[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1568 Introduced in Senate (IS)]

  1st Session
                                S. 1568

    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

               August 1 (legislative day, July 21), 2003

 Mr. Hatch (for himself, Mr. Breaux, Mr. Smith, Mr. Lott, and Ms. 
        Snowe) introduced the following bill; which was read twice and 
        referred to the Committee on FinanceYYYYYYYYYYYYYYYYYYYYYYYYYYY

_______________________________________________________________________

                                 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.

    This Act may be cited as the ``Real Estate Investment Trust 
Improvement Act of 2003''.

SEC. 2. AMENDMENT OF 1986 CODE.

    Except as otherwise expressly provided, whenever in the 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--REIT CORRECTIONS

 SEC. 101. REVISIONS TO REIT ASSET TEST.

    (a) Expansion of Straight Debt Safe Harbor.--Section 856 (defining 
real estate investment trust) is amended--
            (1) in subsection (c) by striking paragraph (7), and
            (2) by adding at the end the following new subsection:
    ``(m) Safe Harbor in Applying Subsection (c)(4).--
            ``(1) In general.--In applying subclause (III) of 
        subsection (c)(4)(B)(iii), except as otherwise determined by 
        the Secretary in regulations, the following shall not be 
        considered securities held by the trust:
                    ``(A) Straight debt securities of an issuer which 
                meet the requirements of paragraph (2).
                    ``(B) Any loan to an individual or an estate.
                    ``(C) Any section 467 rental agreement (as defined 
                in section 467(d)), other than with a person described 
                in subsection (d)(2)(B).
                    ``(D) Any obligation to pay rents from real 
                property (as defined in subsection (d)(1)).
                    ``(E) Any security issued by a State or any 
                political subdivision thereof, the District of 
                Columbia, a foreign government or any political 
                subdivision thereof, or the Commonwealth of Puerto 
                Rico, but only if the determination of any payment 
                received or accrued under such security does not depend 
                in whole or in part on the profits of any entity not 
                described in this subparagraph or payments on any 
                obligation issued by such an entity.
                    ``(F) Any security issued by a real estate 
                investment trust.
                    ``(G) Any other arrangement as determined by the 
                Secretary.
            ``(2) Special rules relating to straight debt securities.--
                    ``(A) In general.--For purposes of paragraph 
                (1)(A), securities meet the requirements of this 
                paragraph if such securities are straight debt, as 
                defined in section 1361(c)(5) (without regard to 
                subparagraph (B)(iii) thereof).
                    ``(B) Special rules relating to certain 
                contingencies.--For purposes of subparagraph (A), any 
                interest or principal shall not be treated as failing 
                to satisfy section 1361(c)(5)(B)(i) solely by reason of 
                the fact that the time of payment of such interest or 
                principal is subject to a contingency, but only if--
                            ``(i) any such contingency does not have 
                        the effect of changing the effective yield to 
                        maturity, as determined under section 1272, 
                        other than a change in the annual yield to 
                        maturity which either--
                                    ``(I) does not exceed the greater 
                                of \1/4\ of 1 percent or 5 percent of 
                                the annual yield to maturity, or
                                    ``(II) results solely from a 
                                default or the exercise of a prepayment 
                                right by the issuer of the debt, or
                            ``(ii) neither the aggregate issue price 
                        nor the aggregate face amount of the issuer's 
                        debt instruments held by the trust exceeds 
$1,000,000 and not more than 12 months of unaccrued interest can be 
required to be prepaid thereunder.
                    ``(C) Special rules relating to corporate or 
                partnership issuers.--In the case of an issuer which is 
                a corporation or a partnership, securities that 
                otherwise would be described in paragraph (1)(A) shall 
                be considered not to be so described if the trust 
                holding such securities and any of its controlled 
                taxable REIT subsidiaries (as defined in subsection 
                (d)(8)(A)(iv)) hold any securities of the issuer 
                which--
                            ``(i) are not described in paragraph (1) 
                        (prior to the application of paragraph (1)(C)), 
                        and
                            ``(ii) have an aggregate value greater than 
                        1 percent of the issuer's outstanding 
                        securities.
            ``(3) Look-through rule for partnership securities.--
                    ``(A) In general.--For purposes of applying 
                subclause (III) of subsection (c)(4)(B)(iii)--
                            ``(i) a trust's interest as a partner in a 
                        partnership (as defined in section 7701(a)(2)) 
                        shall not be considered a security, and
                            ``(ii) the trust shall be deemed to own its 
                        proportionate share of each of the assets of 
                        the partnership.
                    ``(B) Determination of trust's interest in 
                partnership assets.--For purposes of subparagraph (A), 
                with respect to any taxable year beginning after the 
                date of the enactment of this subparagraph--
                            ``(i) the trust's interest in the 
                        partnership assets shall be the trust's 
                        proportionate interest in any securities issued 
                        by the partnership (determined without regard 
                        to subparagraph (A)(i) and paragraph (4), but 
                        not including securities described in paragraph 
                        (1)), and
                            ``(ii) the value of any debt instrument 
                        shall be the adjusted issue price thereof, as 
                        defined in section 1272(a)(4).
            ``(4) Certain partnership debt instruments not treated as a 
        security.--For purposes of applying subclause (III) of 
        subsection (c)(4)(B)(iii)--
                    ``(A) any debt instrument issued by a partnership 
                and not described in paragraph (1) shall not be 
                considered a security to the extent of the trust's 
                interest as a partner in the partnership, and
                    ``(B) any debt instrument issued by a partnership 
                and not described in paragraph (1) shall not be 
                considered a security if at least 75 percent of the 
                partnership's gross income (excluding gross income from 
                prohibited transactions) is derived from sources 
                referred to in subsection (c)(3).
            ``(5) Secretarial guidance.--The Secretary is authorized to 
        provide guidance (including through the issuance of a written 
        determination, as defined in section 6110(b)) that an 
        arrangement shall not be considered a security held by the 
        trust for purposes of applying subclause (III) of subsection 
        (c)(4)(B)(iii) notwithstanding that such arrangement otherwise 
        could be considered a security under subparagraph (F) of 
        subsection (c)(5).''.

