II

106TH CONGRESS

1ST SESSION S. 1057

To amend the Internal Revenue Code of 1986 to simplify certain provisions

applicable to real estate investment trusts.

IN THE SENATE OF THE UNITED STATES

MAY 14, 1999

Mr. MACK (for himself, Mr. GRAHAM, Mr. HATCH, Mr. CONRAD, Mr.

NICKLES, Mr. KERREY, Mr. GRAMM, Mr. BRYAN, Mr. CHAFEE, Mr.

BAUCUS, Mr. MURKOWSKI, Mr. BREAUX, Mr. JEFFORDS, Mr. ROBB, Mr.

COVERDELL, Mr. ROCKEFELLER, Mr. HELMS, Mr. TORRICELLI, and

Mrs. HUTCHISON) 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.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Real Estate Investment Trust Modernization Act of

6 1999’’.

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend-
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1 ment or repeal is expressed in terms of an amendment

2 to, or repeal of, a section or other provision, the reference

3 shall be considered to be made to a section or other provi4 sion of the Internal Revenue Code of 1986.

5 TITLE I—TREATMENT OF IN6 COME AND SERVICES PRO7 VIDED BY TAXABLE REIT SUB8 SIDIARIES

9 SEC. 101. MODIFICATIONS TO ASSET DIVERSIFICATION

10 TEST.

11 Subparagraph (B) of section 856(c)(4) is amended

12 to read as follows:

13 ‘‘(B)(i) not more than 25 percent of the

14 value of its total assets is represented by securi15 ties (other than those includible under subpara16 graph (A)), and

17 ‘‘(ii) except with respect to a taxable REIT

18 subsidiary and securities includible under sub19 paragraph (A)—

20 ‘‘(I) not more than 5 percent of the

21 value of its total assets is represented by

22 securities of any 1 issuer,

23 ‘‘(II) the trust does not hold securities

24 possessing more than 10 percent of the
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1 total voting power of the outstanding secu2 rities of any 1 issuer, and

3 ‘‘(III) the trust does not hold securi4 ties having a value of more than 10 per5 cent of the total value of the outstanding

6 securities of any 1 issuer.’’

7 SEC. 102. TREATMENT OF INCOME AND SERVICES PRO8 VIDED BY TAXABLE REIT SUBSIDIARIES.

9 (a) INCOME FROM TAXABLE REIT SUBSIDIARIES

10 NOT TREATED AS IMPERMISSIBLE TENANT SERVICE IN11 COME.—Clause (i) of section 856(d)(7)(C) (relating to ex12 ceptions to impermissible tenant service income) is amend13 ed by inserting ‘‘or through a taxable REIT subsidiary

14 of such trust’’ after ‘‘income’’.

15 (b) CERTAIN INCOME FROM TAXABLE REIT SUB16 SIDIARIES NOT EXCLUDED FROM RENTS FROM REAL

17 PROPERTY.—

18 (1) IN GENERAL.—Subsection (d) of section

19 856 (relating to rents from real property defined) is

20 amended by adding at the end the following new

21 paragraphs:

22 ‘‘(8) SPECIAL RULE FOR TAXABLE REIT SUB23 SIDIARIES.—For purposes of this subsection,

24 amounts paid to a real estate investment trust by a

25 taxable REIT subsidiary of such trust shall not be
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1 excluded from rents from real property by reason of

2 paragraph (2)(B) if the requirements of subpara3 graph (A) or (B) are met.

4 ‘‘(A) LIMITED RENTAL EXCEPTION.—The

5 requirements of this subparagraph are met with

6 respect to any property if at least 90 percent of

7 the leased space of the property is rented to

8 persons other than taxable REIT subsidiaries of

9 such trust and other than persons described in

10 section 856(d)(2)(B). The preceding sentence

11 shall apply only to the extent that the amounts

12 paid to the trust as rents from real property (as

13 defined in paragraph (1) without regard to

14 paragraph (2)(B)) from such property are sub15 stantially comparable to such rents made by the

16 other tenants of the trust’s property for com17 parable space.

