[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 1297 Introduced in Senate (IS)]

  1st Session
                                S. 1297

    To amend the Internal Revenue Code of 1986 to simplify certain 
        provisions applicable to real estate investment trusts.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

           September 29 (legislative day, September 25), 1995

   Mr. Hatch 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 simplify certain 
        provisions applicable to real estate investment trusts.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Real Estate 
Investment Trust Tax Simplification Act of 1995''.
    (b) Amendment of 1986 Code.--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--REMOVAL OF TAX TRAPS FOR THE UNWARY

SEC. 101. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF 
              SHAREHOLDERS.

    (a) Rules Relating to Determination of Ownership.--
            (1) Failure to issue shareholder demand letter not to 
        disqualify reit.--Section 857(a) (relating to requirements 
        applicable to real estate investment trusts) is amended by 
        striking paragraph (2) and by redesignating paragraph (3) as 
        paragraph (2).
            (2) Shareholder demand letter requirement; penalty.--
        Section 857 (relating to taxation of real estate investment 
        trusts and their beneficiaries) is amended by redesignating 
        subsection (f) as subsection (g) and by inserting after 
        subsection (e) the following new subsection:
    ``(f) Real Estate Investment Trusts To Ascertain Ownership.--
            ``(1) In general.--Each real estate investment trust shall 
        each taxable year comply with regulations prescribed by the 
        Secretary for the purposes of ascertaining the actual ownership 
        of the outstanding shares, or certificates of beneficial 
        interest, of such trust.
            ``(2) Failure to comply.--
                    ``(A) In general.--If a real estate investment 
                trust fails to comply with the requirements of 
                paragraph (1) for a taxable year, such trust shall pay 
                (on notice and demand by the Secretary and in the same 
                manner as tax) a penalty of $25,000.
                    ``(B) Intentional disregard.--If any failure under 
                paragraph (1) is due to intentional disregard of the 
                requirement under paragraph (1), the penalty under 
                subparagraph (A) shall be $50,000.
                    ``(C) Failure to comply after notice.--The 
                Secretary may require a real estate investment trust to 
                take such actions as the Secretary determines 
                appropriate to ascertain actual ownership if the trust 
                fails to meet the requirements of paragraph (1). If the 
                trust fails to take such actions, the trust shall pay 
                (on notice and demand by the Secretary and in the same 
                manner as tax) an additional penalty equal to the 
                penalty determined under subparagraph (A) or (B), 
                whichever is applicable.
                    ``(D) Reasonable cause.--No penalty shall be 
                imposed under this paragraph with respect to any 
                failure if it is shown that such failure is due to 
                reasonable cause and not to willful neglect.''
    (b) Compliance With Closely Held Prohibition.--
            (1) In general.--Section 856 (defining real estate 
        investment trust) is amended by adding at the end the following 
        new subsection:
    ``(k) Requirement That Entity Not Be Closely Held Treated as Met in 
Certain Cases.--A corporation, trust, or association--
            ``(1) which for a taxable year meets the requirements of 
        section 857(f)(1), and
            ``(2) which does not know, or exercising reasonable 
        diligence would not have known, whether the entity failed to 
        meet the requirement of subsection (a)(6),
shall be treated as having met the requirement of subsection (a)(6) for 
the taxable year.''
            (2) Conforming amendment.--Paragraph (6) of section 856(a) 
        is amended by inserting ``subject to the provisions of 
        subsection (k),'' before ``which is not''.

SEC. 102. DE MINIMIS RULE FOR TENANT SERVICES INCOME.

    (a) In General.--Paragraph (2) of section 856(d) (defining rents 
from real property) is amended by striking subparagraph (C) and the 
last sentence and inserting:
                    ``(C) any impermissible tenant service income (as 
                defined in paragraph (7)).''
    (b) Impermissible Tenant Service Income.--Section 856(d) is amended 
by adding at the end the following new paragraph:
            ``(7) Impermissible tenant service income.--For purposes of 
        paragraph (2)(C)--
                    ``(A) In general.--The term `impermissible tenant 
                service income' means, with respect to any real or 
                personal property, any amount (other than amounts 
                described in subparagraph (B) or (C) of paragraph (1)) 
                received or accrued directly or indirectly by the real 
                estate investment trust for--
                            ``(i) services furnished or rendered by the 
                        trust to the tenants of such property, or
                            ``(ii) managing or operating such property.
                    ``(B) Disqualification of all amounts where more 
                than de minimis amount.--If the amount described in 
                subparagraph (A) with respect to a property exceeds 1 
                percent of all amounts received or accrued directly or 
                indirectly by the real estate investment trust with 
                respect to such property, the impermissible tenant 
                service income of the trust with respect to the 
                property shall include all such amounts.
                    ``(C) Exceptions.--For purposes of subparagraph 
                (A)--
                            ``(i) services furnished or rendered, or 
                        management or operation provided, through an 
                        independent contractor from whom the trust 
                        itself does not derive or receive any income 
                        shall not be treated as furnished, rendered, or 
                        provided by the trust, and
                            ``(ii) there shall not be taken into 
                        account any amount which would be excluded from 
                        unrelated business taxable income under section 
                        512(b)(3) if received by an organization 
                        described in section 512(a)(2).
                    ``(D) Amount attributable to impermissible 
                services.--For purposes of subparagraph (A), the amount 
                treated as received for any service (or management or 
                operation) shall not be less than 150 percent of the 
                actual direct cost of the trust in furnishing or 
                rendering the service (or providing the management or 
                operation).
                    ``(E) Coordination with limitations.--For purposes 
                of paragraphs (2) and (3) of subsection (c), amounts 
                described in subparagraph (A) shall be included in the 
                gross income of the corporation, trust, or 
                association.''

