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[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[S. 1057 Introduced in Senate (IS)]

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.

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

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``Real Estate 
Investment Trust Modernization Act of 1999''.
    (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--TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE REIT 
                              SUBSIDIARIES

SEC. 101. MODIFICATIONS TO ASSET DIVERSIFICATION TEST.

    Subparagraph (B) of section 856(c)(4) is amended to read as 
follows:
                    ``(B)(i) not more than 25 percent of the value of 
                its total assets is represented by securities (other 
                than those includible under subparagraph (A)), and
                    ``(ii) except with respect to a taxable REIT 
                subsidiary and securities includible under subparagraph 
                (A)--
                            ``(I) not more than 5 percent of the value 
                        of its total assets is represented by 
                        securities of any 1 issuer,
                            ``(II) the trust does not hold securities 
                        possessing more than 10 percent of the total 
                        voting power of the outstanding securities of 
                        any 1 issuer, and
                            ``(III) the trust does not hold securities 
                        having a value of more than 10 percent of the 
                        total value of the outstanding securities of 
                        any 1 issuer.''

SEC. 102. TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE REIT 
              SUBSIDIARIES.

    (a) Income From Taxable REIT Subsidiaries Not Treated as 
Impermissible Tenant Service Income.--Clause (i) of section 
856(d)(7)(C) (relating to exceptions to impermissible tenant service 
income) is amended by inserting ``or through a taxable REIT subsidiary 
of such trust'' after ``income''.
    (b) Certain Income From Taxable REIT Subsidiaries Not Excluded From 
Rents From Real Property.--
            (1) In general.--Subsection (d) of section 856 (relating to 
        rents from real property defined) is amended by adding at the 
        end the following new paragraphs:
            ``(8) Special rule for taxable reit subsidiaries.--For 
        purposes of this subsection, amounts paid to a real estate 
        investment trust by a taxable REIT subsidiary of such trust 
        shall not be excluded from rents from real property by reason 
        of paragraph (2)(B) if the requirements of subparagraph (A) or 
        (B) are met.
                    ``(A) Limited rental exception.--The requirements 
                of this subparagraph are met with respect to any 
                property if at least 90 percent of the leased space of 
                the property is rented to persons other than taxable 
                REIT subsidiaries of such trust and other than persons 
                described in section 856(d)(2)(B). The preceding 
                sentence shall apply only to the extent that the 
                amounts paid to the trust as rents from real property 
                (as defined in paragraph (1) without regard to 
                paragraph (2)(B)) from such property are substantially 
                comparable to such rents made by the other tenants of 
                the trust's property for comparable space.
                    ``(B) Exception for certain lodging facilities.--
                The requirements of this subparagraph are met with 
                respect to an interest in real property which is a 
                qualified lodging facility 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.
            ``(9) Eligible independent contractor.--For purposes of 
        paragraph (8)(B)--
                    ``(A) In general.--The term `eligible independent 
                contractor' means, with respect to any qualified 
                lodging facility, 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 the facility, such contractor (or 
                any related person) is actively engaged in the trade or 
                business of operating qualified lodging facilities 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 by reason of any of 
                the following:
                            ``(i) The taxable REIT subsidiary bears the 
                        expenses for the operation of the facility 
pursuant to the management agreement or other similar service contract.
                            ``(ii) The taxable REIT subsidiary receives 
                        the revenues from the operation of such 
                        facility, 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 on 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.
                    ``(C) Renewals, etc., of existing leases.--For 
                purposes of subparagraph (B)(iii)--
                            ``(i) a lease shall be treated as in effect 
                        on January 1, 1999, without regard to its 
                        renewal after such date, so long as such 
                        renewal is pursuant to the terms of such lease 
                        as in effect on whichever of the dates under 
                        subparagraph (B)(iii) is the latest, and
                            ``(ii) a lease of a property entered into 
                        after whichever of the dates under subparagraph 
                        (B)(iii) is the latest shall be treated as in 
                        effect on such date if--
                                    ``(I) on such date, a lease of such 
                                property from the trust was in effect, 
                                and
                                    ``(II) under the terms of the new 
                                lease, such trust receives a 
                                substantially similar or lesser benefit 
                                in comparison to the lease referred to 
                                in subclause (I).
                    ``(D) Qualified lodging facility.--For purposes of 
                this paragraph--
                            ``(i) In general.--The term `qualified 
                        lodging facility' means any lodging facility 
                        unless wagering activities are conducted at or 
                        in connection with such facility by any person 
                        who is engaged in the business of accepting 
                        wagers and who is legally authorized to engage 
                        in such business at or in connection with such 
                        facility.
                            ``(ii) Lodging facility.--The term `lodging 
                        facility' means a hotel, motel, or other 
                        establishment more than one-half of the 
                        dwelling units in which are used on a transient 
                        basis.
                            ``(iii) Customary amenities and 
                        facilities.--The term `lodging facility' 
                        includes customary amenities and facilities 
                        operated as part of, or associated with, the 
                        lodging facility so long as such amenities and 
                        facilities are customary for other properties 
                        of a comparable size and class owned by other 
                        owners unrelated to such real estate investment 
                        trust.
                    ``(E) Operate includes manage.--References in this 
                paragraph to operating a property shall be treated as 
                including a reference to managing the property.
                    ``(F) Related person.--Persons shall be treated as 
                related to each other if such persons are treated as a 
                single employer under subsection (a) or (b) of section 
                52.''.
            (2) Conforming amendment.--Subparagraph (B) of section 
        856(d)(2) is amended by inserting ``except as provided in 
        paragraph (8),'' after ``(B)''.