18 ‘‘(B) EXCEPTION FOR CERTAIN LODGING

19 FACILITIES.—The requirements of this subpara20 graph are met with respect to an interest in

21 real property which is a qualified lodging facil22 ity leased by the trust to a taxable REIT sub23 sidiary of the trust if the property is operated

24 on behalf of such subsidiary by a person who is

25 an eligible independent contractor.
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1 ‘‘(9) ELIGIBLE INDEPENDENT CONTRACTOR.—

2 For purposes of paragraph (8)(B)—

3 ‘‘(A) IN GENERAL.—The term ‘eligible

4 independent contractor’ means, with respect to

5 any qualified lodging facility, any independent

6 contractor if, at the time such contractor enters

7 into a management agreement or other similar

8 service contract with the taxable REIT sub9 sidiary to operate the facility, such contractor

10 (or any related person) is actively engaged in

11 the trade or business of operating qualified

12 lodging facilities for any person who is not a re13 lated person with respect to the real estate in14 vestment trust or the taxable REIT subsidiary.

15 ‘‘(B) SPECIAL RULES.—Solely for purposes

16 of this paragraph and paragraph (8)(B), a per17 son shall not fail to be treated as an inde18 pendent contractor with respect to any qualified

19 lodging facility by reason of any of the fol20 lowing:

21 ‘‘(i) The taxable REIT subsidiary

22 bears the expenses for the operation of the

23 facility pursuant to the management agree24 ment or other similar service contract.
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1 ‘‘(ii) The taxable REIT subsidiary re2 ceives the revenues from the operation of

3 such facility, net of expenses for such oper4 ation and fees payable to the operator pur5 suant to such agreement or contract.

6 ‘‘(iii) The real estate investment trust

7 receives income from such person with re8 spect to another property that is attrib9 utable to a lease of such other property to

10 such person that was in effect as on the

11 later of—

12 ‘‘(I) January 1, 1999, or

13 ‘‘(II) the earliest date that any

14 taxable REIT subsidiary of such trust

15 entered into a management agreement

16 or other similar service contract with

17 such person with respect to such

18 qualified lodging facility.

19 ‘‘(C) RENEWALS, ETC., OF EXISTING

20 LEASES.—For purposes of subparagraph

21 (B)(iii)—

22 ‘‘(i) a lease shall be treated as in ef23 fect on January 1, 1999, without regard to

24 its renewal after such date, so long as such

25 renewal is pursuant to the terms of such
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1 lease as in effect on whichever of the dates

2 under subparagraph (B)(iii) is the latest,

3 and

4 ‘‘(ii) a lease of a property entered into

5 after whichever of the dates under sub6 paragraph (B)(iii) is the latest shall be

7 treated as in effect on such date if—

8 ‘‘(I) on such date, a lease of such

9 property from the trust was in effect,

10 and

11 ‘‘(II) under the terms of the new

12 lease, such trust receives a substan13 tially similar or lesser benefit in com14 parison to the lease referred to in sub15 clause (I).

16 ‘‘(D) QUALIFIED LODGING FACILITY.—For

17 purposes of this paragraph—

18 ‘‘(i) IN GENERAL.—The term ‘quali19 fied lodging facility’ means any lodging fa20 cility unless wagering activities are con21 ducted at or in connection with such facil22 ity by any person who is engaged in the

23 business of accepting wagers and who is le24 gally authorized to engage in such business

25 at or in connection with such facility.
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1 ‘‘(ii) LODGING FACILITY.—The term

2 ‘lodging facility’ means a hotel, motel, or

3 other establishment more than one-half of

4 the dwelling units in which are used on a

5 transient basis.

6 ‘‘(iii) CUSTOMARY AMENITIES AND FA7 CILITIES.—The term ‘lodging facility’ in8 cludes customary amenities and facilities

9 operated as part of, or associated with, the

10 lodging facility so long as such amenities

11 and facilities are customary for other prop12 erties of a comparable size and class owned

13 by other owners unrelated to such real es14 tate investment trust.

15 ‘‘(E) OPERATE INCLUDES MANAGE.—Ref16 erences in this paragraph to operating a prop17 erty shall be treated as including a reference to

18 managing the property.

19 ‘‘(F) RELATED PERSON.—Persons shall be

20 treated as related to each other if such persons

21 are treated as a single employer under sub22 section (a) or (b) of section 52.’’.

