[Congressional Record Volume 152, Number 125 (Friday, September 29, 2006)]
[Senate]
[Pages S10732-S10735]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH:
  S. 4030. A bill to amend the Internal Revenue Code of 1986 to 
simplify certain provisions applicable to real estate investment 
trusts, and for other purposes; to the Committee on Finance.
  Mr. HATCH. Mr. President, I rise today to introduce the REIT 
Investment Diversification and Empowerment Act of 2006 (RIDEA). This 
legislation would make a handful of relatively minor, but nonetheless 
important, changes to the tax rules governing Real Estate Investment 
Trusts to permit REITs to better meet the challenges of evolving market 
conditions and opportunities.
  As most of my colleagues know, Real Estate Investment Trusts are 
companies that own, and in most cases, operate income-producing real 
estate. Congress created REITs in 1960 to give everyone the ability to 
invest in large-scale commercial properties in a very liquid way. The 
REIT industry has grown dramatically in size and importance to the U.S. 
economy since then, and in the last ten years in particular.
  While the tax laws governing REITs are very good, from time to time 
they need to be modified to keep pace with the changes in the 
marketplace and in our economy. I am pleased to have supported, along 
with many of my colleagues, several tax bills that have been enacted in 
the past decade or so to modernize the tax treatment of Real Estate 
Investment Trusts.
  Federal tax law requires that REITs meet specific tests regarding the 
composition of their gross income and assets. For example, 95 percent 
of their annual gross income must be from specified sources such as 
dividends, interests and rents, and 75 percent of their gross income 
must be from real estate-related sources. Similarly, at the end of each 
calendar quarter, 75 percent of a REIT's assets must consist of 
specified ``real estate'' assets. Consequently, REITs must derive a 
majority of their gross income from commercial real estate.
  Failure to meet these tests can result in loss of REIT status, 
although with the enactment of the REIT Improvement Act in 2004, it may 
be possible for a REIT to pay a monetary penalty and bring itself into 
compliance in order to avoid such a result if the REIT can demonstrate 
reasonable cause for such failure.
  Commercial real estate represents more than six percent of this 
country's gross domestic product and is a key generator of jobs and 
other economic activities. For example, REITs have invested over $1.2 
billion in my home State of Utah and have thus been a major contributor 
to our robust economy. Over the past 46 years, Real Estate Investment 
Trusts have fulfilled

[[Page S10733]]

Congress' vision by making investments in large scale, capital 
intensive commercial real estate available to all investors.
  Changes to the REIT rules that Congress has made in the past decade 
have allowed REITs to serve better their tenants while maximizing 
returns to REIT shareholders.
  The bill I introduce today would further modify the REIT tax rules to 
conform to constantly evolving business realities, such as the growing 
importance of cross-border trade and the increased velocity of the 
competitive marketplace, while still focusing REITs on commercial real 
estate activities.
  Specifically, the bill includes five titles.
  The first would clarify the tax treatment of foreign currency gains 
attributable to overseas real estate investment. This is important as 
U.S. REITs continue to expand their investments overseas.
  The second title would increase the permissible ownership of a REIT 
in a taxable REIT subsidiary to 25 percent from the current-law 20 
percent. This change would bring the REIT rules into conformity with 
similar rules governing mutual funds.
  Title III of the bill would update the safe harbor test for purposes 
of the 100 percent excise tax in relation to dealer sales. This would 
help REITs more prudently manage the timing and extent of their asset 
dispositions.
  The bill's fourth title would conform the tax treatment of health 
care facilities to that of lodging facilities by treating as qualifying 
income rental payments attributable to a health care facility made to a 
REIT from a taxable REIT subsidiary. This change would allow health 
care REITs more flexibility.
  Finally, the bill's fifth title would amend the REIT rules to provide 
that income from, and interests in, foreign-qualified REITs would be 
treated as qualifying REIT income and assets under the U.S. REIT rules 
under certain circumstances. This change is important because about 20 
countries have now enacted legislation that closely resembles our REIT 
rules, and many U.S. REITs may wish to invest in a non-U.S. REIT. This 
would allow them to do so with a minimum of complexity.
  I urge my colleagues to review this bill and lend their support to 
it. I realize that it is very late in the second session of the 109th 
Congress, and there is little time for us to consider newly-introduced 
tax bills. However, I hope to reintroduce this legislation in the next 
Congress if we do not get a chance to consider it this year.
  I ask unanimous consent that a section-by-section analysis of the 
REIT Investment Diversification and Empowerment Act and the text of the 
bill be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