SEC. 103. TAXABLE REIT SUBSIDIARY.

    (a) In General.--Section 856 is amended by adding at the end the 
following new subsection:
    ``(l) Taxable REIT Subsidiary.--For purposes of this part--
            ``(1) In general.--The term `taxable REIT subsidiary' 
        means, with respect to a real estate investment trust, a 
        corporation (other than a real estate investment trust) if--
                    ``(A) such trust directly or indirectly owns stock 
                in such corporation, and
                    ``(B) such trust and such corporation jointly elect 
                that such corporation shall be treated as a taxable 
                REIT subsidiary of such trust for purposes of this 
                part.
        Such an election, once made, shall be irrevocable unless both 
        such trust and corporation consent to its revocation. Such 
        election, and any revocation thereof, may be made without the 
        consent of the Secretary.
            ``(2) 35 percent ownership in another taxable reit 
        subsidiary.--The term `taxable REIT subsidiary' includes, with 
        respect to any real estate investment trust, any corporation 
        (other than a real estate investment trust) with respect to 
        which a taxable REIT subsidiary of such trust owns directly or 
        indirectly--
                    ``(A) securities possessing more than 35 percent of 
                the total voting power of the outstanding securities of 
                such corporation, or
                    ``(B) securities having a value of more than 35 
                percent of the total value of the outstanding 
                securities of such corporation.
        The preceding sentence shall not apply to a qualified REIT 
        subsidiary (as defined in subsection (i)(2)).
            ``(3) Exceptions.--The term `taxable REIT subsidiary' shall 
        not include--
                    ``(A) any corporation which directly or indirectly 
                operates or manages a lodging facility or a health care 
                facility, and
                    ``(B) any corporation which directly or indirectly 
                provides to any other person (under a franchise, 
                license, or otherwise) rights to any brand name under 
                which any lodging facility or health care facility is 
                operated.
        Subparagraph (B) shall not apply to rights provided to an 
        eligible independent contractor to operate or manage a lodging 
facility if such rights are held by such corporation as a franchisee, 
licensee, or in a similar capacity and such lodging facility is 
either owned by such corporation or is leased to such corporation from 
the real estate investment trust.
            ``(4) Definitions.--For purposes of paragraph (3)--
                    ``(A) Lodging facility.--The term `lodging 
                facility' has the meaning given to such term by 
                paragraph (9)(D)(ii).
                    ``(B) Health care facility.--The term `health care 
                facility' has the meaning given to such term by 
                subsection (e)(6)(D)(ii).''.
    (b) Conforming Amendment.--Paragraph (2) of section 856(i) is 
amended by adding at the end the following new sentence: ``Such term 
shall not include a taxable REIT subsidiary.''

SEC. 104. LIMITATION ON EARNINGS STRIPPING.

