[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[S. 2002 Introduced in Senate (IS)]







110th CONGRESS
  1st Session
                                S. 2002

    To amend the Internal Revenue Code of 1986 to simplify certain 
 provisions applicable to real estate investment trusts, and for other 
                               purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             August 3, 2007

    Mr. Hatch (for himself, Mr. Salazar, Mr. Smith, and Mr. Kerry) 
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, 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.

    This Act may be cited as the ``REIT Investment Diversification and 
Empowerment Act of 2007''.

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--FOREIGN CURRENCY AND OTHER QUALIFIED ACTIVITIES

SEC. 101. REVISIONS TO REIT INCOME TESTS.

    (a) Addition of Permissible Income Categories.--Section 856(c) 
(relating to limitations) is amended--
            (1) by striking ``and'' at the end of paragraph (2)(G) and 
        by inserting after paragraph (2)(H) the following new 
        subparagraphs:
                    ``(I) passive foreign exchange gains; and
                    ``(J) any other item of income or gain as 
                determined by the Secretary;'', and
            (2) by striking ``and'' at the end of paragraphs (3)(H) and 
        (3)(I) and by inserting after paragraph (3)(I) the following 
        new subparagraphs:
                    ``(J) real estate foreign exchange gains; and
                    ``(K) any other item of income or gain as 
                determined by the Secretary; and''.
    (b) Rules Regarding Foreign Currency Transactions.--Section 856 
(defining real estate investment trust) is amended by adding at the end 
the following new subsection:
    ``(n) Rules Regarding Foreign Currency Transactions.--With respect 
to any taxable year--
            ``(1) Real estate foreign exchange gains.--For purposes of 
        subsection (c)(3)(J), the term `real estate foreign exchange 
        gains' means--
                    ``(A) foreign currency gains (as defined in section 
                988(b)(1)) which are attributable to--
                            ``(i) any item described in subsection 
                        (c)(3) (other than in subparagraph (J) 
                        thereof),
                            ``(ii) the acquisition or ownership of 
                        obligations secured by mortgages on real 
                        property or on interests in real property 
                        (other than foreign currency gains attributable 
                        to any item described in clause (i)), or
                            ``(iii) becoming or being the obligor under 
                        obligations secured by mortgages on real 
                        property or on interests in real property 
                        (other than foreign currency gains attributable 
                        to any item described in clause (i)),
                    ``(B) gains described in section 987 attributable 
                to a qualified business unit (as defined by section 
                989) of the real estate investment trust, but only if 
                such qualified business unit meets the requirements 
                under--
                            ``(i) subsection (c)(3) (without regard to 
                        subparagraph (J) thereof) for the taxable year, 
                        and
                            ``(ii) subsection (c)(4)(A) at the close of 
                        each quarter that the real estate investment 
                        trust has directly or indirectly held the 
                        qualified business unit, and
                    ``(C) any other foreign currency gains as 
                determined by the Secretary.
            ``(2) Passive foreign exchange gains.--For purposes of 
        subsection (c)(2)(I), the term `passive foreign exchange gains' 
        means--
                    ``(A) real estate foreign exchange gains,
                    ``(B) foreign currency gains (as defined in section 
                988(b)(1)) which are not described in subparagraph (A) 
                and which are attributable to any item described in 
                subsection (c)(2) (other than in subparagraph (I) 
                thereof), and
                    ``(C) any other foreign currency gains as 
                determined by the Secretary.''.
    (c) Addition to REIT Hedging Rule.--Subparagraph (G) of section 
856(c)(5) is amended to read as follows:
                    ``(G) Treatment of certain hedging instruments.--
                Except to the extent as determined by the Secretary--
                            ``(i) 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 paragraphs (2) and (3) to the extent that 
                        the transaction hedges any indebtedness 
                        incurred or to be incurred by the trust to 
                        acquire or carry real estate assets, and
                            ``(ii) any income of a real estate 
                        investment trust from a transaction entered 
                        into by the trust primarily to manage risk of 
                        currency fluctuations with respect to any item 
                        described in paragraph (2) or (3), including 
                        gain from the termination of such a 
                        transaction, shall not constitute gross income 
                        under paragraphs (2) and (3), but only if such 
                        transaction is clearly identified as such 
                        before the close of the day on which it was 
                        acquired, originated, or entered into (or such 
                        other time as the Secretary may prescribe).''.
    (d) Authority to Exclude Items of Income From REIT Income Tests.--
Section 856(c)(5) is amended by adding at the end the following new 
subparagraph:
                    ``(H) Secretarial authority to exclude other items 
                of income.--The Secretary is authorized to determine 
                whether any item of income or gain which does not 
                otherwise qualify under paragraph (2) or (3) may be 
                considered as not constituting gross income solely for 
                purposes of this part.''.

SEC. 102. REVISIONS TO REIT ASSET TESTS.