23 (2) CONFORMING AMENDMENT.—Subparagraph

24 (B) of section 856(d)(2) is amended by inserting

25 ‘‘except as provided in paragraph (8),’’ after ‘‘(B)’’.
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1 SEC. 103. TAXABLE REIT SUBSIDIARY.

2 (a) IN GENERAL.—Section 856 is amended by adding

3 at the end the following new subsection:

4 ‘‘(l) TAXABLE REIT SUBSIDIARY.—For purposes of

5 this part—

6 ‘‘(1) IN GENERAL.—The term ‘taxable REIT

7 subsidiary’ means, with respect to a real estate in8 vestment trust, a corporation (other than a real es9 tate investment trust) if—

10 ‘‘(A) such trust directly or indirectly owns

11 stock in such corporation, and

12 ‘‘(B) such trust and such corporation joint13 ly elect that such corporation shall be treated as

14 a taxable REIT subsidiary of such trust for

15 purposes of this part.

16 Such an election, once made, shall be irrevocable un17 less both such trust and corporation consent to its

18 revocation. Such election, and any revocation there19 of, may be made without the consent of the Sec20 retary.

21 ‘‘(2) 35 PERCENT OWNERSHIP IN ANOTHER

22 TAXABLE REIT SUBSIDIARY.—The term ‘taxable

23 REIT subsidiary’ includes, with respect to any real

24 estate investment trust, any corporation (other than

25 a real estate investment trust) with respect to which
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1 a taxable REIT subsidiary of such trust owns di2 rectly or indirectly—

3 ‘‘(A) securities possessing more than 35

4 percent of the total voting power of the out5 standing securities of such corporation, or

6 ‘‘(B) securities having a value of more

7 than 35 percent of the total value of the out8 standing securities of such corporation.

9 The preceding sentence shall not apply to a qualified

10 REIT subsidiary (as defined in subsection (i)(2)).

11 ‘‘(3) EXCEPTIONS.—The term ‘taxable REIT

12 subsidiary’ shall not include—

13 ‘‘(A) any corporation which directly or in14 directly operates or manages a lodging facility

15 or a health care facility, and

16 ‘‘(B) any corporation which directly or in17 directly provides to any other person (under a

18 franchise, license, or otherwise) rights to any

19 brand name under which any lodging facility or

20 health care facility is operated.

21 Subparagraph (B) shall not apply to rights provided

22 to an eligible independent contractor to operate or

23 manage a lodging facility if such rights are held by

24 such corporation as a franchisee, licensee, or in a

25 similar capacity and such lodging facility is either
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1 owned by such corporation or is leased to such cor2 poration from the real estate investment trust.

3 ‘‘(4) DEFINITIONS.—For purposes of paragraph

4 (3)—

5 ‘‘(A) LODGING FACILITY.—The term ‘lodg6 ing facility’ has the meaning given to such term

7 by paragraph (9)(D)(ii).

8 ‘‘(B) HEALTH CARE FACILITY.—The term

9 ‘health care facility’ has the meaning given to

10 such term by subsection (e)(6)(D)(ii).’’.

11 (b) CONFORMING AMENDMENT.—Paragraph (2) of

12 section 856(i) is amended by adding at the end the fol13 lowing new sentence: ‘‘Such term shall not include a tax14 able REIT subsidiary.’’

15 SEC. 104. LIMITATION ON EARNINGS STRIPPING.

16 Paragraph (3) of section 163(j) (relating to limitation

17 on deduction for interest on certain indebtedness) is

18 amended by striking ‘‘and’’ at the end of subparagraph

19 (A), by striking the period at the end of subparagraph

20 (B) and inserting ‘‘, and’’, and by adding at the end the

21 following new subparagraph:

22 ‘‘(C) any interest paid or accrued (directly

23 or indirectly) by a taxable REIT subsidiary (as

24 defined in section 856(l)) of a real estate invest25 ment trust to such trust.’’.
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1 SEC. 105. 100 PERCENT TAX ON IMPROPERLY ALLOCATED

2 AMOUNTS.

3 (a) IN GENERAL.—Subsection (b) of section 857 (re4 lating to method of taxation of real estate investment

5 trusts and holders of shares or certificates of beneficial

6 interest) is amended by redesignating paragraphs (7) and

7 (8) as paragraphs (8) and (9), respectively, and by insert8 ing after paragraph (6) the following new paragraph:

9 ‘‘(7) INCOME FROM REDETERMINED RENTS, RE10 DETERMINED DEDUCTIONS, AND EXCESS INTER11 EST.—

12 ‘‘(A) IMPOSITION OF TAX.—There is here13 by imposed for each taxable year of the real es14 tate investment trust a tax equal to 100 percent

15 of redetermined rents, redetermined deductions,

16 and excess interest.

