I

104TH CONGRESS

1ST SESSION H. R. 2121

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

applicable to real estate investment trusts.

IN THE HOUSE OF REPRESENTATIVES

JULY 26, 1995

Mr. SHAW (for himself, Mr. MATSUI, Mr. CRANE, Mr. THOMAS, Mrs. JOHNSON of Connecticut, Mr. ZIMMER, Mr. PORTMAN, Mr. STARK, Mr. JACOBS, Mr. LEVIN, Mr. CARDIN, and Ms. DUNN of Washington) introduced the following bill; which was referred to the Committee on Ways

and Means

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; AMENDMENT OF 1986 CODE.

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

5 ‘‘Real Estate Investment Trust Tax Simplification Act of

6 1995’’.

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 TITLE I—REMOVAL OF TAX

5 TRAPS FOR THE UNWARY

6 SEC. 101. CLARIFICATION OF LIMITATION ON MAXIMUM

7 NUMBER OF SHAREHOLDERS.

8 (a) RULES RELATING TO DETERMINATION OF OWN9 ERSHIP.—

10 (1) FAILURE TO ISSUE SHAREHOLDER DEMAND

11 LETTER NOT TO DISQUALIFY REIT.—Section 857(a)

12 (relating to requirements applicable to real estate in13 vestment trusts) is amended by striking paragraph

14 (2) and by redesignating paragraph (3) as para15 graph (2).

16 (2) SHAREHOLDER DEMAND LETTER REQUIRE17 MENT; PENALTY.—Section 857 (relating to taxation

18 of real estate investment trusts and their bene19 ficiaries) is amended by redesignating subsection (f)

20 as subsection (g) and by inserting after subsection

21 (e) the following new subsection:

22 ‘‘(f) REAL ESTATE INVESTMENT TRUSTS TO ASCER23 TAIN OWNERSHIP.—

24 ‘‘(1) IN GENERAL.—Each real estate invest25 ment trust shall each taxable year comply with regu-
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1 lations prescribed by the Secretary for the purposes

2 of ascertaining the actual ownership of the outstand3 ing shares, or certificates of beneficial interest, of

4 such trust.

5 ‘‘(2) FAILURE TO COMPLY.—

6 ‘‘(A) IN GENERAL.—If a real estate invest7 ment trust fails to comply with the require8 ments of paragraph (1) for a taxable year, such

9 trust shall pay (on notice and demand by the

10 Secretary and in the same manner as tax) a

11 penalty of $25,000.

12 ‘‘(B) INTENTIONAL DISREGARD.—If any

13 failure under paragraph (1) is due to inten14 tional disregard of the requirement under para15 graph (1), the penalty under subparagraph (A)

16 shall be $50,000.

17 ‘‘(C) FAILURE TO COMPLY AFTER NO18 TICE.—The Secretary may require a real estate

19 investment trust to take such actions as the

20 Secretary determines appropriate to ascertain

21 actual ownership if the trust fails to meet the

22 requirements of paragraph (1). If the trust fails

23 to take such actions, the trust shall pay (on no24 tice and demand by the Secretary and in the

25 same manner as tax) an additional penalty
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1 equal to the penalty determined under subpara2 graph (A) or (B), whichever is applicable.

3 ‘‘(D) REASONABLE CAUSE.—No penalty

4 shall be imposed under this paragraph with re5 spect to any failure if it is shown that such fail6 ure is due to reasonable cause and not to willful

7 neglect.’’

8 (b) COMPLIANCE WITH CLOSELY HELD PROHIBI9 TION.—

10 (1) IN GENERAL.—Section 856 (defining real

11 estate investment trust) is amended by adding at the

12 end the following new subsection:

13 ‘‘(k) REQUIREMENT THAT ENTITY NOT BE CLOSELY

14 HELD TREATED AS MET IN CERTAIN CASES.—A corpora15 tion, trust, or association—

16 ‘‘(1) which for a taxable year meets the require17 ments of section 857(f)(1), and

18 ‘‘(2) which does not know, or exercising reason19 able diligence would not have known, whether the

20 entity failed to meet the requirement of subsection

21 (a)(6),

22 shall be treated as having met the requirement of sub23 section (a)(6) for the taxable year.’’