SEC. 102. CLARIFICATION OF APPLICATION OF LIMITED RENTAL EXCEPTION.

    Subparagraph (A) of section 856(d)(8) (relating to special rules 
for taxable REIT subsidiaries) is amended to read as follows:
                    ``(A) Limited rental exception.--
                            ``(i) In general.--The requirements of this 
                        subparagraph are met with respect to any 
                        property if at least 90 percent of the leased 
                        space of the property is rented to persons 
                        other than taxable REIT subsidiaries of such 
                        trust and other than persons described in 
                        paragraph (2)(B).
                            ``(ii) Rents must be substantially 
                        comparable.--Clause (i) shall apply only to the 
                        extent that the amounts paid to the trust as 
                        rents from real property (as defined in 
                        paragraph (1) without regard to paragraph 
                        (2)(B)) from such property are substantially 
                        comparable to such rents paid by the other 
                        tenants of the trust's property for comparable 
                        space.
                            ``(iii) Times for testing rent 
                        comparability.--The substantial comparability 
                        requirement of clause (ii) shall be treated as 
                        met with respect to a lease to a taxable REIT 
subsidiary of the trust if such requirement is met under the terms of 
the lease--
                                    ``(I) at the time such lease is 
                                entered into,
                                    ``(II) at the time of each 
                                extension of the lease, including a 
                                failure to exercise a right to 
                                terminate, and
                                    ``(III) at the time of any 
                                modification of the lease between the 
                                trust and the taxable REIT subsidiary 
                                if the rent under such lease is 
                                effectively increased pursuant to such 
                                modification.
                        With respect to subclause (III), if the taxable 
                        REIT subsidiary of the trust is a controlled 
                        taxable REIT subsidiary of the trust, the term 
                        `rents from real property' shall not in any 
                        event include rent under such lease to the 
                        extent of the increase in such rent on account 
                        of such modification.
                            ``(iv) Controlled taxable reit 
                        subsidiary.--For purposes of clause (iii), the 
                        term `controlled taxable REIT subsidiary' 
                        means, with respect to any real estate 
                        investment trust, any taxable REIT subsidiary 
                        of such trust if such trust owns directly or 
                        indirectly--
                                    ``(I) stock possessing more than 50 
                                percent of the total voting power of 
                                the outstanding stock of such 
                                subsidiary, or
                                    ``(II) stock having a value of more 
                                than 50 percent of the total value of 
                                the outstanding stock of such 
                                subsidiary.
                            ``(v) Continuing qualification based on 
                        third party actions.--If the requirements of 
                        clause (i) are met at a time referred to in 
                        clause (iii), such requirements shall continue 
                        to be treated as met so long as there is no 
                        increase in the space leased to any taxable 
                        REIT subsidiary of such trust or to any person 
                        described in paragraph (2)(B).
                            ``(vi) Correction period.--If there is an 
                        increase referred to in clause (v) during any 
                        calendar quarter with respect to any property, 
                        the requirements of clause (iii) shall be 
                        treated as met during the quarter and the 
                        succeeding quarter if such requirements are met 
                        at the close of such succeeding quarter.''.