SEC. 103. ATTRIBUTION RULES APPLICABLE TO TENANT OWNERSHIP.

    Section 856(d)(5) (relating to constructive ownership of stock) is 
amended by adding at the end the following: ``For purposes of paragraph 
(2)(B), section 318(a)(3)(A) shall be applied under the preceding 
sentence in the case of a partnership by taking into account only 
partners who own (directly or indirectly) 25 percent or more of the 
capital interest, or the profits interest, in the partnership.''

      TITLE II--CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES

SEC. 201. CREDIT FOR TAX PAID BY REIT ON RETAINED CAPITAL GAINS.

    (a) General Rule.--Paragraph (3) of section 857(b) (relating to 
capital gains) is amended by redesignating subparagraph (D) as 
subparagraph (E) and by inserting after subparagraph (C) the following 
new subparagraph:
                    ``(D) Treatment by shareholders of undistributed 
                capital gains.--
                            ``(i) Every shareholder of a real estate 
                        investment trust at the close of the trust's 
                        taxable year shall include, in computing his 
                        long-term capital gains in his return for his 
                        taxable year in which the last day of the 
                        trust's taxable year falls, such amount as the 
                        trust shall designate in respect of such shares 
                        in a written notice mailed to its shareholders 
                        at any time prior to the expiration of 60 days 
                        after the close of its taxable year (or mailed 
                        to its shareholders or holders of beneficial 
                        interests with its annual report for the 
                        taxable year), but the amount so includible by 
                        any shareholder shall not exceed that part of 
                        the amount subjected to tax in subparagraph 
                        (A)(ii) which he would have received if all of 
                        such amount had been distributed as capital 
                        gain dividends by the trust to the holders of 
                        such shares at the close of its taxable year.
                            ``(ii) For purposes of this title, every 
                        such shareholder shall be deemed to have paid, 
                        for his taxable year under clause (i), the tax 
                        imposed by subparagraph (A)(ii) on the amounts 
                        required by this subparagraph to be included in 
                        respect of such shares in computing his long-
                        term capital gains for that year; and such 
                        shareholders shall be allowed credit or refund 
                        as the case may be, for the tax so deemed to 
                        have been paid by him.
                            ``(iii) The adjusted basis of such shares 
                        in the hands of the holder shall be increased 
                        with respect to the amounts required by this 
                        subparagraph to be included in computing his 
                        long-term capital gains, by the difference 
                        between the amount of such includible gains and 
                        such holder's credit or refund determined under 
                        clause (ii).
                            ``(iv) In the event of such designation, 
                        the tax imposed by subparagraph (A)(ii) shall 
                        be paid by the real estate investment trust 
                        within 30 days after the close of its taxable 
                        year.
                            ``(v) The earnings and profits of such real 
                        estate investment trust, and the earnings and 
                        profits of any such shareholder which is a 
                        corporation, shall be appropriately adjusted in 
                        accordance with regulations prescribed by the 
                        Secretary.
                            ``(vi) As used in this subparagraph, the 
                        terms `shares' and `shareholders' shall include 
                        beneficial interests and holders of beneficial 
                        interest, respectively.''
    (b) Conforming Amendments.--
            (1) Clause (i) of section 857(b)(7)(A) is amended by 
        striking ``subparagraph (B)'' and inserting ``subparagraph (B) 
        or (D)''.
            (2) Clause (iii) of section 852(b)(3)(D) is amended by 
        striking ``by 65 percent'' and all that follows and inserting 
        ``by the difference between the amount of such includible gains 
and such holder's credit or refund determined under clause (ii).''

