[Congressional Record Volume 143, Number 82 (Thursday, June 12, 1997)]
[Senate]
[Pages S5611-S5614]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Baucus, and Mr. Mack, and Mr. 
        D'Amato):
  S. 898. A bill to amend the Internal Revenue Code of 1986 to simplify 
certain provisions applicable to real estate investment trusts; to the 
Committee on Finance.


          the real estate investment trust simplification act

  Mr. HATCH. Mr. President on behalf of myself and Senators Baucus, 
Mack, and D'Amato, I rise today to introduce the Real Estate Investment 
Trust Tax Simplification Act of 1997. This legislation would simplify 
and reform the tax law concerning Real Estate Investment Trusts 
[REITs]. Similar legislation has been introduced in the House by 
Representative E. Clay Shaw, Jr. along with many of our House 
colleagues.
  REIT's were designed to allow small investors to invest in large real 
estate projects that they otherwise could not afford, including 
apartment buildings, office buildings, shopping centers, malls, 
warehouses, etc. Real Estate Investment Trusts have become a very 
popular form of investment as indicated by the fact that the market 
capitalization in the whole industry has risen from $9 billion in 1991 
to over $100 billion today.
  Mr. President, if a REIT properly follows all of the rules, it is not 
normally taxed at the entity level, but passes through most items of 
income to the shareholders to report on their own individual tax 
returns. However, there are many minefields for the unwary that can 
inadvertently penalize investors and even the general public in some 
circumstances. This bill is designed to alleviate these complexities 
and uncertainties.
  Let me share with my colleagues an example of the difficulties facing 
small investors. Under the current rules, in order to gain the benefits 
of REIT taxation, the investment has to be passive in nature. Hence, 
the normal procedure is for the REIT to buy the underlying property and 
lease it out to tenants. However, the REIT must be careful not to 
provide directly to the tenants any services that are not customary in 
the real estate business. If this rule is violated, severe consequences 
can follow. For example, under a literal interpretation of the law, if 
a REIT that operates a retail mall provides wheelchairs to the 
customers of the retail tenants, or even assists the tenant in moving 
into its space, the entity's very status as a REIT could be placed in 
jeopardy. This is ridiculous and needs to be changed.
  Furthermore, current law imposes a tax on a REIT that retains capital 
gains and imposes a second level of tax on the REIT shareholders when 
they later receive the capital gain distribution. We need to make the 
changes necessary to help unsuspecting investors to avoid double 
taxation. This bill would adopt the corresponding mutual fund rules 
governing taxation of retained capital gains by passing through a 
credit to shareholders capital gains taxes paid at the corporate level. 
The bill would also conform a REIT's 95-percent annual distribution 
requirement to a mutual fund's 90-percent requirement.
  Mr. President, this bill also relaxes some of the current law's 
onerous penalties for failing to perform some recordkeeping 
requirements. Currently, a REIT could lose its favored tax status 
simply by failing to send out or receive back shareholder demand 
letters for the purpose of verifying the fact that no five or fewer 
parties own controlling interest in the REIT. So, even though

[[Page S5612]]

the REIT in fact meets this test, Mr. President, simply by failing to 
have on file sufficient shareholder letters substantiating this fact, 
all of the REIT shareholders could face the extremely harsh penalty of 
REIT disqualification and double taxation.

  Rather than penalizing the REIT so severely for this oversight, Mr. 
President, this bill would impose a $25,000 penalty for failing to 
comply with this requirement, if the failure is inadvertent in nature. 
The penalty would rise to $50,000 in the case of willful noncompliance. 
I believe my colleagues would agree that this approach makes much more 
sense than the current rules. It serves as an adequate incentive to 
keep the appropriate records without causing the unsuspecting, innocent 
investors severe and unnecessary tax penalties.
  Mr. President, this bill also addresses other problems that are 
detailed in the summary of the bill that I ask unanimous consent to be 
included in the Record after my remarks.
  I do not believe this bill is controversial. And, according to the 
Joint Committee on Taxation, it will have a negligible effect on 
revenues. It is also important to note that this bill is endorsed by 
the National Association of Real Estate Investment Trusts, which 
represents a high percentage of the REIT industry. Whenever we can do 
things to simplify the Tax Code without causing substantial revenue 
loss or negative policy consequences we should do it.
  Mr. President, this is an opportunity for us to do just that in the 
area of real estate investment trusts. I urge my colleagues on both 
sides of the aisle to join me in reforming and simplifying the tax law 
regarding this very difficult and complex area of the law.
  Mr. President, I ask unanimous consent that the text of the bill and 
a detailed summary of its provisions be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 898

       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 1997''.
       (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 
     adding ``and'' at the end of paragraph (1), 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 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 during such taxable year 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 511(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 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 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

[[Page S5613]]

     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 
     shareholder 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 shareholder 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 the tax 
     deemed paid by such shareholder in respect of such shares 
     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 interests, 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 the tax deemed paid by such shareholder in respect 
     of such shares under clause (ii).''

     SEC. 202. REDUCTION OF DISTRIBUTION REQUIREMENT.