    Paragraph (3) of section 163(j) (relating to limitation on 
deduction for interest on certain indebtedness) is amended by striking 
``and'' at the end of subparagraph (A), by striking the period at the 
end of subparagraph (B) and inserting ``, and'', and by adding at the 
end the following new subparagraph:
                    ``(C) any interest paid or accrued (directly or 
                indirectly) by a taxable REIT subsidiary (as defined in 
                section 856(l)) of a real estate investment trust to 
                such trust.''.

SEC. 105. 100 PERCENT TAX ON IMPROPERLY ALLOCATED AMOUNTS.

    (a) In General.--Subsection (b) of section 857 (relating to method 
of taxation of real estate investment trusts and holders of shares or 
certificates of beneficial interest) is amended by redesignating 
paragraphs (7) and (8) as paragraphs (8) and (9), respectively, and by 
inserting after paragraph (6) the following new paragraph:
            ``(7) Income from redetermined rents, redetermined 
        deductions, and excess interest.--
                    ``(A) Imposition of tax.--There is hereby imposed 
                for each taxable year of the real estate investment 
                trust a tax equal to 100 percent of redetermined rents, 
                redetermined deductions, and excess interest.
                    ``(B) Redetermined rents.--
                            ``(i) In general.--The term `redetermined 
                        rents' means rents from real property (as 
                        defined in subsection 856(d)) the amount of 
                        which would (but for subparagraph (E)) be 
                        reduced on distribution, apportionment, or 
                        allocation under section 482 to clearly reflect 
                        income as a result of services furnished or 
                        rendered by a taxable REIT subsidiary of the 
                        real estate investment trust to a tenant of 
                        such trust.
                            ``(ii) Exception for certain services.--
                        Clause (i) shall not apply to amounts received 
                        directly or indirectly by a real estate 
                        investment trust for services described in 
                        paragraph (1)(B) or (7)(C)(i) of section 
                        856(d).
                            ``(iii) Exception for de minimis amounts.--
                        Clause (i) shall not apply to amounts described 
                        in section 856(d)(7)(A) with respect to a 
                        property to the extent such amounts do not 
                        exceed the one percent threshold described in 
                        section 856(d)(7)(B) with respect to such 
                        property.
                            ``(iv) Exception for comparably priced 
                        services.--Clause (i) shall not apply to any 
                        service rendered by a taxable REIT subsidiary 
                        of a real estate investment trust to a tenant 
                        of such trust if--
                                    ``(I) such subsidiary renders a 
                                significant amount of similar services 
                                to persons other than such trust and 
                                tenants of such trust who are unrelated 
                                (within the meaning of section 
                                856(d)(8)(F)) to such subsidiary, 
                                trust, and tenants, but
                                    ``(II) only to the extent the 
                                charge for such service so rendered is 
                                substantially comparable to the charge 
                                for the similar services rendered to 
                                persons referred to in subclause (I).
                            ``(v) Exception for certain separately 
                        charged services.--Clause (i) shall not apply 
                        to any service rendered by a taxable REIT 
                        subsidiary of a real estate investment trust to 
                        a tenant of such trust if--
                                    ``(I) the rents paid to the trust 
                                by tenants (leasing at least 25 percent 
                                of the net leasable space in the 
                                trust's property) who are not receiving 
                                such service from such subsidiary are 
                                substantially comparable to the rents 
                                paid by tenants leasing comparable 
                                space who are receiving such service 
                                from such subsidiary, and
                                    ``(II) the charge for such service 
                                from such subsidiary is separately 
                                stated.
                            ``(vi) Exception for certain services based 
                        on subsidiary's income from the services.--
                        Clause (i) shall not apply to any service 
                        rendered by a taxable REIT subsidiary of a real 
                        estate investment trust to a tenant of such 
                        trust if the gross income of such subsidiary 
                        from such service is not less than 150 percent 
                        of such subsidiary's direct cost in furnishing 
                        or rendering the service.
                            ``(vii) Exceptions granted by secretary.--
                        The Secretary may waive the tax otherwise 
                        imposed by subparagraph (A) if the trust 
                        establishes to the satisfaction of the 
                        Secretary that rents charged to tenants were 
                        established on an arms' length basis even 
                        though a taxable REIT subsidiary of the trust 
                        provided services to such tenants.
                            ``(viii) No inference with respect to rents 
                        not within exceptions.--In determining whether 
                        rents are subject to reduction upon 
                        distribution, apportionment, or allocation 
                        under section 482 for purposes of subparagraph 
                        (B), the fact that rents from real property do 
                        not meet the requirements of clauses (ii) 
                        through (vii) shall not be taken into account; 
                        and such determination, in the case of rents 
                        not meeting such requirements, shall be made as 
                        if such clauses had not been enacted.
                            ``(ix) No inference as to whether 
                        redetermined rent is rent from real property.--
                        Rent received by a real estate investment trust 
                        shall not fail to qualify as rents from real 
                        property under section 856(d) by reason of the 
                        fact that all or any portion of such rent is 
                        determined to be redetermined rent.
                    ``(C) Redetermined deductions.--The term 
                `redetermined deductions' means deductions (other than 
                redetermined rents) of a taxable REIT subsidiary of a 
                real estate investment trust if the amount of such 
                deductions would (but for subparagraph (E)) be 
                increased on distribution, apportionment, or allocation 
                under section 482 to clearly reflect income as between 
                such subsidiary and such trust.
                    ``(D) Excess interest.--The term `excess interest' 
                means any deductions for interest payments by a taxable 
                REIT subsidiary of a real estate investment trust to 
                such trust to the extent that the interest payments are 
                in excess of a rate that is commercially reasonable.
                    ``(E) Coordination with section 482.--The 
                imposition of tax under subparagraph (A) shall be in 
                lieu of any distribution, apportionment, or allocation 
                under section 482.
                    ``(F) Regulatory authority.--The Secretary shall 
                prescribe such regulations as may be necessary or 
                appropriate to carry out the purposes of this 
                paragraph. Until the Secretary prescribes such 
                regulations, real estate investment trusts and their 
                taxable REIT subsidiaries may base their allocations on 
                any reasonable method.''.
    (b) Amount Subject to Tax Not Required To Be Distributed.--
Subparagraph (E) of section 857(b)(2) (relating to real estate 
investment trust taxable income) is amended by striking ``paragraph 
(5)'' and inserting ``paragraphs (5) and (7)''.