    (a) Clarification of Valuation Test.--The first sentence in the 
matter following section 856(c)(4)(B)(iii)(III) is amended by inserting 
``(including a discrepancy caused solely by the change in the foreign 
currency exchange rate used to value a foreign asset)'' after ``such 
requirements''.
    (b) Clarification of Permissible Asset Category.--Section 
856(c)(5), as amended by section 101(d), is amended by adding at the 
end the following new subparagraph:
                    ``(I) Cash.--The term `cash' includes foreign 
                currency if the real estate investment trust or its 
                qualified business unit (as defined in section 989) 
                uses such foreign currency as its functional currency 
                (as defined in section 985(b)).''.

SEC. 103. CONFORMING FOREIGN CURRENCY REVISIONS.

    (a) Net Income From Foreclosure Property.--Clause (i) of section 
857(b)(4)(B) is amended to read as follows:
                            ``(i) gain (including any foreign currency 
                        gain, as defined in section 988(b)(1)) from the 
                        sale or other disposition of foreclosure 
                        property described in section 1221(a)(1) and 
                        the gross income for the taxable year derived 
                        from foreclosure property (as defined in 
                        section 856(e)), but only to the extent such 
                        gross income is not described in (or, in the 
                        case of foreign currency gain, not attributable 
                        to gross income described in) section 856(c)(3) 
                        other than subparagraph (F) thereof, over''.
    (b) Net Income From Prohibited Transactions.--Clause (i) of section 
857(b)(6)(B) is amended to read as follows:
                            ``(i) the term `net income derived from 
                        prohibited transactions' means the excess of 
                        the gain (including any foreign currency gain, 
                        as defined in section 988(b)(1)) from 
                        prohibited transactions over the deductions 
                        (including any foreign currency loss, as 
                        defined in section 988(b)(2)) allowed by this 
                        chapter which are directly connected with 
                        prohibited transactions;''.

                  TITLE II--TAXABLE REIT SUBSIDIARIES

SEC. 201. CONFORMING TAXABLE REIT SUBSIDIARY ASSET TEST.

    Section 856(c)(4)(B)(ii) is amended by striking ``20 percent'' and 
inserting ``25 percent''.

                        TITLE III--DEALER SALES

SEC. 301. HOLDING PERIOD UNDER SAFE HARBOR.

    Section 857(b)(6) (relating to income from prohibited transactions) 
is amended--
            (1) by striking ``4 years'' in subparagraphs (C)(i), 
        (C)(iv), and (D)(i) and inserting ``2 years'',
            (2) by striking ``4-year period'' in subparagraphs (C)(ii), 
        (D)(ii), and (D)(iii) and inserting ``2-year period'', and
            (3) by striking ``real estate asset''and all that follows 
        through ``if'' in the matter preceding clause (i) of 
        subparagraphs (C) and (D), respectively, and inserting ``real 
        estate asset (as defined in section 856(c)(5)(B)) and which is 
        described in section 1221(a)(1) if''.

SEC. 302. DETERMINING VALUE OF SALES UNDER SAFE HARBOR.

    Section 857(b)(6) is amended--
            (1) by striking the semicolon at the end of subparagraph 
        (C)(iii) and inserting ``, or (III) the fair market value 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 fair market value of all of the 
        assets of the trust as of the beginning of the taxable year;'', 
        and
            (2) by adding ``or'' at the end of subclause (II) of 
        subparagraph (D)(iv) and by adding at the end of such 
        subparagraph the following new subclause:
                            ``(III) the fair market value 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 fair market value of all of the 
                        assets of the trust as of the beginning of the 
                        taxable year,''.

                      TITLE IV--HEALTH CARE REITS

SEC. 401. CONFORMITY FOR HEALTH CARE FACILITIES.