       Clauses (i) and (ii) of section 857(a)(1)(A) are each 
     amended by striking ``95 percent (90 percent for taxable 
     years beginning before January 1, 1980)'' and inserting ``90 
     percent''.
                    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 and 
     subsection (a)(2)(B) 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) to the extent treated under subparagraph (A) as made 
     from accumulated earnings and profits, 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 such trust acquired such property'' and inserting ``as 
     of the close of the 3d taxable year following the taxable 
     year in which such 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 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 RULE 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 rule 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.--In the case of a qualified health care 
     property which is foreclosure property solely by reason of 
     subparagraph (A), in lieu of applying paragraphs (2) and 
     (3)--
       ``(i) 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, and
       ``(ii) if the real estate investment trust establishes to 
     the satisfaction of the Secretary that an extension of the 
     grace period in clause (i) is necessary to the orderly 
     leasing or liquidation of the trust's interest in such 
     qualified health care property, the Secretary may grant 1 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.
       ``(C) 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.
       ``(D) 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 health care facility, or
       ``(ii) is necessary or incidental to the use of a health 
     care facility.

     For purposes of the preceding sentence, the term `health care 
     facility' means a hospital, 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, 
     default, 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.''

     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 
     reduce the interest rate risks with respect to 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 
     instrument described in clause (i),

     shall be treated as income qualifying under paragraph (2).''

     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.

       (a) In General.--Clause (iii) of section 857(b)(6)(C) 
     (relating to certain sales not to constitute prohibited 
     transactions) is amended by striking ``(other than 
     foreclosure property)'' each place it appears and inserting 
     ``(other than exempt property)''.
       (b) Exempt Property.--Subparagraph (D) of section 857(b)(6) 
     is amended by adding at the end the following new clause:
       ``(viii) The term `exempt property' means--

       ``(I) foreclosure property, and
       ``(II) property which, while held by the real estate 
     investment trust, was compulsorily or involuntarily converted 
     (within the meaning of section 1033).''

     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:

[[Page S5614]]

       ``(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 
     striking ``gain'' each place it appears and inserting ``gain 
     or appreciation in value''.

     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.
                                  ____


                          Reit Tax Provisions

       The tax provisions in the Real Estate Investment Trust 
     Simplification Act (``REITSA'') fall within three broad 
     categories.
       1. Traps For The Unwary. First, current law disqualifies a 
     REIT that satisfies all required ownership tests but does not 
     follow certain administrative details relating to shareholder 
     demand letters. REITSA would replace the potential 
     disqualification with a reporting penalty imposed on a REIT's 
     failure to follow IRS notification rules.
       Second, REITSA would create a de minimis exception to 
     current law so that a REIT's rental income would not be 
     disqualified if it performs nominal, although impermissible, 
     services for a tenant.
       Third, REITSA would correct a technical ``glitch'' in which 
     stock ownership attribution may occur between unrelated 
     partners. The current constructive ownership rule results in 
     certain rents received by a REIT not qualifying for the REIT 
     income tests.
       2. Mutual Fund Conformity. First, current law taxes a REIT 
     that retains capital gains, and imposes a second level of the 
     tax on the REIT shareholders when later they receive the 
     capital gain distribution. REITSA would mirror the 
     corresponding mutual fund rules governing taxation of 
     retained capital gains by passing through a credit to 
     shareholders for capital gains taxes paid at the corporate 
     level.
       Second, REITSA would conform a REIT's 95% annual 
     distribution requirement to a mutual fund's 90% requirement.
       3. Other Simplification Measures. First, REITSA would make 
     a technical change to how a REIT computes its earnings & 
     profits (``E&P''). Since 1986, a REIT must distribute all 
     pre-REIT earnings and profits within its first REIT taxable 
     year or lose its REIT status. However, if a REIT has 
     unexpected year-end earnings, the normal ordering rules 
     governing E&P distributions create a substantial risk that a 
     new REIT may fail to distribute all of its pre-REIT E&P, 
     notwithstanding its good faith efforts to comply with the 
     distribution requirement. REITSA would correct the ordering 
     rules for accumulated E&P distributions to make it easier for 
     a new REIT to comply with the distribution requirement.
       Second, REITSA would simplify the administration of the 
     REIT foreclosure property rules by: (a) extending the time 
     period for the foreclosure election from 2 to 3 years; (b) 
     coordinating the foreclosure property independent contractor 
     rule with the primary independent contractor rule for REITs; 
     and (3) creating a more practical definition of independent 
     contractor for certain health care properties.
       Third, REITSA would update the current REIT hedging rule to 
     include income from all hedges of REIT liabilities.
       Fourth, REITSA would extend an exception to the current 95% 
     distribution rule to include other forms of phantom income, 
     e.g., income from the discharge of indebtedness.
       Fifth, REITSA would correct a problem in the wording of 
     Congress' past liberalization of the safe harbor from the 
     100% excise tax on prohibited transactions, i.e., sales of 
     property in the ordinary course of business. The proposal 
     would not count as a dealer sale property that is 
     involuntarily converted.
       Sixth, REITSA would create a safe harbor to the shared 
     appreciation mortgage (``SAM'') rules that would not penalize 
     a REIT lender for the borrower's bankruptcy. The proposal 
     also would clarify that SAMs could be based on appreciation 
     in value as well as gain.
       Last, REITSA would codify an IRS ruling position by 
     allowing a REIT to use a wholly-owned subsidiary to hold 
     property even if the subsidiary previously had been owned by 
     a non-REIT.
                                 ______