Calendar No. 346

106TH CONGRESS

1ST SESSION S. 1792

[Report No. 106–201]

A BILL

To amend the Internal Revenue Code of 1986 to

extend expiring provisions, to fully allow the nonrefundable personal credits against regular tax liability, and for other purposes.

OCTOBER 26, 1999

Read twice and placed on the calendar
II

Calendar No. 346

106TH CONGRESS

1ST SESSION S. 1792

[Report No. 106–201]

To amend the Internal Revenue Code of 1986 to extend expiring provisions,

to fully allow the nonrefundable personal credits against regular tax

liability, and for other purposes.

IN THE SENATE OF THE UNITED STATES

OCTOBER 26, 1999

Mr. ROTH, from the Committee on Finance, reported the following original

bill; which was read twice and placed on the calendar

A BILL

To amend the Internal Revenue Code of 1986 to extend

expiring provisions, to fully allow the nonrefundable personal credits against regular tax liability, and for other

purposes.

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; ETC.

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

5 ‘‘Tax Relief Extension Act of 1999’’.
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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment

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

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986.

7 (c) TABLE OF CONTENTS.—The table of contents for

8 this Act is as follows:

Sec. 1. Short title; etc.

TITLE I—EXTENSION OF EXPIRED AND EXPIRING PROVISIONS

Sec. 101. Extension of minimum tax relief for individuals.

Sec. 102. Extension of exclusion for employer-provided educational assistance.

Sec. 103. Extension of research and experimentation credit and increase in

rates for alternative incremental research credit.

Sec. 104. Extension of exceptions under subpart F for active financing income.

Sec. 105. Extension of suspension of net income limitation on percentage depletion from marginal oil and gas wells.

Sec. 106. Extension of work opportunity tax credit and welfare-to-work tax

credit.

Sec. 107. Extension and modification of tax credit for electricity produced from

certain renewable resources.

Sec. 108. Expansion of brownfields environmental remediation.

Sec. 109. Temporary increase in amount of rum excise tax covered over to

Puerto Rico and Virgin Islands.

Sec. 110. Delay requirement that registered motor fuels terminals offer dyed

fuel as a condition of registration.

Sec. 111. Extension of production credit for fuel produced by certain gasification facilities.

TITLE II—REVENUE OFFSET PROVISIONS

Subtitle A—General Provisions

Sec. 201. Modification of individual estimated tax safe harbor.

Sec. 202. Modification of foreign tax credit carryover rules.

Sec. 203. Clarification of tax treatment of income and losses on derivatives.

Sec. 204. Inclusion of certain vaccines against streptococcus pneumoniae to list

of taxable vaccines.

Sec. 205. Expansion of reporting of cancellation of indebtedness income.

Sec. 206. Imposition of limitation on prefunding of certain employee benefits.

Sec. 207. Increase in elective withholding rate for nonperiodic distributions

from deferred compensation plans.

Sec. 208. Limitation on conversion of character of income from constructive

ownership transactions.

Sec. 209. Treatment of excess pension assets used for retiree health benefits.
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Sec. 210. Modification of installment method and repeal of installment method

for accrual method taxpayers.

Sec. 211. Limitation on use of nonaccrual experience method of accounting.

Sec. 212. Denial of charitable contribution deduction for transfers associated

with split-dollar insurance arrangements.

Sec. 213. Prevention of duplication of loss through assumption of liabilities giving rise to a deduction.

Sec. 214. Consistent treatment and basis allocation rules for transfers of intangibles in certain nonrecognition transactions.

Sec. 215. Distributions by a partnership to a corporate partner of stock in another corporation.

Sec. 216. Prohibited allocations of stock in S corporation ESOP.

Subtitle B—Provisions Relating to Real Estate Investment Trusts

PART I—TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE

REIT SUBSIDIARIES

Sec. 221. Modifications to asset diversification test.

Sec. 222. Treatment of income and services provided by taxable REIT subsidiaries.

Sec. 223. Taxable REIT subsidiary.

Sec. 224. Limitation on earnings stripping.

Sec. 225. 100 percent tax on improperly allocated amounts.

Sec. 226. Effective date.

PART II—HEALTH CARE REITS

Sec. 231. Health care REITs.

PART III—CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES

Sec. 241. Conformity with regulated investment company rules.