                    TITLE III--OTHER SIMPLIFICATION

SEC. 301. MODIFICATION OF EARNINGS AND PROFITS RULES FOR DETERMINING 
              WHETHER REIT HAS EARNINGS AND PROFITS FROM NON-REIT YEAR.

    Subsection (d) of section 857 is amended by adding at the end the 
following new paragraph:
            ``(3) Distributions to meet requirements of subsection 
        (a)(2)(B).--Any distribution which is made in order to comply 
        with the requirements of subsection (a)(2)(B)--
                    ``(A) shall be treated for purposes of this 
                subsection as made from the earliest accumulated 
                earnings and profits (other than earnings and profits 
                to which subsection (a)(2)(A) applies) rather than the 
                most recently accumulated earnings and profits, and
                    ``(B) shall not be treated as a distribution for 
                purposes of subsection (b)(2)(B).''

SEC. 302. TREATMENT OF FORECLOSURE PROPERTY.

    (a) Grace Periods.--
            (1) Initial period.--Paragraph (2) of section 856(e) 
        (relating to special rules for foreclosure property) is amended 
        by striking ``on the date which is 2 years after the date the 
        trust acquired such property'' and inserting ``as of the close 
        of the 3d taxable year following the taxable year in which the 
        trust acquired such property''.
            (2) Extension.--Paragraph (3) of section 856(e) is 
        amended--
                    (A) by striking ``or more extensions'' and 
                inserting ``extension'', and
                    (B) by striking the last sentence and inserting: 
                ``Any such extension shall not extend the grace period 
                beyond the close of the 3d taxable year following the 
                last taxable year in the period under paragraph (2).''
    (b) Revocation of Election.--Paragraph (5) of section 856(e) is 
amended by striking the last sentence and inserting: ``A real estate 
investment trust may revoke any such election for a taxable year by 
filing the revocation (in the manner provided in regulations by the 
Secretary) on or before the due date (including any extension of time) 
for filing its return of tax under this chapter for the taxable year. 
If a trust revokes an election for any property, no election may be 
made by the trust under this paragraph with respect to the property for 
any subsequent taxable year.''
    (c) Certain Activities Not To Disqualify Property.--Paragraph (4) 
of section 856(e) is amended by adding at the end the following new 
flush sentence:
        ``For purposes of subparagraph (C), property shall not be 
        treated as used in a trade or business by reason of any 
        activities of the real estate investment trust with respect to 
        such property to the extent that such activities would not 
        result in amounts received or accrued, directly or indirectly, 
        with respect to such property being treated as other than rents 
        from real property.''

SEC. 303. SPECIAL FORECLOSURE RULES FOR HEALTH CARE PROPERTIES.

    Section 856(e) (relating to special rules for foreclosure property) 
is amended by adding at the end the following new paragraph:
            ``(6) Special rules for qualified health care properties.--
        For purposes of this subsection--
                    ``(A) Acquisition by lease terminations.--The term 
                `foreclosure property' shall include any qualified 
                health care property acquired by a real estate 
                investment trust as the result of the termination or 
                expiration of a lease of such property.
                    ``(B) Grace period.--For purposes of qualified 
                health care property of a real estate investment trust 
                qualifying as `foreclosure property' under subparagraph 
                (A), the qualified health care property shall cease to 
                be foreclosure property on the date which is 2 years 
                after the date such trust acquired such property.
                    ``(C) Extensions.--If the real estate investment 
                trust establishes to the satisfaction of the Secretary 
                that an extension of the grace period in subparagraph 
                (B) is necessary to the orderly leasing or liquidation 
                of the trust's interest in such qualified health care 
                property, the Secretary may grant one or more 
                extensions of the grace period for such qualified 
                health care property. Any such extension shall not 
                extend the grace period beyond the date which is 6 
                years after the date such trust acquired such qualified 
                health care property.
                    ``(D) Income from independent contractors.--For 
                purposes of applying paragraph (4)(C) with respect to 
                qualified health care property which is foreclosure 
                property, income derived or received by the trust from 
                an independent contractor shall be disregarded to the 
                extent such income is attributable to--
                            ``(i) leases existing on the date the real 
                        estate investment trust acquired the qualified 
                        health care property, or
                            ``(ii) leases extended or entered into 
                        after the trust acquired such property from 
                        lessees pursuant to terms set forth in such 
                        existing leases or on terms under which the 
                        trust receives a substantially similar or 
                        lesser benefit in comparison to the previous 
                        lease for such property.
                    ``(E) Qualified health care property.--The term 
                `qualified health care property' means any real 
                property (including interests therein), and any 
                personal property incident to such real property, 
                which--
                            ``(i) is a hospital, outpatient medical 
                        clinic, nursing facility, assisted living 
                        facility, or other licensed health care 
                        facility which extends medical or nursing or 
                        ancillary services to patients and which, 
                        immediately before the termination, expiration, 
                        or breach of the lease of or mortgage secured 
                        by such facility, was operated by a provider of 
                        such services which was eligible for 
                        participation in the medicare program under 
                        title XVIII of the Social Security Act with 
                        respect to such facility, or
                            ``(ii) is necessary or incidental to the 
                        use of such a health care facility.''