17 ‘‘(B) REDETERMINED RENTS.—

18 ‘‘(i) IN GENERAL.—The term ‘redeter19 mined rents’ means rents from real prop20 erty (as defined in subsection 856(d)) the

21 amount of which would (but for subpara22 graph (E)) be reduced on distribution, ap23 portionment, or allocation under section

24 482 to clearly reflect income as a result of

25 services furnished or rendered by a taxable
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1 REIT subsidiary of the real estate invest2 ment trust to a tenant of such trust.

3 ‘‘(ii) EXCEPTION FOR CERTAIN SERV4 ICES.—Clause (i) shall not apply to

5 amounts received directly or indirectly by a

6 real estate investment trust for services de7 scribed in paragraph (1)(B) or (7)(C)(i) of

8 section 856(d).

9 ‘‘(iii) EXCEPTION FOR DE MINIMIS

10 AMOUNTS.—Clause (i) shall not apply to

11 amounts described in section 856(d)(7)(A)

12 with respect to a property to the extent

13 such amounts do not exceed the one per14 cent threshold described in section

15 856(d)(7)(B) with respect to such prop16 erty.

17 ‘‘(iv) EXCEPTION FOR COMPARABLY

18 PRICED SERVICES.—Clause (i) shall not

19 apply to any service rendered by a taxable

20 REIT subsidiary of a real estate invest21 ment trust to a tenant of such trust if—

22 ‘‘(I) such subsidiary renders a

23 significant amount of similar services

24 to persons other than such trust and

25 tenants of such trust who are unre-
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1 lated (within the meaning of section

2 856(d)(8)(F)) to such subsidiary,

3 trust, and tenants, but

4 ‘‘(II) only to the extent the

5 charge for such service so rendered is

6 substantially comparable to the charge

7 for the similar services rendered to

8 persons referred to in subclause (I).

9 ‘‘(v) EXCEPTION FOR CERTAIN SEPA10 RATELY CHARGED SERVICES.—Clause (i)

11 shall not apply to any service rendered by

12 a taxable REIT subsidiary of a real estate

13 investment trust to a tenant of such trust

14 if—

15 ‘‘(I) the rents paid to the trust

16 by tenants (leasing at least 25 percent

17 of the net leasable space in the trust’s

18 property) who are not receiving such

19 service from such subsidiary are sub20 stantially comparable to the rents

21 paid by tenants leasing comparable

22 space who are receiving such service

23 from such subsidiary, and
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1 ‘‘(II) the charge for such service

2 from such subsidiary is separately

3 stated.

4 ‘‘(vi) EXCEPTION FOR CERTAIN SERV5 ICES BASED ON SUBSIDIARY’S INCOME

6 FROM THE SERVICES.—Clause (i) shall not

7 apply to any service rendered by a taxable

8 REIT subsidiary of a real estate invest9 ment trust to a tenant of such trust if the

10 gross income of such subsidiary from such

11 service is not less than 150 percent of such

12 subsidiary’s direct cost in furnishing or

13 rendering the service.

14 ‘‘(vii) EXCEPTIONS GRANTED BY SEC15 RETARY.—The Secretary may waive the

16 tax otherwise imposed by subparagraph

17 (A) if the trust establishes to the satisfac18 tion of the Secretary that rents charged to

19 tenants were established on an arms’

20 length basis even though a taxable REIT

21 subsidiary of the trust provided services to

22 such tenants.