      REIT Investment Diversification and Empowerment Act of 2006


                     Section-by-Section Description

       The REIT Investment Diversification and Empowerment Act of 
     2006 (RIDEA) includes the following provisions to help 
     modernize the tax rules governing Real Estate Investment 
     Trusts to permit REITs to better meet the challenges of 
     evolving market conditions and opportunities:
     Title I: Foreign Currency and Other Qualified Activities
       The Internal Revenue Service (IRS) has long recognized that 
     U.S. REITs can, and do, invest outside the U.S., essentially 
     recognizing that any income generated from REIT-permissible 
     sources outside of the U.S. should not jeopardize the REIT's 
     tax status. However, the treatment of foreign currency gains 
     directly attributable to overseas real estate investment is 
     not wholly clear, and its correct characterization is 
     becoming increasingly important as U.S. REITs strengthen 
     their positions in foreign markets.
       To ensure that foreign currency gains do not harm a REIT's 
     tax status, the IRS has provided a short-term solution by 
     allowing certain REITs to establish a subsidiary REIT in each 
     currency zone in which a REIT invests. However, the use of 
     subsidiary REITs, each of which must satisfy the complex 
     myriad of REIT rules or risk disqualification of the parent 
     REIT, is a cumbersome and unmanageable solution in the long 
     term. Accordingly, RIDEA would clarify existing law by 
     characterizing foreign currency gains generated by a REIT 
     outside the U.S. as ``good'' REIT income so long as the REIT 
     focuses on commercial real estate, as measured by specific 
     objective rules. Despite the IRS' authority to prescribe 
     similar rules, the absence of such guidance necessitates 
     legislative clarification to provide certainty to REIT 
     management and their shareholders within a more administrable 
     framework.
       RIDEA also would delegate to the IRS the express authority 
     to issue guidance with respect to whether any other item of 
     income should satisfy the REIT gross income tests or should 
     not be taken into account in calculating these tests. While 
     the IRS often has been willing to grant such rulings to 
     specific taxpayers, these rulings cannot be relied on by 
     other taxpayers and in any event do not cover all 
     circumstances.
       Thus, RIDEA would: (1) characterize foreign currency gains 
     attributable to a REIT's ownership and operation of overseas 
     real estate assets as qualifying income under REIT gross 
     income tests; (2) conform the current REIT hedging rule to 
     also apply to foreign currency gains and to apply those rules 
     for purposes of the REIT gross income tests under current 
     law; (3) specifically provide the Department of the 
     Treasury the authority to issue guidance on other items of 
     income to either qualify under the REIT gross income tests 
     or to provide that items of income are not taken into 
     account in computing those tests; (4) treat foreign 
     currency as a qualifying real estate asset; and (5) make 
     conforming changes to other REIT provisions reflecting 
     foreign currency gains.
     Title II: Taxable REIT Subsidiaries
       As originally introduced in 1999, the REIT Modernization 
     Act (RMA) limited a REIT's ownership in taxable REIT 
     subsidiaries (TRS) to 25 percent of a REIT's gross assets. 
     However, the limit was reduced to 20 percent when Congress 
     ultimately enacted the RMA as part of the Ticket to Work 
     Incentives Improvement Act of 1999.
       RIDEA would increase the limit on TRS securities from 20 
     percent to 25 percent of a REIT's gross assets. The rationale 
     for a 25 percent limit on TRSs that was contained in the RMA 
     remains the same today. The dividing line for testing a 
     concentration on commercial real estate in the REIT rules has 
     long been set at 25 percent, and even the mutual fund rule 
     uses a 25 percent test. An IRS study shows increasing amounts 
     of taxes paid by new TRSs, and common sense tells IUS that 
     permitting increased activities in a double tax regime should 
     increase revenues to the fisc compared to a single tax 
     regime.
     Title III: Dealer Sales
       The Internal Revenue Code imposes a 100 percent excise tax 
     on profits generated on sales of property in which a REIT is 
     acting as a dealer rather than an investor. Because of the 
     confiscatory nature of this 100 percent excise tax, the Code 
     provides a ``safe harbor'' under which a REIT can be assured 
     that the excise tax does not apply if it satisfies a number 
     of requirements. RIDEA would make two changes to the dealer 
     safe harbor.
       One requirement under current law is that the REIT not 
     either make seven sales in a taxable year or sell more than 
     10 percent of its portfolio each year. However, the test as 
     currently constructed penalizes many REITs that have owned 
     their properties for a long period of time. This is because 
     the test is geared to the property's ``tax basis,'' an amount 
     that diminishes over time due to tax depreciation, rather 
     than ``fair market value'', an amount that generally 
     increases over time. Second, the current test requires that a 
     REIT hold a property for at least four years, three years 
     longer than the general holding period required to 
     distinguish between an ``investor'' and a ``dealer'' in 
     property.
       RIDEA would update this safe harbor to test ``fair market'' 
     value instead of ``tax basis'' to allow REITs that have owned 
     their properties for longer periods not be penalized and 
     thereby prevented from prudently managing the timing and 
     extent of asset dispositions. As part of the REIT 
     Modernization Act of 1999, Congress adopted a provision that 
     utilizes fair market value rules for purposes of 
     calculating personal property rents associated with the 
     rental of real property. Thus, there is an analogous 
     precedent for a fair value approach.
       The safe harbor also would be amended to replace the 4-year 
     holding period with a 2-year holding period. The 4-year 
     requirement is not consistent with other Code provisions that 
     define whether property is held for long term investments, 
     such as the 1-year holding period to determine long-term 
     capital gains treatment, and the 2-year holding period to 
     distinguish whether the sale of a home is taxable because it 
     is held for investment purposes.
     Title IV: Health Care REITs
       Generally, rental payments made from a subsidiary owned by 
     a REIT to that REIT are not considered qualified rental 
     income for REIT purposes under the ``related party rules''. 
     However, as part of the REIT Modernization Act of 1999 (RMA), 
     a lodging REIT is allowed to establish a taxable REIT 
     subsidiary (TRS) that can lease lodging facilities from a 
     REIT holding a controlling interest, with the payments to the 
     REIT considered qualified income under the REIT rules. The 
     RMA also created a rule under which a TRS is not allowed to 
     operate or manage lodging or health care facilities.
       At the time the RMA was considered, it was not clear that 
     health care REITs would be interested in such treatment, so 
     health care facilities do not qualify for the RMA exception 
     to the related party rules. Today, many operators of health 
     care assets such as assisted living facilities do not want to 
     bear the financial risks of being a lessee of such facilities 
     and would rather act purely as an