SEC. 304. PAYMENTS UNDER HEDGING INSTRUMENTS.

    Section 856(c)(6)(G) (relating to treatment of certain interest 
rate agreements) is amended to read as follows:
                    ``(G) Treatment of certain hedging instruments.--
                Except to the extent provided by regulations, any--
                            ``(i) payment to a real estate investment 
                        trust under an interest rate swap or cap 
                        agreement, option, futures contract, forward 
                        rate agreement, or any similar financial 
                        instrument, entered into by the trust in a 
                        transaction to hedge any indebtedness incurred 
                        or to be incurred by the trust to acquire or 
                        carry real estate assets, and
                            ``(ii) gain from the sale or other 
                        disposition of any such investment,
                shall not be taken into account under paragraphs (2), 
                (3), and (4).

SEC. 305. EXCESS NONCASH INCOME.

    Section 857(e)(2) (relating to determination of amount of excess 
noncash income) is amended--
            (1) by striking subparagraph (B),
            (2) by striking the period at the end of subparagraph (C) 
        and inserting a comma,
            (3) by redesignating subparagraph (C) (as amended by 
        paragraph (2)) as subparagraph (B), and
            (4) by adding at the end the following new subparagraphs:
                    ``(C) the amount (if any) by which--
                            ``(i) the amounts includible in gross 
                        income with respect to instruments to which 
                        section 860E(a) or 1272 applies, exceed
                            ``(ii) the amount of money and the fair 
                        market value of other property received during 
                        the taxable year under such instruments, and
                    ``(D) amounts includible in income by reason of 
                cancellation of indebtedness.''

SEC. 306. PROHIBITED TRANSACTION SAFE HARBOR.

    Clause (iii) of section 857(b)(6)(C) (relating to certain sales not 
to constitute prohibited transactions) is amended--
            (1) by striking ``(other than foreclosure property)'' in 
        subclauses (I) and (II) and inserting ``(other than sales of 
        foreclosure property or sales to which section 1033 applies)'', 
        and
            (2) by striking ``(as determined for purposes of computing 
        earnings and profits)'' in subclause (II) and inserting 
        ``(determined without regard to any adjustment for depreciation 
        or amortization)''.

SEC. 307. SHARED APPRECIATION MORTGAGES.

    (a) Bankruptcy Safe Harbor.--Section 856(j) (relating to treatment 
of shared appreciation mortgages) is amended by redesignating paragraph 
(4) as paragraph (5) and by inserting after paragraph (3) the following 
new paragraph:
            ``(4) Coordination with 4-year holding period.--
                    ``(A) In general.--For purposes of section 
                857(b)(6)(C), if a real estate investment trust is 
                treated as having sold secured property under paragraph 
                (3)(A), the trust shall be treated as having held such 
                property for at least 4 years if--
                            ``(i) the secured property is sold or 
                        otherwise disposed of pursuant to a case under 
                        title 11 of the United States Code,
                            ``(ii) the seller is under the jurisdiction 
                        of the court in such case, and
                            ``(iii) the disposition is required by the 
                        court or is pursuant to a plan approved by the 
                        court.
                    ``(B) Exception.--Subparagraph (A) shall not apply 
                if--
                            ``(i) the secured property was acquired by 
                        the trust with the intent to evict or 
                        foreclose, or
                            ``(ii) the trust knew or had reason to know 
                        that default on the obligation described in 
                        paragraph (5)(A) would occur.''
    (b) Clarification of Definition of Shared Appreciation Provision.--
Clause (ii) of section 856(j)(5)(A) is amended by inserting ``or 
appreciation in value'' after ``gain'' each place it appears.

SEC. 308. WHOLLY OWNED SUBSIDIARIES.

    Section 856(i)(2) (defining qualified REIT subsidiary) is amended 
by striking ``at all times during the period such corporation was in 
existence''.

                        TITLE IV--EFFECTIVE DATE

SEC. 401. EFFECTIVE DATE.

    The amendments made by this Act shall apply to taxable years 
beginning after the date of the enactment of this Act.
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