24 (2) CONFORMING AMENDMENT.—Paragraph (6)

25 of section 856(a) is amended by inserting ‘‘subject
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1 to the provisions of subsection (k),’’ before ‘‘which

2 is not’’.

3 SEC. 102. DE MINIMIS RULE FOR TENANT SERVICES IN4 COME.

5 (a) IN GENERAL.—Paragraph (2) of section 856(d)

6 (defining rents from real property) is amended by striking

7 subparagraph (C) and the last sentence and inserting:

8 ‘‘(C) any impermissible tenant service in9 come (as defined in paragraph (7)).’’

10 (b) IMPERMISSIBLE TENANT SERVICE INCOME.—

11 Section 856(d) is amended by adding at the end the fol12 lowing new paragraph:

13 ‘‘(7) IMPERMISSIBLE TENANT SERVICE IN14 COME.—For purposes of paragraph (2)(C)—

15 ‘‘(A) IN GENERAL.—The term ‘impermis16 sible tenant service income’ means, with respect

17 to any real or personal property, any amount

18 (other than amounts described in subparagraph

19 (B) or (C) of paragraph (1)) received or ac20 crued directly or indirectly by the real estate in21 vestment trust for—

22 ‘‘(i) services furnished or rendered by

23 the trust to the tenants of such property,

24 or
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1 ‘‘(ii) managing or operating such

2 property.

3 ‘‘(B) DISQUALIFICATION OF ALL AMOUNTS

4 WHERE MORE THAN DE MINIMIS AMOUNT.—If

5 the amount described in subparagraph (A) with

6 respect to a property exceeds 1 percent of all

7 amounts received or accrued directly or indi8 rectly by the real estate investment trust with

9 respect to such property, the impermissible ten10 ant service income of the trust with respect to

11 the property shall include all such amounts.

12 ‘‘(C) EXCEPTIONS.—For purposes of sub13 paragraph (A)—

14 ‘‘(i) services furnished or rendered, or

15 management or operation provided,

16 through an independent contractor from

17 whom the trust itself does not derive or re18 ceive any income shall not be treated as

19 furnished, rendered, or provided by the

20 trust, and

21 ‘‘(ii) there shall not be taken into ac22 count any amount which would be excluded

23 from unrelated business taxable income

24 under section 512(b)(3) if received by an
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1 organization described in section

2 512(a)(2).

3 ‘‘(D) AMOUNT ATTRIBUTABLE TO IMPER4 MISSIBLE SERVICES.—For purposes of subpara5 graph (A), the amount treated as received for

6 any service (or management or operation) shall

7 not be less than 150 percent of the actual direct

8 cost of the trust in furnishing or rendering the

9 service (or providing the management or oper10 ation).

11 ‘‘(E) COORDINATION WITH LIMITA12 TIONS.—For purposes of paragraphs (2) and

13 (3) of subsection (c), amounts described in sub14 paragraph (A) shall be included in the gross in15 come of the corporation, trust, or association.’’

16 SEC. 103. ATTRIBUTION RULES APPLICABLE TO TENANT

17 OWNERSHIP.

18 Section 856(d)(5) (relating to constructive ownership

19 of stock) is amended by adding at the end the following:

20 ‘‘For purposes of paragraph (2)(B), section 318(a)(3)(A)

21 shall be applied under the preceding sentence in the case

22 of a partnership by taking into account only partners who

23 own (directly or indirectly) 25 percent or more of the cap24 ital interest, or the profits interest, in the partnership.’’
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1 TITLE II—CONFORMITY WITH

2 REGULATED INVESTMENT

3 COMPANY RULES

4 SEC. 201. CREDIT FOR TAX PAID BY REIT ON RETAINED

5 CAPITAL GAINS.

6 (a) GENERAL RULE.—Paragraph (3) of section

7 857(b) (relating to capital gains) is amended by redesig8 nating subparagraph (D) as subparagraph (E) and by in9 serting after subparagraph (C) the following new subpara10 graph:

11 ‘‘(D) TREATMENT BY SHAREHOLDERS OF

12 UNDISTRIBUTED CAPITAL GAINS.—

13 ‘‘(i) Every shareholder of a real estate

14 investment trust at the close of the trust’s

15 taxable year shall include, in computing his

16 long-term capital gains in his return for

17 his taxable year in which the last day of

18 the trust’s taxable year falls, such amount

19 as the trust shall designate in respect of

20 such shares in a written notice mailed to

21 its shareholders at any time prior to the

22 expiration of 60 days after the close of its

23 taxable year (or mailed to its shareholders

24 or holders of beneficial interests with its

25 annual report for the taxable year), but the
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1 amount so includible by any shareholder

2 shall not exceed that part of the amount

3 subjected to tax in subparagraph (A)(ii)

4 which he would have received if all of such

5 amount had been distributed as capital

6 gain dividends by the trust to the holders

7 of such shares at the close of its taxable

8 year.

9 ‘‘(ii) For purposes of this title, every

10 such shareholder shall be deemed to have

11 paid, for his taxable year under clause (i),

12 the tax imposed by subparagraph (A)(ii)

13 on the amounts required by this subpara14 graph to be included in respect of such

15 shares in computing his long-term capital

16 gains for that year; and such shareholders

17 shall be allowed credit or refund as the

18 case may be, for the tax so deemed to have

19 been paid by him.

20 ‘‘(iii) The adjusted basis of such

21 shares in the hands of the holder shall be

22 increased with respect to the amounts re23 quired by this subparagraph to be included

24 in computing his long-term capital gains,

25 by the difference between the amount of
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1 such includible gains and such holder’s

2 credit or refund determined under clause

3 (ii).

4 ‘‘(iv) In the event of such designation,

5 the tax imposed by subparagraph (A)(ii)

6 shall be paid by the real estate investment

7 trust within 30 days after the close of its

8 taxable year.

9 ‘‘(v) The earnings and profits of such

10 real estate investment trust, and the earn11 ings and profits of any such shareholder

12 which is a corporation, shall be appro13 priately adjusted in accordance with regu14 lations prescribed by the Secretary.

15 ‘‘(vi) As used in this subparagraph,

16 the terms ‘shares’ and ‘shareholders’ shall

17 include beneficial interests and holders of

18 beneficial interest, respectively.’’

19 (b) CONFORMING AMENDMENTS.—

20 (1) Clause (i) of section 857(b)(7)(A) is amend21 ed by striking ‘‘subparagraph (B)’’ and inserting

22 ‘‘subparagraph (B) or (D)’’.

23 (2) Clause (iii) of section 852(b)(3)(D) is

24 amended by striking ‘‘by 65 percent’’ and all that

25 follows and inserting ‘‘by the difference between the
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1 amount of such includible gains and such holder’s

2 credit or refund determined under clause (ii).’’

3 SEC. 202. REPEAL OF 30-PERCENT GROSS INCOME RE4 QUIREMENT.

5 (a) GENERAL RULE.—Subsection (c) of section 856

6 (relating to limitations) is amended—

7 (1) by adding ‘‘and’’ at the end of paragraph

8 (3),

9 (2) by striking paragraphs (4) and (8), and

10 (3) by redesignating paragraphs (5), (6), and

11 (7) as paragraphs (4), (5), and (6), respectively.

12 (b) CONFORMING AMENDMENTS.—

13 (1) Paragraph (5) of section 857(b) is amended

14 by striking ‘‘section 856(c)(7)’’ and inserting ‘‘sec15 tion 856(c)(6)’’.

16 (2) Subparagraph (C) of section 857(b)(6) is

17 amended by striking ‘‘section 856(c)(6)(B)’’ and in18 serting ‘‘section 856(c)(5)(B)’’.
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1 TITLE III—OTHER

2 SIMPLIFICATION

3 SEC. 301. MODIFICATION OF EARNINGS AND PROFITS

4 RULES FOR DETERMINING WHETHER REIT

5 HAS EARNINGS AND PROFITS FROM NON6 REIT YEAR.

7 Subsection (d) of section 857 is amended by adding

8 at the end the following new paragraph:

9 ‘‘(3) DISTRIBUTIONS TO MEET REQUIREMENTS

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

11 is made in order to comply with the requirements of

12 subsection (a)(2)(B)—

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

14 subsection as made from the earliest accumu15 lated earnings and profits (other than earnings

16 and profits to which subsection (a)(2)(A) ap17 plies) rather than the most recently accumu18 lated earnings and profits, and

19 ‘‘(B) shall not be treated as a distribution

20 for purposes of subsection (b)(2)(B).’’

