SECTION 1. TERMINATION OF EXCEPTION FOR CERTAIN REAL ESTATE INVESTMENT 
              TRUSTS FROM THE TREATMENT OF STAPLED ENTITIES.

    (a) In General.--Notwithstanding paragraph (3) of section 136(c) of 
the Tax Reform Act of 1984 (relating to stapled stock; stapled 
entities), the REIT gross income provisions shall be applied by 
treating the activities and gross income of members of the stapled REIT 
group properly allocable to any nonqualified real property interest 
held by the exempt REIT or any stapled entity which is a member of such 
group (or treated under subsection (c) as held by such REIT or stapled 
entity) as the activities and gross income of the exempt REIT in the 
same manner as if the exempt REIT and such group were 1 entity.
    (b) Nonqualified Real Property Interest.--For purposes of this 
section--
            (1) In general.--The term ``nonqualified real property 
        interest'' means, with respect to any exempt REIT, any interest 
        in real property acquired after March 26, 1998, by the exempt 
        REIT or any stapled entity.
            (2) Exception for binding contracts, etc.--Such term shall 
        not include any interest in real property acquired after March 
        26, 1998, by the exempt REIT or any stapled entity if--
                    (A) the acquisition is pursuant to a written 
                agreement which was binding on such date and at all 
                times thereafter on such REIT or stapled entity, or
                    (B) the acquisition is described on or before such 
                date in a public announcement or in a filing with the 
                Securities and Exchange Commission.
            (3) Improvements and leases.--
                    (A) In general.--Except as otherwise provided in 
                this paragraph, the term ``nonqualified real property 
                interest'' shall not include--
                            (i) any improvement to land owned or leased 
                        by the exempt REIT or any member of the stapled 
                        REIT group, and
                            (ii) any repair to, or improvement of, any 
                        improvement owned or leased by the exempt REIT 
                        or any member of the stapled REIT group,
                if such ownership or leasehold interest is a qualified 
                real property interest.
                    (B) Leases.--Such term shall not include any lease 
                of a qualified real property interest.
                    (C) Termination where change in use.--
                            (i) In general.--Subparagraph (A) shall not 
                        apply to any improvement placed in service 
                        after December 31, 1999, which is part of a 
                        change in the use of the property to which such 
                        improvement relates unless the cost of such 
                        improvement does not exceed 200 percent of--
                                    (I) the cost of such property, or
                                    (II) if such property is 
                                substituted basis property (as defined 
                                in section 7701(a)(42) of the Internal 
                                Revenue Code of 1986), the fair market 
                                value of the property at the time of 
                                acquisition.
                            (ii) Binding contracts.--For purposes of 
                        clause (i), an improvement shall be treated as 
                        placed in service before January 1, 2000, if 
                        such improvement is placed in service before 
                        January 1, 2004, pursuant to a binding contract 
                        in effect on December 31, 1999, and at all 
                        times thereafter.
            (4) Treatment of entities which are not stapled, etc. on 
        march 26, 1998.--Notwithstanding any other provision of this 
        section, all interests in real property held by an exempt REIT 
        or any stapled entity with respect to such REIT (or treated 
        under subsection (c) as held by such REIT or stapled entity) 
        shall be treated as nonqualified real property interests 
        unless--
                    (A) such stapled entity was a stapled entity with 
                respect to such REIT as of March 26, 1998, and at all 
                times thereafter, and
                    (B) as of March 26, 1998, and at all times 
                thereafter, such REIT was a real estate investment 
                trust.
            (5) Qualified real property interest.--The term ``qualified 
        real property interest'' means any interest in real property 
        other than a nonqualified real property interest.
    (c) Treatment of Property Held by 10-Percent Subsidiaries.--For 
purposes of this section--
            (1) In general.--Any exempt REIT and any stapled entity 
        shall be treated as holding their proportionate shares of each 
        interest in real property held by any 10-percent subsidiary 
        entity of the exempt REIT or stapled entity, as the case may 
        be.
            (2) Property held by 10-percent subsidiaries treated as 
        nonqualified.--
                    (A) In general.--Except as provided in subparagraph 
                (B), any interest in real property held by a 10-percent 
                subsidiary entity of an exempt REIT or stapled entity 
                shall be treated as a nonqualified real property 
                interest.
                    (B) Exception for interests in real property held 
                on march 26, 1998, etc.--In the case of an entity which 
                was a 10-percent subsidiary entity of an exempt REIT or 
                stapled entity on March 26, 1998, and at all times 
                thereafter, an interest in real property held by such 
                subsidiary entity shall be treated as a qualified real 
                property interest if such interest would be so treated 
                if held directly by the exempt REIT or the stapled 
                entity.
            (3) Reduction in qualified real property interests if 
        increase in ownership of subsidiary.--If, after March 26, 1998, 
        an exempt REIT or stapled entity increases its ownership 
        interest in a subsidiary entity to which paragraph (2)(B) 
        applies above its ownership interest in such subsidiary entity 
        as of such date, the additional portion of each interest in 
        real property which is treated as held by the exempt REIT or 
        stapled entity by reason of such increased ownership shall be 
        treated as a nonqualified real property interest.
            (4) Special rules for determining ownership.--For purposes 
        of this subsection--
                    (A) percentage ownership of an entity shall be 
                determined in accordance with subsection (e)(4),
                    (B) interests in the entity which are acquired by 
                the exempt REIT or stapled entity in any acquisition 
                described in an agreement, announcement, or filing 
                described in subsection (b)(2) shall be treated as 
                acquired on March 26, 1998, and
                    (C) except as provided in guidance prescribed by 
                the Secretary, any change in proportionate ownership 
                which is attributable solely to fluctuations in the 
                relative fair market values of different classes of 
                stock shall not be taken into account.