PART IV—CLARIFICATION OF EXCEPTION FROM IMPERMISSIBLE TENANT

SERVICE INCOME

Sec. 251. Clarification of exception for independent operators.

PART V—MODIFICATION OF EARNINGS AND PROFITS RULES

Sec. 261. Modification of earnings and profits rules.

PART VI—MODIFICATION OF ESTIMATED TAX RULES

Sec. 271. Modification of estimated tax rules for closely held real estate investment trusts.

PART VIII—MODIFICATION OF TREATMENT OF CLOSELY-HELD REITS

Sec. 281. Controlled entities ineligible for REIT status.

TITLE III—BUDGET PROVISION

Sec. 301. Exclusion from paygo scorecard.
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1 TITLE I—EXTENSION OF EX2 PIRED AND EXPIRING PROVI3 SIONS

4 SEC. 101. EXTENSION OF MINIMUM TAX RELIEF FOR INDI5 VIDUALS.

6 (a) IN GENERAL.—The second sentence of section

7 26(a) (relating to limitations based on amount of tax) is

8 amended by striking ‘‘1998’’ and inserting ‘‘calendar year

9 1998, 1999, or 2000’’.

10 (b) CHILD CREDIT.—Section 24(d)(2) (relating to re11 duction of credit to taxpayer subject to alternative min12 imum tax) is amended by striking ‘‘December 31, 1998’’

13 and inserting ‘‘December 31, 2000’’.

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

15 this section shall apply to taxable years beginning after

16 December 31, 1998.

17 SEC. 102. EXTENSION OF EXCLUSION FOR EMPLOYER-PRO18 VIDED EDUCATIONAL ASSISTANCE.

19 (a) IN GENERAL.—Section 127(d) (relating to termi20 nation) is amended by striking ‘‘May 31, 2000’’ and in21 serting ‘‘December 31, 2000’’.

22 (b) REPEAL OF LIMITATION ON GRADUATE EDU23 CATION.—

24 (1) IN GENERAL.—The last sentence of section

25 127(c)(1) (defining educational assistance) is
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1 amended by striking ‘‘, and such term also does not

2 include any payment for, or the provision of any

3 benefits with respect to, any graduate level course

4 of a kind normally taken by an individual pursuing

5 a program leading to a law, business, medical, or

6 other advanced academic or professional degree’’.

7 (2) EFFECTIVE DATE.—The amendment made

8 by paragraph (1) shall apply with respect to ex9 penses relating to courses beginning after December

10 31, 1999.

11 SEC. 103. EXTENSION OF RESEARCH AND EXPERIMEN12 TATION CREDIT AND INCREASE IN RATES

13 FOR ALTERNATIVE INCREMENTAL RE14 SEARCH CREDIT.

15 (a) EXTENSION.—

16 (1) IN GENERAL.—Section 41(h) (relating to

17 termination) is amended—

18 (A) by striking ‘‘June 30, 1999’’ and in19 serting ‘‘December 31, 2000’’,

20 (B) by striking ‘‘36-month’’ and inserting

21 ‘‘54-month’’, and

22 (C) by striking ‘‘36 months’’ and inserting

23 ‘‘54 months’’.
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1 (2) CONFORMING AMENDMENT.—Section

2 45C(b)(1)(D) is amended by striking ‘‘June 30,

3 1999’’ and inserting ‘‘December 31, 2000’’.

4 (3) EFFECTIVE DATE.—The amendments made

5 by this subsection shall apply to amounts paid or in6 curred after June 30, 1999.

7 (b) INCREASE IN PERCENTAGES UNDER ALTER8 NATIVE INCREMENTAL CREDIT.—

9 (1) IN GENERAL.—Subparagraph (A) of section

10 41(c)(4) is amended—

11 (A) by striking ‘‘1.65 percent’’ and insert12 ing ‘‘2.65 percent’’,

13 (B) by striking ‘‘2.2 percent’’ and inserting

14 ‘‘3.2 percent’’, and

15 (C) by striking ‘‘2.75 percent’’ and insert16 ing ‘‘3.75 percent’’.

17 (2) EFFECTIVE DATE.—The amendments made

18 by this subsection shall apply to taxable years begin19 ning after June 30, 1999.

