A), such entity shall not be treated as a 
                personal holding company for such taxable year for 
                purposes of part II of subchapter G of this chapter.
                    ``(C) Treatment for purposes of unrelated business 
                tax.--If any qualified trust holds more than 10 percent 
                (by value) of the interests in any pension-held REIT at 
                any time during a taxable year, the trust shall be 
                treated as having for such taxable year gross income 
                from an unrelated trade or business in an amount which 
                bears the same ratio to the aggregate dividends paid 
                (or treated as paid) by the REIT to the trust for the 
                taxable year of the REIT with or within which the 
                taxable year of the trust ends (the `REIT year') as--
                            ``(i) the gross income (less direct 
                        expenses related thereto) of the REIT for the 
                        REIT year from unrelated trades or businesses 
                        (determined as if the REIT were a qualified 
                        trust), bears to
                            ``(ii) the gross income (less direct 
                        expenses related thereto) of the REIT for the 
                        REIT year.
                This subparagraph shall apply only if the ratio 
                determined under the preceding sentence is at least 5 
                percent.
                    ``(D) Pension-held reit.--For purposes of 
                subparagraph (C)--
                            ``(i) In general.--A real estate investment 
                        trust is a pension-held REIT if such trust 
                        would not have qualified as a real estate 
                        investment trust but for the provisions of this 
                        paragraph and if such trust is predominantly 
                        held by qualified trusts.
                            ``(ii) Predominantly held.--For purposes of 
                        clause (i), a real estate investment trust is 
                        predominantly held by qualified trusts if--
                                    ``(I) at least 1 qualified trust 
                                holds more than 25 percent (by value) 
                                of the interests in such real estate 
                                investment trust, or
                                    ``(II) 1 or more qualified trusts 
                                (each of whom own more than 10 percent 
                                by value of the interests in such real 
                                estate investment trust) hold in the 
                                aggregate more than 50 percent (by 
                                value) of the interests in such real 
                                estate investment trust.
                    ``(E) Qualified trust.--For purposes of this 
                paragraph, the term `qualified trust' means any trust 
                described in section 401(a) and exempt from tax under 
                section 501(a).''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1992.

                  TITLE III--DISCHARGE OF INDEBTEDNESS

SEC. 301. EXCLUSION FROM GROSS INCOME FOR INCOME FROM DISCHARGE OF 
              QUALIFIED REAL PROPERTY BUSINESS INDEBTEDNESS.