    (d) Treatment of Property Secured by Mortgage Held by Exempt REIT 
or Member of Stapled REIT Group.--
            (1) In general.--In the case of any nonqualified obligation 
        held by an exempt REIT or any member of the stapled REIT group, 
        the REIT gross income provisions shall be applied by treating 
        the exempt REIT as having impermissible tenant service income 
        equal to--
                    (A) the interest income from such obligation which 
                is properly allocable to the property described in 
                paragraph (2), and
                    (B) the income of any member of the stapled REIT 
                group from services described in paragraph (2) with 
                respect to such property.
        If the income referred to in subparagraph (A) or (B) is of a 
        10-percent subsidiary entity, only the portion of such income 
        which is properly allocable to the exempt REIT's or the stapled 
        entity's interest in the subsidiary entity shall be taken into 
        account.
            (2) Nonqualified obligation.--Except as otherwise provided 
        in this subsection, the term ``nonqualified obligation'' means 
        any obligation secured by a mortgage on an interest in real 
        property if the income of any member of the stapled REIT group 
        for services furnished with respect to such property would be 
        impermissible tenant service income were such property held by 
        the exempt REIT and such services furnished by the exempt REIT.
            (3) Exception for certain market rate obligations.--Such 
        term shall not include any obligation--
                    (A) payments under which would be treated as 
                interest if received by a REIT, and
                    (B) the rate of interest on which does not exceed 
                an arm's length rate.
            (4) Exception for existing obligations.--Such term shall 
        not include any obligation--
                    (A) which is secured on March 26, 1998, by an 
                interest in real property, and
                    (B) which is held on such date by the exempt REIT 
                or any entity which is a member of the stapled REIT 
                group on such date and at all times thereafter,
        but only so long as such obligation is secured by such 
        interest. The preceding sentence shall not cease to apply by 
        reason of the refinancing of the obligation if (immediately 
        after the refinancing) the principal amount of the obligation 
        resulting from the refinancing does not exceed the principal 
        amount of the refinanced obligation (immediately before the 
        refinancing).
            (5) Treatment of entities which are not stapled, etc. on 
        march 26, 1998.--A rule similar to the rule of subsection 
        (b)(4) shall apply for purposes of this subsection.
            (6) Increase in amount of nonqualified obligations if 
        increase in ownership of subsidiary.--A rule similar to the 
        rule of subsection (c)(3) shall apply for purposes of this 
        subsection.
            (7) Coordination with subsection (a).--This subsection 
        shall not apply to the portion of any interest in real property 
        that the exempt REIT or stapled entity holds or is treated as 
        holding under this section without regard to this subsection.
    (e) Definitions.--For purposes of this section--
            (1) REIT gross income provisions.--The term ``REIT gross 
        income provisions'' means--
                    (A) paragraphs (2), (3), and (6) of section 856(c) 
                of the Internal Revenue Code of 1986, and
                    (B) section 857(b)(5) of such Code.
            (2) Exempt reit.--The term ``exempt REIT'' means a real 
        estate investment trust to which section 269B of the Internal 
        Revenue Code of 1986 does not apply by reason of paragraph (3) 
        of section 136(c) of the Tax Reform Act of 1984.
            (3) Stapled reit group.--The term ``stapled REIT group'' 
        means, with respect to an exempt REIT, the group consisting 
        of--
                    (A) all entities which are stapled entities with 
                respect to the exempt REIT, and
                    (B) all entities which are 10-percent subsidiary 
                entities of the exempt REIT or any such stapled entity.
            (4) 10-percent subsidiary entity.--
                    (A) In general.--The term ``10-percent subsidiary 
                entity'' means, with respect to any exempt REIT or 
                stapled entity, any entity in which the exempt REIT or 
                stapled entity (as the case may be) directly or 
                indirectly holds at least a 10-percent interest.
                    (B) Exception for certain c corporation 
                subsidiaries of reits.--A corporation which would, but 
                for this subparagraph, be treated as a 10-percent 
                subsidiary of an exempt REIT shall not be so treated if 
                such corporation is taxable under section 11 of the 
                Internal Revenue Code of 1986.
                    (C) 10-percent interest.--The term ``10-percent 
                interest'' means--
                            (i) in the case of an interest in a 
                        corporation, ownership of 10 percent (by vote 
                        or value) of the stock in such corporation,
                            (ii) in the case of an interest in a 
                        partnership, ownership of 10 percent of the 
                        assets or net profits interest in the 
                        partnership, and
                            (iii) in any other case, ownership of 10 
                        percent of the beneficial interests in the 
                        entity.
            (5) Other definitions.--Terms used in this section which 
        are used in section 269B or section 856 of such Code shall have 
        the respective meanings given such terms by such section.
    (f) Guidance.--The Secretary may prescribe such guidance as may be 
necessary or appropriate to carry out the purposes of this section, 
including guidance to prevent the avoidance of such purposes and to 
prevent the double counting of income.
    (g) Effective Date.--This section shall apply to taxable years 
ending after March 26, 1998.
Amends the Tax Reform Act of 1984 to provide for the termination of the exception for certain real estate investment trusts from the treatment of stapled entities.
A bill to provide that the exception for certain real estate investment trusts from the treatment of stapled entities shall apply only to existing property, and for other purposes.