[Congressional Record Volume 144, Number 36 (Thursday, March 26, 1998)]
[Extensions of Remarks]
[Pages E488-E489]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      INTRODUCTION OF LEGISLATION

                                 ______
                                 

                            HON. BILL ARCHER

                                of texas

                    in the house of representatives

                        Thursday, March 26, 1998

  Mr. ARCHER. Mr. Speaker, today, I introduce H.R. 3558, a bill to 
limit the tax benefits of so-called ``stapled'' or ``paired-share'' 
Real Estate Investment Trusts (``stapled REITs''). Identical 
legislation is being introduced in the Senate by Senator Roth.
  In the Deficit Reduction Act of 1984, Congress eliminated the tax 
benefits of the stapled REIT structure out of concern that it could 
effectively result in one level of tax on active corporate business 
income that would otherwise be subject to two levels of tax. Congress 
also believed that allowing a corporate business to be stapled to a 
REIT was inconsistent with the policy that led Congress to create 
REITs.
  As part of the 1984 Act provision, Congress provided grandfather 
relief to the small number of stapled REITs that were already in 
existence. Since 1984, however, almost all of the gandfathered stapled 
REITs have been acquired by new owners. Some have entered into new 
lines of businesses, and most of the grandfathered REITs have used the 
stapled structure to engage in large scale acquisitions of assets. Such 
unlimited relief from a general tax provision by a handful of taxpayers 
raises new questions not only of fairness, but of unfair competition 
because the stapled REITs are in direct competition with other 
companies that cannot use the benefits of the stapled structure.
  This legislation, which is a refinement of the proposal contained in 
the Clinton Administration's Revenue Proposals for fiscal year 1999, 
takes a moderate and fair approach. The legislation essentially 
subjects the grandfathered stapled REITs to rules similar to the 1984 
Act, but only to acquisitions of assets (or substantial improvements of 
existing assets) occurring after today. The legislation also provides 
transition relief for future acquisitions that are pursuant to a 
binding written contract, as well as acquisitions that already have 
been announced (or described in a filing with the SEC).
  A technical explanation of the legislation is provided below.