    (a) In General.--Paragraph (1) of section 108(a) (relating to 
income from discharge of indebtedness) is amended by striking ``or'' at 
the end of subparagraph (B), by striking the period at the end of 
subparagraph (C) and inserting ``, or'', and by adding at the end the 
following new subparagraph:
            ``(D) in the case of an individual, the indebtedness 
        discharged is qualified real property business indebtedness.''
    (b) Qualified Real Property Business Indebtedness.--Section 108 is 
amended by inserting after subsection (b) the following new subsection:
    ``(c) Treatment of Discharge of Qualified Real Property Business 
Indebtedness.--
            ``(1) Basis reduction.--
                    ``(A) In general.--The amount excluded from gross 
                income under subparagraph (D) of subsection (a)(1) 
                shall be applied to reduce the basis of the depreciable 
                real property of the taxpayer.
                    ``(B) Cross reference.--For provisions making the 
                reduction described in subparagraph (A), see section 
                1017.
            ``(2) Limitations.--
                    ``(A) Indebtedness in excess of value.--The amount 
                excluded under subparagraph (D) of subsection (a)(1) 
                with respect to any qualified real property business 
                indebtedness shall not exceed the excess (if any) of--
                            ``(i) the outstanding principal amount of 
                        such indebtedness (immediately before the 
                        discharge), over
                            ``(ii) the fair market value of the real 
                        property described in paragraph (3)(A) (as of 
                        such time), reduced by the outstanding 
                        principal amount of any other qualified real 
                        property business indebtedness secured by such 
                        property (as of such time).
                    ``(B) Overall limitation.--The amount excluded 
                under subparagraph (D) of subsection (a)(1) shall not 
                exceed the aggregate adjusted bases of depreciable real 
                property (determined after any reductions under 
                subsections (b) and (g)) held by the taxpayer 
                immediately before the discharge (other than 
                depreciable real property acquired in contemplation of 
                such discharge).
            ``(3) Qualified real property business indebtedness.--The 
        term `qualified real property business indebtedness' means 
        indebtedness which--
                    ``(A) was incurred or assumed by an individual in 
                connection with real property used in a trade or 
                business and is secured by such real property,
                    ``(B) was incurred or assumed before January 1, 
                1993, or if incurred or assumed on or after such date, 
                is qualified acquisition indebtedness, and
                    ``(C) with respect to which such taxpayer makes an 
                election to have this paragraph apply.
        Such term shall not include qualified farm indebtedness. 
        Indebtedness under subparagraph (B) shall include indebtedness 
        resulting from the refinancing of indebtedness under 
        subparagraph (B) (or this sentence), but only to the extent it 
        does not exceed the amount of the indebtedness being 
        refinanced.
            ``(4) Qualified acquisition indebtedness.--For purposes of 
        paragraph (3)(B), the term `qualified acquisition indebtedness' 
        means, with respect to any real property described in paragraph 
        (3)(A), indebtedness incurred or assumed to acquire, construct, 
        reconstruct, or substantially improve such property.
            ``(5) Regulations.--The Secretary shall issue such 
        regulations as are necessary to carry out this subsection, 
        including regulations preventing the abuse of this subsection 
        through cross-collateralization or other means.''
    (c) Technical Amendments.--
            (1) Subparagraph (A) of section 108(a)(2) is amended by 
        striking ``and (C)'' and inserting ``, (C), and (D)''.
            (2) Subparagraph (B) of section 108(a)(2) is amended to 
        read as follows:
                    ``(B) Insolvency exclusion takes precedence over 
                qualified farm exclusion and qualified real property 
                business exclusion.--Subparagraphs (C) and (D) of 
                paragraph (1) shall not apply to a discharge to the 
                extent the taxpayer is insolvent.''
            (3) Subsection (d) of section 108 is amended by striking 
        ``Subsections (a), (b), and (g)'' each place it appears in the 
        heading thereof and in the text and headings of paragraphs (6) 
        and (7)(A) and inserting ``Subsections (a), (b), (c), and 
        (g)''.
            (4) Subparagraph (B) of section 108(d)(7) is amended by 
        adding at the end thereof the following new sentence: ``The 
        preceding sentence shall not apply to any discharge to the 
        extent that subsection (a)(1)(D) applies to such discharge.''
            (5) Subparagraph (A) of section 108(d)(9) is amended by 
        inserting ``or under paragraph (3)(B) of subsection (c)'' after 
        ``subsection (b)''.
            (6) Paragraph (2) of section 1017(a) is amended by striking 
        ``or (b)(5)'' and inserting ``, (b)(5), or (c)(1)''.
            (7) Subparagraph (A) of section 1017(b)(3) is amended by 
        inserting ``or (c)(1)'' after ``subsection (b)(5)''.
            (8) Section 1017(b)(3) is amended by adding at the end the 
        following new subparagraph:
                    ``(F) Special rules for qualified real property 
                business indebtedness.--In the case of any amount which 
                under section 108(c)(1) is to be applied to reduce 
                basis--
                            ``(i) depreciable property shall only 
                        include depreciable real property for purposes 
                        of subparagraphs (A) and (C),
                            ``(ii) subparagraph (E) shall not apply, 
                        and
                            ``(iii) in the case of property taken into 
                        account under section 108(c)(2)(B), the 
                        reduction with respect to such property shall 
                        be made as of the time immediately before 
                        disposition if earlier than the time under 
                        subsection (a).''
    (d) Effective Date.--The amendments made by this section shall 
apply to discharges after December 31, 1992, in taxable years ending 
after such date.

                                 <all>

S 342 IS----2