21 SEC. 302. TREATMENT OF FORECLOSURE PROPERTY.

22 (a) GRACE PERIODS.—

23 (1) INITIAL PERIOD.—Paragraph (2) of section

24 856(e) (relating to special rules for foreclosure prop25 erty) is amended by striking ‘‘on the date which is
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1 2 years after the date the trust acquired such prop2 erty’’ and inserting ‘‘as of the close of the 3d taxable

3 year following the taxable year in which the trust ac4 quired such property’’.

5 (2) EXTENSION.—Paragraph (3) of section

6 856(e) is amended—

7 (A) by striking ‘‘or more extensions’’ and

8 inserting ‘‘extension’’, and

9 (B) by striking the last sentence and in10 serting: ‘‘Any such extension shall not extend

11 the grace period beyond the close of the 3d tax12 able year following the last taxable year in the

13 period under paragraph (2).’’

14 (b) REVOCATION OF ELECTION.—Paragraph (5) of

15 section 856(e) is amended by striking the last sentence

16 and inserting: ‘‘A real estate investment trust may revoke

17 any such election for a taxable year by filing the revocation

18 (in the manner provided in regulations by the Secretary)

19 on or before the due date (including any extension of time)

20 for filing its return of tax under this chapter for the tax21 able year. If a trust revokes an election for any property,

22 no election may be made by the trust under this paragraph

23 with respect to the property for any subsequent taxable

24 year.’’
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1 (c) CERTAIN ACTIVITIES NOT TO DISQUALIFY PROP2 ERTY.—Paragraph (4) of section 856(e) is amended by

3 adding at the end the following new flush sentence:

4 ‘‘For purposes of subparagraph (C), property shall

5 not be treated as used in a trade or business by rea6 son of any activities of the real estate investment

7 trust with respect to such property to the extent

8 that such activities would not result in amounts re9 ceived or accrued, directly or indirectly, with respect

10 to such property being treated as other than rents

11 from real property.’’

12 SEC. 303. SPECIAL FORECLOSURE RULES FOR HEALTH

13 CARE PROPERTIES.

14 Section 856(e) (relating to special rules for fore15 closure property) is amended by adding at the end the fol16 lowing new paragraph:

17 ‘‘(6) SPECIAL RULES FOR QUALIFIED HEALTH

18 CARE PROPERTIES.—For purposes of this sub19 section—

20 ‘‘(A) ACQUISITION BY LEASE TERMI21 NATIONS.—The term ‘foreclosure property’

22 shall include any qualified health care property

23 acquired by a real estate investment trust as

24 the result of the termination or expiration of a

25 lease of such property.
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1 ‘‘(B) INCOME FROM INDEPENDENT CON2 TRACTORS.—For purposes of applying para3 graph (4)(C) with respect to qualified health

4 care property which is foreclosure property, in5 come derived or received by the trust from an

6 independent contractor shall be disregarded to

7 the extent such income is attributable to other

8 property.

9 ‘‘(C) QUALIFIED HEALTH CARE PROP10 ERTY.—The term ‘qualified health care prop11 erty’ means any real property (including inter12 ests therein), and any personal property inci13 dent to such real property, which—

14 ‘‘(i) is a health care facility, or

15 ‘‘(ii) is necessary or incidental to the

16 use of a health care facility.’’