                         Technical Explanation

       The tax benefits of the stapled real estate investment 
     trust (``REIT'') structure were curtailed for almost all 
     taxpayers by section 269B, which was enacted by the Deficit 
     Reduction Act of 1984 (``1984 Act''). The bill limits the tax 
     benefits of a few stapled REITs that continue to qualify 
     under the 1984 Act's grandfather rule.
       A REIT is an entity that receives most of its income from 
     passive real-estate related investments and that essentially 
     receives pass-through treatment for income that is 
     distributed to shareholders. In general, a REIT must derive 
     its income from passive sources and not engage in any active 
     trade or business. In a stapled REIT structure, both the 
     shares of a REIT and a C corporation may be traded, and in 
     most cases publicly traded, but are subject to a provision 
     that they may not be sold separately. Thus, the REIT and the 
     C corporation have identical ownership at all times.
     Overview
       Under the bill, rules similar to the rules of present law 
     treating a REIT and all stapled entities as a single entity 
     for purposes of determining REIT status (sec. 269B) would 
     apply to real property interests acquired after March 26, 
     1998, by the existing stapled REIT, or by a stapled entity, 
     or a subsidiary or partnership in which a 10-percent or 
     greater interest is owned by the existing stapled REIT or 
     stapled entity (together referred to as the ``REIT group''), 
     unless the real property is grandfathered under the rules 
     discussed below. Different rules would be applied to certain 
     mortgage interests acquired by the REIT group after March 26, 
     1998, where a member of the REIT group performs services with 
     respect to the property secured by the mortgage.
     General rules
       The bill treats certain activities and gross income of a 
     REIT group with respect to real property interests held by 
     any member of the REIT group (and not grandfathered under the 
     rules described below) as activities and income of the REIT 
     for certain purposes. This treatment would apply for purposes 
     of certain provisions of the REIT rules that depend on the 
     REIT's gross income, including the requirement that 95 
     percent of a REIT's gross income be from passive sources (the 
     ``95-percent test'') and the requirement that 75 percent of a 
     REIT's gross income be from real estate sources (the ``75-
     percent test''). Thus, for example, where a stapled entity 
     earns gross income from operating a non-grandfathered real 
     property held by a member of the REIT group, such gross 
     income would be treated as income of the REIT, with the 
     result that either the 75-percent or 95-percent test might 
     not be met and REIT status might be lost.
       If a REIT or stapled entity owns, directly or indirectly, a 
     10-percent-or-greater interest in a subsidiary or partnership 
     that holds a real property interest, the above rules would 
     apply with respect to a proportionate part of the 
     subsidiary's or partnership's property, activities and gross 
     income. Thus, any real property acquired by such a subsidiary 
     or partnership that is not grandfathered under the rules 
     described below would be treated as held by the REIT in the 
     same proportion as the ownership interest in the entity. The 
     same proportion of the subsidiary's or partnership's gross 
     income from any real property interest (other than a 
     grandfathered property) held by it or another member of 
     the REIT group would be treated as income of the REIT. 
     Similar rules attributing the proportionate part of the 
     subsidiary's or partnership's real estate interests and 
     gross income would apply when a REIT or stapled entity 
     acquires a 10-percent-or-greater interest (or in the case 
     of a previously-owned entity, acquires an additional 
     interest) after March 26, 1998, with exceptions for 
     interests acquired pursuant to agreements or announcements 
     described below.
     Grandfathered properties
       Under the bill, there is an exception to the treatment of 
     activities and gross income of a stapled entity as activities 
     and gross income of the REIT for certain grandfathered 
     properties. Grandfathered properties generally are those 
     properties that had been acquired by a member of the REIT 
     group on or before March 26, 1998. In addition, grandfathered 
     properties include properties acquired by a member of the 
     REIT group after March 26, 1998, pursuant to a written 
     agreement which was binding on March 26, 1998, and all times 
     thereafter. Grandfathered properties also include certain 
     properties, the acquisition of which were described in a 
     public announcement or in a filing with the Securities and 
     Exchange Commission on or before March 26, 1998.
       In general, a property does not lose its status as a 
     grandfathered property by reason of a repair to, an 
     improvement of, or a lease of, a grandfathered property. On 
     the other hand, a property loses its status as a 
     grandfathered property under the bill to the extent that a 
     non-qualified expansion is made to an otherwise grandfathered 
     property. A non-qualified expansion is either (1) an 
     expansion beyond the boundaries of the land of the otherwise 
     grandfathered property or (2) an improvement of an otherwise 
     grandfathered property placed in service after December 31, 
     1999, which changes the use of the property and whose cost is 
     greater than 200 percent of (a) the undepreciated cost of the 
     property (prior to the improvement) or (b) in the case of 
     property acquired where there is a substituted basis, the 
     fair market value of the property on the date that the 
     property was acquired by the stapled entity or the REIT. A 
     non-qualified expansion could occur, for example, if a member 
     of the REIT group were to construct a building after December 
     31, 1999, on previously undeveloped raw land that had been 
     acquired on or before March 26, 1998. There is an exception 
     for improvements placed in service before January 1, 2004, 
     pursuant to a binding contract in effect on December 31, 
     1999, and at all times thereafter.
       If a stapled REIT is not stapled as of March 26, 1998, or 
     if it fails to qualify as a REIT as of such date or any time 
     thereafter, no properties of any member of the REIT group 
     would be treated as grandfathered properties, and thus the 
     general provisions of the bill described above would apply to 
     all properties held by the group.
     Mortgage rules
       Special rules would apply where a member of the REIT group 
     holds a mortgage (that is not an existing obligation under 
     the rules described below) that is secured by an interest in 
     real property, where a member of the REIT group engages in 
     certain activities with respect to that property. The 
     activities that would have this effect under the bill are 
     activities that would result in a type of income that is not 
     treated as counting toward the 75-percent and 95-percent 
     tests if they are performed by the REIT. In such cases, all 
     interest on the mortgage and all gross income received by a 
     member of the REIT group from the activity would be treated 
     as income of the REIT that does not count toward the 75-
     percent or 95-percent tests, with the result that REIT status 
     might be lost. In the case of a 10-percent-or-greater 
     partnership or subsidiary, a proportionate part of the 
     entity's mortgages, interest and gross income from activities 
     would be subject to the above rules.
       An exception to the above rules would be provided for 
     mortgage the interest on which does not exceed an arm's-
     length rate and which would be treated as interest for 
     purposes of the REIT rules (e.g., the 75-percent and 95-
     percent tests, above). An exception also would be available 
     for certain mortgages that are held on March 26, 1998, by an 
     entity that is a member of the REIT group. The exception for 
     existing mortgages would

[[Page E489]]

     cease to apply if the mortgage is refinanced and the 
     principal amount is increased in such refinancing.
     Other rules
       For a corporate subsidiary owned by a stapled entity, the 
     10-percent ownership test would be met if a stapled entity 
     owns, directly or indirectly, 10 percent or more of the 
     corporation's stock, by either vote or value. (The bill would 
     not apply to a stapled REIT's ownership of a corporate 
     subsidiary, although a stapled REIT would be subject to the 
     normal restrictions on a REIT's ownership of stock in a 
     corporation.) For interests in partnerships and other pass-
     through entities, the ownership test would be met if either 
     the REIT or a stapled entity owns, directly or indirectly, a 
     10-percent or greater interest.
       The Secretary of the Treasury would be given authority to 
     prescribe such guidance as may be necessary or appropriate to 
     carry out the purposes of the provision, including guidance 
     to prevent the double counting of income and to prevent 
     transactions that would avoid the purposes of the provision.

     

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