SEC. 103. DELETION OF CUSTOMARY SERVICES EXCEPTION.

    Subparagraph (B) of section 857(b)(7) (relating to redetermined 
rents) is amended by striking clause (ii) and by redesignating clauses 
(iii), (iv), (v), (vi), and (vii) as clauses (ii), (iii), (iv), (v), 
and (vi), respectively.

SEC. 104. CONFORMITY WITH GENERAL HEDGING DEFINITION.

    (a) Definition.--Subparagraph (G) of section 856(c)(5) (relating to 
treatment of certain hedging instruments) is amended to read as 
follows:
                    ``(G) Treatment of certain hedging instruments.--
                Except to the extent provided by regulations, any 
                income of a real estate investment trust from a hedging 
                transaction (as defined in clause (ii) or (iii) of 
                section 1221(b)(2)(A)) which is clearly identified 
                pursuant to section 1221(a)(7), including gain from the 
                sale or disposition of such a transaction, shall not 
                constitute gross income under paragraph (2) to the 
                extent that the transaction hedges any indebtedness 
                incurred or to be incurred by the trust to acquire or 
                carry real estate assets.''.

SEC. 105. CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES.

    Clause (i) of section 857(b)(5)(A) (relating to imposition of tax 
in case of failure to meet certain requirements) is amended by striking 
``90 percent'' and inserting ``95 percent''.

SEC. 106. PROHIBITED TRANSACTIONS PROVISIONS.

    (a) Expansion of Prohibited Transaction Safe Harbor.--Section 
857(b)(6) (relating to income from prohibited transactions) is amended 
by redesignating subparagraphs (D) and (E) as subparagraphs (E) and 
(F), respectively, and by inserting after subparagraph (C) the 
following new subparagraph:
                    ``(D) Certain sales not to constitute prohibited 
                transactions.--For purposes of this part, the term 
                `prohibited transaction' does not include a sale of 
                property which is a real estate asset (as defined in 
                section 856(c)(5)(B)) if--
                            ``(i) the trust held the property for not 
                        less than 4 years in connection with the trade 
                        or business of producing timber,
                            ``(ii) the aggregate expenditures made by 
                        the trust, or a partner of the trust, during 
                        the 4-year period preceding the date of sale 
                        which--
                                    ``(I) are includible in the basis 
                                of the property (other than timberland 
                                acquisition expenditures), and
                                    ``(II) are directly related to 
                                operation of the property for the 
                                production of timber or for the 
                                preservation of the property for use as 
                                timberland,
                        do not exceed 30 percent of the net selling 
                        price of the property,
                            ``(iii) the aggregate expenditures made by 
                        the trust, or a partner of the trust, during 
                        the 4-year period preceding the date of sale 
                        which--
                                    ``(I) are includible in the basis 
                                of the property (other than timberland 
                                acquisition expenditures), and
                                    ``(II) are not directly related to 
                                operation of the property for the 
                                production of timber, or for the 
                                preservation of the property for use as 
                                timberland, do not exceed 5 percent of 
the net selling price of the property,
                            ``(iv)(I) during the taxable year the trust 
                        does not make more than 7 sales of property 
                        (other than sales of foreclosure property or 
                        sales to which section 1033 applies), or
                            ``(II) the aggregate adjusted bases (as 
                        determined for purposes of computing earnings 
                        and profits) of property (other than sales of 
                        foreclosure property or sales to which section 
                        1033 applies) sold during the taxable year does 
                        not exceed 10 percent of the aggregate bases 
                        (as so determined) of all of the assets of the 
                        trust as of the beginning of the taxable year,
                            ``(v) in the case that the requirement of 
                        clause (iv)(I) is not satisfied, substantially 
                        all of the marketing expenditures with respect 
                        to the property were made through an 
                        independent contractor (as defined in section 
                        856(d)(3)) from whom the trust itself does not 
                        derive or receive any income, and
                            ``(vi) the sales price of the property sold 
                        by the trust to its taxable REIT subsidiary is 
                        not based in whole or in part on the income or 
                        profits of the subsidiary or the income or 
                        profits that the subsidiary derives from the 
                        sale or operation of such property.''.