SEC. 106. EFFECTIVE DATE.

    (a) In General.--The amendments made by this title shall apply to 
taxable years beginning after the date of enactment of this Act.
    (b) Transitional Rules Related to Section 101.--
            (1) Existing arrangements.--
                    (A) In general.--Except as otherwise provided in 
                this paragraph, the amendment made by section 101 shall 
                not apply to a real estate investment trust with 
                respect to--
                            (i) securities of a corporation held 
                        directly or indirectly by such trust on April 
                        28, 1999,
                            (ii) securities received by such trust (or 
                        a successor) in exchange for, or with respect 
                        to, securities described in clause (i) in a 
                        transaction in which gain or loss is not 
                        recognized, and
                            (iii) securities acquired directly or 
                        indirectly by such trust as part of a 
                        reorganization (as defined in section 368(a)(1) 
                        of the Internal Revenue Code of 1986) with 
                        respect to such trust if such securities are 
                        described in clause (i) or (ii) with respect to 
                        any other real estate investment trust.
                    (B) New trade or business or substantial new 
                assets.--Subparagraph (A) shall cease to apply to 
                securities of a corporation as of the first day after 
                April 28, 1999, on which such corporation engages in a 
                substantial new line of business, or acquires any 
                substantial asset, other than--
                            (i) pursuant to a binding contract in 
                        effect on such date and at all times thereafter 
                        before the acquisition of such asset,
                            (ii) in a transaction in which gain or loss 
                        is not recognized by reason of section 1031 or 
                        1033 of the Internal Revenue Code of 1986, or
                            (iii) in a reorganization (as so defined) 
                        with another corporation the securities of 
                        which are described in paragraph (1)(A) of this 
                        subsection.
            (2) Tax-free conversion.--If--
                    (A) at the time of an election for a corporation to 
                become a taxable REIT subsidiary, the amendment made by 
                section 101 does not apply to such corporation by 
                reason of paragraph (1), and
                    (B) such election first takes effect during the 3-
                year period beginning on the date of the enactment of 
                this Act,
        such election shall be treated as a reorganization qualifying 
        under section 368(a)(1)(A) of such Code.

                      TITLE II--HEALTH CARE REITS

SEC. 201. HEALTH CARE REITS.