17 SEC. 304. PAYMENTS UNDER HEDGING INSTRUMENTS.

18 Section 856(c)(5)(G) (relating to treatment of certain

19 interest rate agreements), as redesignated by section 202,

20 is amended to read as follows:

21 ‘‘(G) TREATMENT OF CERTAIN HEDGING

22 INSTRUMENTS.—Except to the extent provided

23 by regulations, any—

24 ‘‘(i) payment to a real estate invest25 ment trust under an interest rate swap or
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1 cap agreement, option, futures contract,

2 forward rate agreement, or any similar fi3 nancial instrument, entered into by the

4 trust in a transaction to hedge any indebt5 edness incurred or to be incurred by the

6 trust to acquire or carry real estate assets,

7 and

8 ‘‘(ii) gain from the sale or other dis9 position of any such investment,

10 shall be treated as income qualifying under

11 paragraph (2).’’

12 SEC. 305. EXCESS NONCASH INCOME.

13 Section 857(e)(2) (relating to determination of

14 amount of excess noncash income) is amended—

15 (1) by striking subparagraph (B),

16 (2) by striking the period at the end of sub17 paragraph (C) and inserting a comma,

18 (3) by redesignating subparagraph (C) (as

19 amended by paragraph (2)) as subparagraph (B),

20 and

21 (4) by adding at the end the following new sub22 paragraphs:

23 ‘‘(C) the amount (if any) by which—

24 ‘‘(i) the amounts includible in gross

25 income with respect to instruments to
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1 which section 860E(a) or 1272 applies, ex2 ceed

3 ‘‘(ii) the amount of money and the

4 fair market value of other property re5 ceived during the taxable year under such

6 instruments, and

7 ‘‘(D) amounts includible in income by rea8 son of cancellation of indebtedness.’’

9 SEC. 306. PROHIBITED TRANSACTION SAFE HARBOR.

10 Clause (iii) of section 857(b)(6)(C) (relating to cer11 tain sales not to constitute prohibited transactions) is

12 amended—

13 (1) by striking ‘‘(other than foreclosure prop14 erty)’’ in subclauses (I) and (II) and inserting

15 ‘‘(other than sales of foreclosure property or sales to

16 which section 1033 applies)’’, and

17 (2) by striking ‘‘(as determined for purposes of

18 computing earnings and profits)’’ in subclause (II)

19 and inserting ‘‘(determined without regard to any

20 adjustment for depreciation or amortization)’’.

21 SEC. 307. SHARED APPRECIATION MORTGAGES.

22 (a) BANKRUPTCY SAFE HARBOR.—Section 856(j)

23 (relating to treatment of shared appreciation mortgages)

24 is amended by redesignating paragraph (4) as paragraph
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1 (5) and by inserting after paragraph (3) the following new

2 paragraph:

3 ‘‘(4) COORDINATION WITH 4-YEAR HOLDING PE4 RIOD.—

5 ‘‘(A) IN GENERAL.—For purposes of sec6 tion 857(b)(6)(C), if a real estate investment

7 trust is treated as having sold secured property

8 under paragraph (3)(A), the trust shall be

9 treated as having held such property for at

10 least 4 years if—

11 ‘‘(i) the secured property is sold or

12 otherwise disposed of pursuant to a case

13 under title 11 of the United States Code,

14 ‘‘(ii) the seller is under the jurisdic15 tion of the court in such case, and

16 ‘‘(iii) the disposition is required by the

17 court or is pursuant to a plan approved by

18 the court.

19 ‘‘(B) EXCEPTION.—Subparagraph (A)

20 shall not apply if—

21 ‘‘(i) the secured property was acquired

22 by the trust with the intent to evict or

23 foreclose, or
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1 ‘‘(ii) the trust knew or had reason to

2 know that default on the obligation de3 scribed in paragraph (5)(A) would occur.’’

4 (b) CLARIFICATION OF DEFINITION OF SHARED AP5 PRECIATION PROVISION.—Clause (ii) of section

6 856(j)(5)(A) is amended by inserting ‘‘or appreciation in

7 value’’ after ‘‘gain’’ each place it appears.

8 SEC. 308. WHOLLY OWNED SUBSIDIARIES.

9 Section 856(i)(2) (defining qualified REIT subsidi10 ary) is amended by striking ‘‘at all times during the period

11 such corporation was in existence’’.

12 TITLE IV—EFFECTIVE DATE

13 SEC. 401. EFFECTIVE DATE.

14 The amendments made by this Act shall apply to tax15 able years beginning after the date of the enactment of

16 this Act.

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