SEC. 107. EFFECTIVE DATES.

    (a) In General.--Except as provided in subsection (b), the 
amendments made by this title shall apply to taxable years beginning 
after December 31, 2000.
    (b) Sections 103 Through 106.--The amendments made by sections 103, 
104, 105 and 106 shall apply to taxable years beginning after the date 
of the enactment of this Act.

                      TITLE II--FIRPTA CORRECTION

SEC. 201. MODIFICATION OF THE TREATMENT OF CERTAIN REIT DISTRIBUTIONS 
              ATTRIBUTABLE TO GAIN FROM SALES OR EXCHANGES OF UNITED 
              STATES REAL PROPERTY INTERESTS.

    (a) In General.--Paragraph (1) of section 897(h) (relating to look-
through of distributions) is amended by inserting before the period at 
the end the following: ``, except that any distribution by a REIT with 
respect to any class of stock which is regularly traded on an 
established securities market located in the Unites States shall not be 
treated as gain recognized from the sale or exchange of a United States 
real property interest if the shareholder did not own more than 5 
percent of such class of stock during the taxable year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

                   TITLE III--REIT SAVINGS PROVISIONS

SEC. 301. REVISIONS TO REIT PROVISIONS.

    (a) Rules of Application for Failure To Satisfy Section 
856(c)(4).--Section 856(c) (relating to definition of real estate 
investment trust), as amended by section 101, is amended by inserting 
after paragraph (6) the following new paragraph:
            ``(7) Rules of application for failure to satisfy paragraph 
        (4).--
                    ``(A) De minimis failure.--A corporation, trust, or 
                association that fails to meet the requirements of 
                paragraph (4)(B)(iii) for a particular quarter shall 
                nevertheless be considered to have satisfied the 
                requirements of such paragraph for such quarter if--
                            ``(i) such failure is due to the ownership 
                        of assets the total value of which does not 
                        exceed the lesser of--
                                    ``(I) 1 percent of the total value 
                                of the trust's assets at the end of the 
                                quarter for which such measurement is 
                                done, and
                                    ``(II) $10,000,000, and
                            ``(ii)(I) the corporation, trust, or 
                        association, following the identification of 
                        such failure, disposes of assets in order to 
                        meet the requirements of such paragraph within 
                        6 months after the last day of the quarter in 
                        which the corporation, trust or association's 
                        identification of the failure to satisfy the 
                        requirements of such paragraph occurred or such 
                        other time period prescribed by the Secretary 
                        and in the manner prescribed by the Secretary, 
                        or
                            ``(II) the requirements of such paragraph 
                        are otherwise met within the time period 
                        specified in subclause (I).
                    ``(B) Failures exceeding de minimis amount.--A 
                corporation, trust, or association that fails to meet 
                the requirements of paragraph (4) for a particular 
                quarter shall nevertheless be considered to have 
                satisfied the requirements of such paragraph for such 
                quarter if--
                            ``(i) such failure involves the ownership 
                        of assets the total value of which exceeds the 
                        de minimis standard described in subparagraph 
                        (A)(i) at the end of the quarter for which such 
                        measurement is done,
                            ``(ii) following the corporation, trust, or 
                        association's identification of the failure to 
                        satisfy the requirements of such paragraph for 
                        a particular quarter, a description of each 
                        asset that causes the corporation, trust, or 
                        association to fail to satisfy the requirements 
                        of such paragraph at the close of such quarter 
                        of any taxable year is set forth in a schedule 
                        for such quarter filed in accordance with 
                        regulations prescribed by the Secretary,
                            ``(iii) the failure to meet the 
                        requirements of such paragraph for a particular 
                        quarter is due to reasonable cause and not due 
                        to willful neglect,
                            ``(iv) the corporation, trust, or 
                        association pays a tax computed under 
                        subparagraph (C), and
                            ``(v)(I) the corporation, trust, or 
                        association disposes of the assets set forth on 
                        the schedule specified in clause (ii) within 6 
                        months after the last day of the quarter in 
                        which the corporation, trust or association's 
                        identification of the failure to satisfy the 
                        requirements of such paragraph occurred or such 