    (a) Special Foreclosure Rule for Health Care Properties.--
Subsection (e) of section 856 (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 at expiration of lease.--The term 
                `foreclosure property' shall include any qualified 
                health care property acquired by a real estate 
                investment trust as the result of the termination of a 
                lease of such property (other than a termination by 
                reason of a default, or the imminence of a default, on 
                the lease).
                    ``(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 as of 
                        the close of the second taxable year after the 
                        taxable year in which 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 close of the 6th year after the taxable year 
                in which 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 by reason of subparagraph (A) or paragraph 
                (1), income derived or received by the trust from an 
                independent contractor shall be disregarded to the 
                extent such income is attributable to--
                            ``(i) any lease of property in effect on 
                        the date the real estate investment trust 
                        acquired the qualified health care property 
                        (without regard to its renewal after such date 
                        so long as such renewal is pursuant to the 
                        terms of such lease as in effect on such date), 
                        or
                            ``(ii) any lease of property entered into 
                        after such date if--
                                    ``(I) on such date, a lease of such 
                                property from the trust was in effect, 
                                and
                                    ``(II) under the terms of the new 
                                lease, such trust receives a 
                                substantially similar or lesser benefit 
                                in comparison to the lease referred to 
                                in subclause (I).
                    ``(D) Qualified health care property.--
                            ``(i) In general.--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.
                            ``(ii) Health care facility.--For purposes 
                        of clause (i), the term `health care facility' 
                        means a hospital, nursing facility, assisted 
                        living facility, congregate care facility, 
                        qualified continuing care facility (as defined 
                        in section 7872(g)(4)), or other licensed 
                        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.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of enactment of this Act.

     TITLE III--CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES

SEC. 301. CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES.

    (a) Distribution Requirement.--Clauses (i) and (ii) of section 
857(a)(1)(A) (relating to requirements applicable to real estate 
investment trusts) are each amended by striking ``95 percent (90 
percent for taxable years beginning before January 1, 1980)'' and 
inserting ``90 percent''.
    (b) Imposition of Tax.--Clause (i) of section 857(b)(5)(A) 
(relating to imposition of tax in case of failure to meet certain 
requirements) is amended by striking ``95 percent (90 percent in the 
case of taxable years beginning before January 1, 1980)'' and inserting 
``90 percent''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of enactment of this 
Act.

    TITLE IV--CLARIFICATION OF DEFINITION OF INDEPENDENT CONTRACTOR

SEC. 401. CLARIFICATION OF DEFINITION OF INDEPENDENT CONTRACTOR.

    (a) In General.--Paragraph (3) of section 856(d) (relating to 
independent contractor defined) is amended by adding at the end the 
following flush sentence:
        ``In the event that any class of stock of either the real 
        estate investment trust or such person is regularly traded on 
        an established securities market, only persons who own, 
        directly or indirectly, more than 5 percent of such class of 
        stock shall be taken into account as owning any of the stock of 
        such class for purposes of applying the 35 percent limitation 
        set forth in subparagraph (B) (but all of the outstanding stock 
        of such class shall be considered outstanding in order to 
        compute the denominator for purpose of determining the 
        applicable percentage of ownership).''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

          TITLE V--MODIFICATION OF EARNINGS AND PROFITS RULES

SEC. 501. MODIFICATION OF EARNINGS AND PROFITS RULES.

    (a) Rules for Determining Whether Regulated Investment Company Has 
Earnings and Profits From Non-RIC Year.--Subsection (c) of section 852 
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 earnings and profits accumulated in any 
                taxable year to which the provisions of this part did 
                not apply 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)(D) and section 855.''.
    (b) Clarification of Application of REIT Spillover Dividend Rules 
to Distributions To Meet Qualification Requirement.--Subparagraph (B) 
of section 857(d)(3) is amended by inserting before the period ``and 
section 858''.
    (c) Application of Deficiency Dividend Procedures.--Paragraph (1) 
of section 852(e) is amended by adding at the end the following new 
sentence: ``If the determination under subparagraph (A) is solely as a 
result of the failure to meet the requirements of subsection (a)(2), 
the preceding sentence shall also apply for purposes of applying 
subsection (a)(2) to the non-RIC year.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning before, on, or after the date of the 
enactment of this Act.
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