23 ‘‘(viii) NO INFERENCE WITH RESPECT

24 TO RENTS NOT WITHIN EXCEPTIONS.—In

25 determining whether rents are subject to
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1 reduction upon distribution, apportion2 ment, or allocation under section 482 for

3 purposes of subparagraph (B), the fact

4 that rents from real property do not meet

5 the requirements of clauses (ii) through

6 (vii) shall not be taken into account; and

7 such determination, in the case of rents

8 not meeting such requirements, shall be

9 made as if such clauses had not been en10 acted.

11 ‘‘(ix) NO INFERENCE AS TO WHETHER

12 REDETERMINED RENT IS RENT FROM REAL

13 PROPERTY.—Rent received by a real estate

14 investment trust shall not fail to qualify as

15 rents from real property under section

16 856(d) by reason of the fact that all or any

17 portion of such rent is determined to be re18 determined rent.

19 ‘‘(C) REDETERMINED DEDUCTIONS.—The

20 term ‘redetermined deductions’ means deduc21 tions (other than redetermined rents) of a tax22 able REIT subsidiary of a real estate invest23 ment trust if the amount of such deductions

24 would (but for subparagraph (E)) be increased

25 on distribution, apportionment, or allocation
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1 under section 482 to clearly reflect income as

2 between such subsidiary and such trust.

3 ‘‘(D) EXCESS INTEREST.—The term ‘ex4 cess interest’ means any deductions for interest

5 payments by a taxable REIT subsidiary of a

6 real estate investment trust to such trust to the

7 extent that the interest payments are in excess

8 of a rate that is commercially reasonable.

9 ‘‘(E) COORDINATION WITH SECTION 482.—

10 The imposition of tax under subparagraph (A)

11 shall be in lieu of any distribution, apportion12 ment, or allocation under section 482.

13 ‘‘(F) REGULATORY AUTHORITY.—The Sec14 retary shall prescribe such regulations as may

15 be necessary or appropriate to carry out the

16 purposes of this paragraph. Until the Secretary

17 prescribes such regulations, real estate invest18 ment trusts and their taxable REIT subsidi19 aries may base their allocations on any reason20 able method.’’.

21 (b) AMOUNT SUBJECT TO TAX NOT REQUIRED TO

22 BE DISTRIBUTED.—Subparagraph (E) of section

23 857(b)(2) (relating to real estate investment trust taxable

24 income) is amended by striking ‘‘paragraph (5)’’ and in25 serting ‘‘paragraphs (5) and (7)’’.
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1 SEC. 106. EFFECTIVE DATE.

2 (a) IN GENERAL.—The amendments made by this

3 title shall apply to taxable years beginning after the date

4 of enactment of this Act.

5 (b) TRANSITIONAL RULES RELATED TO SECTION

6 101.—

7 (1) EXISTING ARRANGEMENTS.—

8 (A) IN GENERAL.—Except as otherwise

9 provided in this paragraph, the amendment

10 made by section 101 shall not apply to a real

11 estate investment trust with respect to—

12 (i) securities of a corporation held di13 rectly or indirectly by such trust on April

14 28, 1999,

15 (ii) securities received by such trust

16 (or a successor) in exchange for, or with

17 respect to, securities described in clause (i)

18 in a transaction in which gain or loss is

19 not recognized, and

20 (iii) securities acquired directly or in21 directly by such trust as part of a reorga22 nization (as defined in section 368(a)(1) of

23 the Internal Revenue Code of 1986) with

24 respect to such trust if such securities are

25 described in clause (i) or (ii) with respect

26 to any other real estate investment trust.
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1 (B) NEW TRADE OR BUSINESS OR SUB2 STANTIAL NEW ASSETS.—Subparagraph (A)

3 shall cease to apply to securities of a corpora4 tion as of the first day after April 28, 1999, on

5 which such corporation engages in a substantial

6 new line of business, or acquires any substantial

7 asset, other than—

8 (i) pursuant to a binding contract in

9 effect on such date and at all times there10 after before the acquisition of such asset,

11 (ii) in a transaction in which gain or

12 loss is not recognized by reason of section

13 1031 or 1033 of the Internal Revenue

14 Code of 1986, or

15 (iii) in a reorganization (as so de16 fined) with another corporation the securi17 ties of which are described in paragraph

18 (1)(A) of this subsection.