20 (c) EXTENSION OF RESEARCH CREDIT TO RESEARCH

21 IN PUERTO RICO AND THE POSSESSIONS OF THE UNITED

22 STATES.—

23 (1) IN GENERAL.—Section 41(d)(4)(F) (relat24 ing to foreign research) is amended by inserting ‘‘,
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1 the Commonwealth of Puerto Rico, or any posses2 sion of the United States’’ after ‘‘United States’’.

3 (2) DENIAL OF DOUBLE BENEFIT.—Section

4 280C(c)(1) is amended by inserting ‘‘or credit’’ after

5 ‘‘deduction’’ each place it appears.

6 (3) EFFECTIVE DATE.—The amendments made

7 by this subsection shall apply to amounts paid or in8 curred after June 30, 1999.

9 SEC. 104. EXTENSION OF EXCEPTIONS UNDER SUBPART F

10 FOR ACTIVE FINANCING INCOME.

11 (a) IN GENERAL.—Sections 953(e)(10) and

12 954(h)(9) (relating to application) are each amended—

13 (1) by striking ‘‘the first taxable year’’ and in14 serting ‘‘taxable years’’,

15 (2) by striking ‘‘January 1, 2000’’ and insert16 ing ‘‘January 1, 2001’’, and

17 (3) by striking ‘‘within which such’’ and insert18 ing ‘‘within which any such’’.

19 (b) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to taxable years beginning after

21 December 31, 1999.
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1 SEC. 105. EXTENSION OF SUSPENSION OF NET INCOME LIM2 ITATION ON PERCENTAGE DEPLETION FROM

3 MARGINAL OIL AND GAS WELLS.

4 (a) IN GENERAL.—Subparagraph (H) of section

5 613A(c)(6) (relating to temporary suspension of taxable

6 limit with respect to marginal production) is amended by

7 striking ‘‘January 1, 2000’’ and inserting ‘‘January 1,

8 2001’’.

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

10 this section shall apply to taxable years beginning after

11 December 31, 1999.

12 SEC. 106. EXTENSION OF WORK OPPORTUNITY TAX CREDIT

13 AND WELFARE-TO-WORK TAX CREDIT.

14 (a) TEMPORARY EXTENSION.—Sections 51(c)(4)(B)

15 and 51A(f ) (relating to termination) are each amended

16 by striking ‘‘June 30, 1999’’ and inserting ‘‘December 31,

17 2000’’.

18 (b) CLARIFICATION OF FIRST YEAR OF EMPLOY19 MENT.—Paragraph (2) of section 51(i) is amended by

20 striking ‘‘during which he was not a member of a targeted

21 group’’.

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

23 this section shall apply to individuals who begin work for

24 the employer after June 30, 1999.
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1 SEC. 107. EXTENSION AND MODIFICATION OF TAX CREDIT

2 FOR ELECTRICITY PRODUCED FROM CER3 TAIN RENEWABLE RESOURCES.

4 (a) EXTENSION AND MODIFICATION OF PLACED-IN5 SERVICE RULES.—Paragraph (3) of section 45(c) is

6 amended to read as follows:

7 ‘‘(3) QUALIFIED FACILITY.—

8 ‘‘(A) WIND FACILITY.—In the case of a fa9 cility using wind to produce electricity, the term

10 ‘qualified facility’ means any facility owned by

11 the taxpayer which is originally placed in serv12 ice after December 31, 1993, and before Janu13 ary 1, 2001.

14 ‘‘(B) CLOSED-LOOP BIOMASS FACILITY.—

15 In the case of a facility using closed-loop bio16 mass to produce electricity, the term ‘qualified

17 facility’ means any facility owned by the tax18 payer which is—

19 ‘‘(i) originally placed in service after

20 December 31, 1992, and before January 1,

21 2001, or

22 ‘‘(ii) originally placed in service before

23 December 31, 1992, and modified to use

24 closed-loop biomass to co-fire with coal

25 after such date and before January 1,

26 2001.
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1 ‘‘(C) BIOMASS FACILITY.—In the case of a

2 facility using biomass (other than closed-loop

3 biomass) to produce electricity, the term ‘quali4 fied facility’ means any facility owned by the

5 taxpayer which is originally placed in service be6 fore January 1, 2001.