[[Page S10734]]

     independent operator of the facilities. Health care REITs now 
     believe that the TRS restriction is interfering with their 
     ability to manage their operations in the most efficient 
     manner.
       RIDEA would conform the treatment of health care facilities 
     to that of lodging facilities by treating as qualifying 
     income rental payments attributable to a health care facility 
     made to a REIT from a taxable REIT subsidiary. Under this 
     proposal, a TRS would still be required to use an independent 
     contractor to manage or operate health care facilities, but 
     payments collected by a REIT from its TRS renting health care 
     facilities would be qualified income under the REIT tests.
     Title V: Foreign REITs
       Since imitation is the sincerest form of flattery, Congress 
     should be proud that about 20 countries have enacted 
     legislation paralleling the U.S. REIT rules after observing 
     the benefits brought to the United States as a result of a 
     vibrant REIT market. The number of countries that have 
     adopted REIT-like legislation this past decade has greatly 
     accelerated, with Israel being the latest country to do so 
     and legislation in the United Kingdom going into effect on 
     January 1, 2007. Although the tax code treats stock in a U.S. 
     REIT as a real estate asset, so that it is a qualified 
     asset that generates qualifying income, current law does 
     not afford the same treatment to the stock of non-U.S. 
     REITs.
       A U.S. REIT might want to invest in another country through 
     a REIT organized in that country. A company could lose its 
     status as a U.S. REIT if it owns more than 10 percent of the 
     foreign REIT's securities, even though the foreign company 
     looks and acts like a U.S. REIT. A REIT should not be 
     discouraged from investing in an entity that engages in the 
     same activities that a U.S. REIT is allowed to undertake if 
     it invests directly in another country.
       RIDEA would amend the REIT rules to provide that income 
     from, and interests in, foreign-qualified REITs would be 
     treated as qualifying REIT income and assets under the U.S. 
     REIT rules provided that under the laws of another country: 
     (1) at least 75 percent of the foreign company's assets must 
     be invested in real estate assets; (2) the foreign REIT 
     either receives a dividends paid deduction or is exempt from 
     corporate level tax; and (3) the foreign REIT is required to 
     distribute at least 85 percent of its taxable income to 
     shareholders on an annual basis.
                                  ____


                                S. 4030

       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 2006''.

     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),
       ``(ii) the acquisition or ownership of obligations secured 
     by mortgages on real property or on interests in real 
     property (other than foreign currency gains 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 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) 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) gains described under paragraph (1),
       ``(B) foreign currency gains (as defined in section 
     988(b)(1)) which are attributable to any item described in 
     subsection (c)(2) (other than those items includible under 
     subparagraph (A)), 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 paragraphs (2) and (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.--For purposes of this part, 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) and inserting ``real estate asset 
     (as defined in section 856(c)(5)(B) otherwise described in 
     section 1221(a)(1) if''.

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

       Subparagraphs (C)(iii)(II) and (D)(iv)(II) of section 
     857(b)(6) are each amended by striking ``the aggregate 
     adjusted bases'' and all that follows through ``the beginning 
     of the taxable year'' and inserting ``the fair market

[[Page S10735]]

     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.''.
       (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.''.

                         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.''.

     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 Hedging Rules.--The amendment made by section 
     101(c) shall apply to transactions entered into after the 
     date of the enactment of this Act.
                                 ______