19 (2) TAX-FREE CONVERSION.—If—

20 (A) at the time of an election for a cor21 poration to become a taxable REIT subsidiary,

22 the amendment made by section 101 does not

23 apply to such corporation by reason of para24 graph (1), and
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1 (B) such election first takes effect during

2 the 3-year period beginning on the date of the

3 enactment of this Act,

4 such election shall be treated as a reorganization

5 qualifying under section 368(a)(1)(A) of such Code.

6 TITLE II—HEALTH CARE REITS

7 SEC. 201. HEALTH CARE REITS.

8 (a) SPECIAL FORECLOSURE RULE FOR HEALTH

9 CARE PROPERTIES.—Subsection (e) of section 856 (relat10 ing to special rules for foreclosure property) is amended

11 by adding at the end the following new paragraph:

12 ‘‘(6) SPECIAL RULE FOR QUALIFIED HEALTH

13 CARE PROPERTIES.—For purposes of this

14 subsection—

15 ‘‘(A) ACQUISITION AT EXPIRATION OF

16 LEASE.—The term ‘foreclosure property’ shall

17 include any qualified health care property ac18 quired by a real estate investment trust as the

19 result of the termination of a lease of such

20 property (other than a termination by reason of

21 a default, or the imminence of a default, on the

22 lease).

23 ‘‘(B) GRACE PERIOD.—In the case of a

24 qualified health care property which is fore25 closure property solely by reason of subpara-
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1 graph (A), in lieu of applying paragraphs (2)

2 and (3)—

3 ‘‘(i) the qualified health care property

4 shall cease to be foreclosure property as of

5 the close of the second taxable year after

6 the taxable year in which such trust ac7 quired such property, and

8 ‘‘(ii) if the real estate investment

9 trust establishes to the satisfaction of the

10 Secretary that an extension of the grace

11 period in clause (i) is necessary to the or12 derly leasing or liquidation of the trust’s

13 interest in such qualified health care prop14 erty, the Secretary may grant 1 or more

15 extensions of the grace period for such

16 qualified health care property.

17 Any such extension shall not extend the grace

18 period beyond the close of the 6th year after

19 the taxable year in which such trust acquired

20 such qualified health care property.

21 ‘‘(C) INCOME FROM INDEPENDENT CON22 TRACTORS.—For purposes of applying para23 graph (4)(C) with respect to qualified health

24 care property which is foreclosure property by

25 reason of subparagraph (A) or paragraph (1),
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1 income derived or received by the trust from an

2 independent contractor shall be disregarded to

3 the extent such income is attributable to—

4 ‘‘(i) any lease of property in effect on

5 the date the real estate investment trust

6 acquired the qualified health care property

7 (without regard to its renewal after such

8 date so long as such renewal is pursuant to

9 the terms of such lease as in effect on such

10 date), or

11 ‘‘(ii) any lease of property entered

12 into after such date if—

13 ‘‘(I) on such date, a lease of such

14 property from the trust was in effect,

15 and

16 ‘‘(II) under the terms of the new

17 lease, such trust receives a substan18 tially similar or lesser benefit in com19 parison to the lease referred to in sub20 clause (I).

21 ‘‘(D) QUALIFIED HEALTH CARE PROP22 ERTY.—

23 ‘‘(i) IN GENERAL.—The term ‘quali24 fied health care property’ means any real

25 property (including interests therein), and
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1 any personal property incident to such real

2 property, which—

3 ‘‘(I) is a health care facility, or

4 ‘‘(II) is necessary or incidental to

5 the use of a health care facility.

6 ‘‘(ii) HEALTH CARE FACILITY.—For

7 purposes of clause (i), the term ‘health

8 care facility’ means a hospital, nursing fa9 cility, assisted living facility, congregate

10 care facility, qualified continuing care facil11 ity (as defined in section 7872(g)(4)), or

12 other licensed facility which extends med13 ical or nursing or ancillary services to pa14 tients and which, immediately before the

15 termination, expiration, default, or breach

16 of the lease of or mortgage secured by

17 such facility, was operated by a provider of

18 such services which was eligible for partici19 pation in the medicare program under title

20 XVIII of the Social Security Act with re21 spect to such facility.’’

22 (b) EFFECTIVE DATE.—The amendment made by

23 this section shall apply to taxable years beginning after

24 the date of enactment of this Act.
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1 TITLE III—CONFORMITY WITH

2 REGULATED INVESTMENT

3 COMPANY RULES

4 SEC. 301. CONFORMITY WITH REGULATED INVESTMENT

5 COMPANY RULES.

6 (a) DISTRIBUTION REQUIREMENT.—Clauses (i) and

7 (ii) of section 857(a)(1)(A) (relating to requirements ap8 plicable to real estate investment trusts) are each amended

9 by striking ‘‘95 percent (90 percent for taxable years be10 ginning before January 1, 1980)’’ and inserting ‘‘90 per11 cent’’.