                        other time period prescribed by the Secretary 
                        and in the manner prescribed by the Secretary, 
                        or
                            ``(II) the requirements of such paragraph 
                        are otherwise met within the time period 
                        specified in subclause (I).
                    ``(C) Tax.--For purposes of subparagraph (B)(iv)--
                            ``(i) Tax imposed.--If a corporation, 
                        trust, or association elects the application of 
                        this subparagraph, there is hereby imposed a 
                        tax on the failure described in subparagraph 
                        (B) of such corporation, trust, or association. 
                        Such tax shall be paid by the corporation, 
                        trust, or association.
                            ``(ii) Tax computed.--The amount of the tax 
                        imposed by clause (i) shall be the greater of--
                                    ``(I) $50,000, or
                                    ``(II) the amount determined 
                                (pursuant to regulations promulgated by 
                                the Secretary) by multiplying the net 
                                income generated by the assets 
                                described in the schedule specified in 
                                subparagraph (B)(ii) for the period 
                                specified in clause (iii) by the 
                                highest rate of tax specified in 
                                section 11.
                            ``(iii) Period.--For purposes of clause 
                        (ii)(II), the period described in this clause 
                        is the period beginning on the first date that 
                        the failure to satisfy the requirements of such 
                        paragraph (4) occurs as a result of the 
                        ownership of such assets and ending on the 
                        earlier of the date on which the trust disposes 
                        of such assets or the end of the first quarter 
                        when there is no longer a failure to satisfy 
                        such paragraph (4).
                            ``(iv) Administrative provisions.--For 
                        purposes of subtitle F, the taxes imposed by 
                        this subparagraph shall be treated as excise 
                        taxes with respect to which the deficiency 
                        procedures of such subtitle apply.''.
    (b) Modification of Rules of Application for Failure To Satisfy 
Sections 856(c)(2) or 856(c)(3).--Paragraph (6) of section 856(c) 
(relating to definition of real estate investment trust) is amended by 
striking subparagraphs (A) and (B), by redesignating subparagraph (C) 
as subparagraph (B), and by inserting before subparagraph (B) (as so 
redesignated) the following new subparagraph:
                    ``(A) following the corporation, trust, or 
                association's identification of the failure to meet the 
                requirements of paragraph (2) or (3), or of both such 
                paragraphs, for any taxable year, a description of each 
                item of its gross income described in such paragraphs 
                is set forth in a schedule for such taxable year filed 
                in accordance with regulations prescribed by the 
                Secretary, and''.
    (c) Reasonable Cause Exception To Loss of REIT Status if Failure To 
Satisfy Requirements.--Subsection (g) of section 856 (relating to 
termination of election) is amended--
            (1) in paragraph (1) by inserting before the period at the 
        end of the first sentence the following: ``unless paragraph (5) 
        applies'', and
            (2) by adding at the end the following new paragraph:
            ``(5) Entities to which paragraph applies.--This paragraph 
        applies to a corporation, trust, or association--
                    ``(A) which is not a real estate investment trust 
                to which the provisions of this part apply for the 
                taxable year due to one or more failures to comply with 
                one or more of the provisions of this part (other than 
                subsection (c)(6) or (c)(7) of section 856),
                    ``(B) such failures are due to reasonable cause and 
                not due to willful neglect, and
                    ``(C) if such corporation, trust, or association 
                pays (as prescribed by the Secretary in regulations and 
                in the same manner as tax) a penalty of $50,000 for 
                each failure to satisfy a provision of this part due to 
                reasonable cause and not willful neglect.''.
    (d) Deduction of Tax Paid From Amount Required To Be Distributed.--
Subparagraph (E) of section 857(b)(2) is amended by striking ``(7)'' 
and inserting ``(7) of this subsection, section 856(c)(7)(B)(iii), and 
section 856(g)(1).''.
    (e) Expansion of Deficiency Dividend Procedure.--Subsection (e) of 
section 860 is amended by striking ``or'' at the end of paragraph (2), 
by striking the period at the end of paragraph (3) and inserting ``; 
or'', and by adding at the end the following new paragraph:
            ``(4) a statement by the taxpayer attached to its amendment 
        or supplement to a return of tax for the relevant tax year.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after date of the enactment of this 
Act.
                                 <all>