    (a) Related Party Rentals.--Subparagraph (B) of section 856(d)(8) 
(relating to special rule for taxable REIT subsidiaries) is amended to 
read as follows:
                    ``(B) Exception for certain lodging facilities and 
                health care property.--The requirements of this 
                subparagraph are met with respect to an interest in 
                real property which is a qualified lodging facility or 
                a qualified health care property (as defined in 
                subsection (e)(6)(D)(i)) leased by the trust to a 
                taxable REIT subsidiary of the trust if the property is 
                operated on behalf of such subsidiary by a person who 
                is an eligible independent contractor. For purposes of 
                this section, a taxable REIT subsidiary is not 
                considered to be operating or managing a qualified 
                health care property or qualified lodging facility 
                solely because it directly or indirectly possesses a 
                license, permit or similar instrument enabling it to do 
                so.''.
    (b) Eligible Independent Contractor.--Subparagraphs (A) and (B) of 
section 856(d)(9) (relating to eligible independent contractor) are 
amended to read as follows:
                    ``(A) In general.--The term `eligible independent 
                contractor' means, with respect to any qualified 
                lodging facility or qualified health care property (as 
                defined in subsection (e)(6)(D)(i)), any independent 
                contractor if, at the time such contractor enters into 
                a management agreement or other similar service 
                contract with the taxable REIT subsidiary to operate 
                such qualified lodging facility or qualified health 
                care property, such contractor (or any related person) 
                is actively engaged in the trade or business of 
                operating qualified lodging facilities or qualified 
                health care properties, respectively, for any person 
                who is not a related person with respect to the real 
                estate investment trust or the taxable REIT subsidiary.
                    ``(B) Special rules.--Solely for purposes of this 
                paragraph and paragraph (8)(B), a person shall not fail 
                to be treated as an independent contractor with respect 
                to any qualified lodging facility or qualified health 
                care property (as so defined) by reason of the 
                following:
                            ``(i) The taxable REIT subsidiary bears the 
                        expenses for the operation of such qualified 
                        lodging facility or qualified health care 
                        property pursuant to the management agreement 
                        or other similar service contract.
                            ``(ii) The taxable REIT subsidiary receives 
                        the revenues from the operation of such 
                        qualified lodging facility or qualified health 
                        care property, net of expenses for such 
                        operation and fees payable to the operator 
                        pursuant to such agreement or contract.
                            ``(iii) The real estate investment trust 
                        receives income from such person with respect 
                        to another property that is attributable to a 
                        lease of such other property to such person 
                        that was in effect as of the later of--
                                    ``(I) January 1, 1999, or
                                    ``(II) the earliest date that any 
                                taxable REIT subsidiary of such trust 
                                entered into a management agreement or 
                                other similar service contract with 
                                such person with respect to such 
                                qualified lodging facility or qualified 
                                health care property.''.
    (c) Taxable Reit Subsidiaries.--The last sentence of section 
856(l)(3) is amended--
            (1) by inserting ``or a health care facility'' after ``a 
        lodging facility'', and
            (2) by inserting ``or health care facility'' after ``such 
        lodging facility''.

                         TITLE V--FOREIGN REITS

SEC. 501. STOCK OF FOREIGN REITS AS REAL ESTATE ASSETS.

    (a) In General.--The first sentence in section 856(c)(5)(B) is 
amended by inserting ``or in a qualified foreign REIT'' after ``this 
part''.
    (b) Qualified Foreign REIT.--Section 856(c) is amended by adding at 
the end the following new paragraph:
            ``(8) Qualified foreign reit.--For purposes of this 
        subsection, the term `qualified foreign REIT' means a 
        corporation, trust, or association--
                    ``(A) treated as a corporation under section 
                7701(a)(3),
                    ``(B) the shares or certificates of beneficial 
                interests of which are regularly traded on an 
                established securities market, and
                    ``(C) which is organized in a country under rules 
                that the Secretary determines meet the following 
                criteria:
                            ``(i) At least 75 percent of the entity's 
                        assets must qualify as real estate assets 
                        (determined without regard to shares or 
                        transferable certificates of beneficial 
                        interest in such entity), as determined at the 
                        close of the entity's prior taxable year.
                            ``(ii) The entity either receives a 
                        dividends paid deduction comparable to section 
                        561 or is exempt from corporate level tax.
                            ``(iii) The entity is required to 
                        distribute at least 85 percent of its annual 
                        taxable income (as computed in the jurisdiction 
                        in which it is organized) to the holders of its 
                        shares or certificates of beneficial interest 
                        on an annual basis.
                In determining whether the rules of a country meet the 
                criteria of a qualified foreign REIT, the Secretary 
                shall take into account non-statutory rules such as 
                stock exchange listing requirements as well as existing 
                practices resulting from market preferences, and may 
                take into account situations that in the judgment of 
                the Secretary present a significant opportunity for a 
                foreign REIT to generate an amount of income that is 
                not compatible with the principles underlying section 
                856(c)(3).''.

SEC. 502. DIVIDENDS FROM FOREIGN REITS.

    Section 856(c)(3)(D) is amended by inserting ``and in qualified 
foreign REITs'' after ``this part''.

                       TITLE VI--EFFECTIVE DATES

SEC. 601 EFFECTIVE DATES.

    (a) In General.--Except as otherwise provided in this section, the 
amendments made by this Act shall apply to taxable years beginning 
after the date of the enactment of this Act.
    (b) REIT Income Tests.--
            (1) The amendment made by section 101(a) and (b) shall 
        apply to gains and items of income recognized after the date of 
        the enactment of this Act.
            (2) The amendment made by section 101(c) shall apply to 
        transactions entered into after the date of the enactment of 
        this Act.
            (3) The amendment made by section 101(d) shall apply after 
        the date of the enactment of this Act.
    (c) Conforming Foreign Currency Revisions.--
            (1) The amendment made by section 103(a) shall apply to 
        gains recognized after the date of the enactment of this Act.
            (2) The amendment made by section 103(b) shall apply to 
        gains and deductions recognized after the date of the enactment 
        of this Act.
    (d) Dealer Sales.--The amendments made by Title III shall apply to 
sales made after the date of the enactment of this Act.
                                 <all>