12 (b) IMPOSITION OF TAX.—Clause (i) of section

13 857(b)(5)(A) (relating to imposition of tax in case of fail14 ure to meet certain requirements) is amended by striking

15 ‘‘95 percent (90 percent in the case of taxable years begin16 ning before January 1, 1980)’’ and inserting ‘‘90 per17 cent’’.

18 (c) EFFECTIVE DATE.—The amendments made by

19 this section shall apply to taxable years beginning after

20 the date of enactment of this Act.
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1 TITLE IV—CLARIFICATION OF

2 DEFINITION OF INDE3 PENDENT CONTRACTOR

4 SEC. 401. CLARIFICATION OF DEFINITION OF INDE5 PENDENT CONTRACTOR.

6 (a) IN GENERAL.—Paragraph (3) of section 856(d)

7 (relating to independent contractor defined) is amended

8 by adding at the end the following flush sentence:

9 ‘‘In the event that any class of stock of either the

10 real estate investment trust or such person is regu11 larly traded on an established securities market, only

12 persons who own, directly or indirectly, more than 5

13 percent of such class of stock shall be taken into ac14 count as owning any of the stock of such class for

15 purposes of applying the 35 percent limitation set

16 forth in subparagraph (B) (but all of the out17 standing stock of such class shall be considered out18 standing in order to compute the denominator for

19 purpose of determining the applicable percentage of

20 ownership).’’

21 (b) EFFECTIVE DATE.—The amendment made by

22 this section shall apply to taxable years beginning after

23 the date of the enactment of this Act.
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1 TITLE V—MODIFICATION OF

2 EARNINGS AND PROFITS RULES

3 SEC. 501. MODIFICATION OF EARNINGS AND PROFITS

4 RULES.

5 (a) RULES FOR DETERMINING WHETHER REGU6 LATED INVESTMENT COMPANY HAS EARNINGS AND

7 PROFITS FROM NON-RIC YEAR.—Subsection (c) of sec8 tion 852 is amended by adding at the end the following

9 new paragraph:

10 ‘‘(3) DISTRIBUTIONS TO MEET REQUIREMENTS

11 OF SUBSECTION (a)(2)(B).—Any distribution which

12 is made in order to comply with the requirements of

13 subsection (a)(2)(B)—

14 ‘‘(A) shall be treated for purposes of this

15 subsection and subsection (a)(2)(B) as made

16 from the earliest earnings and profits accumu17 lated in any taxable year to which the provi18 sions of this part did not apply rather than the

19 most recently accumulated earnings and profits,

20 and

21 ‘‘(B) to the extent treated under subpara22 graph (A) as made from accumulated earnings

23 and profits, shall not be treated as a distribu24 tion for purposes of subsection (b)(2)(D) and

25 section 855.’’.
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1 (b) CLARIFICATION OF APPLICATION OF REIT

2 SPILLOVER DIVIDEND RULES TO DISTRIBUTIONS TO

3 MEET QUALIFICATION REQUIREMENT.—Subparagraph

4 (B) of section 857(d)(3) is amended by inserting before

5 the period ‘‘and section 858’’.

6 (c) APPLICATION OF DEFICIENCY DIVIDEND PROCE7 DURES.—Paragraph (1) of section 852(e) is amended by

8 adding at the end the following new sentence: ‘‘If the de9 termination under subparagraph (A) is solely as a result

10 of the failure to meet the requirements of subsection

11 (a)(2), the preceding sentence shall also apply for pur12 poses of applying subsection (a)(2) to the non-RIC year.’’

13 (d) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to taxable years beginning before,

15 on, or after the date of the enactment of this Act.

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