7 ‘‘(D) LANDFILL GAS OR POULTRY WASTE

8 FACILITY.—

9 ‘‘(i) IN GENERAL.—In the case of a

10 facility using landfill gas or poultry waste

11 to produce electricity, the term ‘qualified

12 facility’ means any facility of the taxpayer

13 which is originally placed in service after

14 December 31, 1999, and before January 1,

15 2001.

16 ‘‘(ii) LANDFILL GAS.—In the case of a

17 facility using landfill gas, such term shall

18 include equipment and housing (not includ19 ing wells and related systems required to

20 collect and transmit gas to the production

21 facility) required to generate electricity

22 which are owned by the taxpayer and so

23 placed in service.

24 ‘‘(E) SPECIAL RULE.—In the case of a

25 qualified facility described in subparagraph (B)
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1 or (C) using coal to co-fire with biomass, the

2 10-year period referred to in subsection (a)

3 shall be treated as beginning no earlier than

4 January 1, 2000.’’

5 (b) EXPANSION OF QUALIFIED ENERGY RE6 SOURCES.—

7 (1) IN GENERAL.—Section 45(c)(1) (defining

8 qualified energy resources) is amended by striking

9 ‘‘and’’ at the end of subparagraph (A), by striking

10 the period at the end of subparagraph (B) and in11 serting a comma, and by adding at the end the fol12 lowing new subparagraphs:

13 ‘‘(C) biomass (other than closed-loop bio14 mass),

15 ‘‘(D) landfill gas, and

16 ‘‘(E) poultry waste.’’

17 (2) DEFINITIONS.—Section 45(c), as amended

18 by subsection (a), is amended by redesignating para19 graph (3) as paragraph (6) and inserting after para20 graph (2) the following new paragraphs:

21 ‘‘(3) BIOMASS.—The term ‘biomass’ means any

22 solid, nonhazardous, cellulosic waste material which

23 is segregated from other waste materials and which

24 is derived from—
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1 ‘‘(A) any of the following forest-related re2 sources: mill residues, precommercial thinnings,

3 slash, and brush, but not including old-growth

4 timber,

5 ‘‘(B) urban sources, including waste pal6 lets, crates, and dunnage, manufacturing and

7 construction wood wastes, and landscape or

8 right-of-way tree trimmings, but not including

9 unsegregated municipal solid waste (garbage)

10 or paper that is commonly recycled, or

11 ‘‘(C) agriculture sources, including orchard

12 tree crops, vineyard, grain, legumes, sugar, and

13 other crop by-products or residues.

14 ‘‘(4) LANDFILL GAS.—The term ‘landfill gas’

15 means gas from the decomposition of any household

16 solid waste, commercial solid waste, and industrial

17 solid waste disposed of in a municipal solid waste

18 landfill unit (as such terms are defined in regula19 tions promulgated under subtitle D of the Solid

20 Waste Disposal Act (42 U.S.C. 6941 et seq.)).

21 ‘‘(5) POULTRY WASTE.—The term ‘poultry

22 waste’ means poultry manure and litter, including

23 wood shavings, straw, rice hulls, and other bedding

24 material for the disposition of manure.’’
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1 (c) SPECIAL RULES.—Section 45(d) (relating to defi2 nitions and special rules) is amended by adding at the end

3 the following new paragraphs:

4 ‘‘(6) CREDIT ELIGIBILITY IN THE CASE OF GOV5 ERNMENT-OWNED FACILITIES USING POULTRY

6 WASTE.—In the case of a facility using poultry

7 waste to produce electricity and owned by a govern8 mental unit, the person eligible for the credit under

9 subsection (a) is the lessor or the operator of such

10 facility.

11 ‘‘(7) PROPORTIONAL CREDIT FOR FACILITY

12 USING COAL TO CO-FIRE WITH BIOMASS.—In the

13 case of a qualified facility described in subparagraph

14 (B) or (C) of subsection (c)(6) using coal to co-fire

15 with biomass, the amount of the credit determined

16 under subsection (a) for the taxable year shall be re17 duced by the percentage coal comprises (on a Btu

18 basis) of the average fuel input of the facility for the

19 taxable year.

20 ‘‘(8) DENIAL OF DOUBLE BENEFIT.—No credit

21 shall be allowed under this section with respect to a

22 facility for any taxable year if the credit under sec23 tion 29 is allowed in such year or has been allowed

24 in any preceding taxable year with respect to any

25 fuel produced from such facility.’’
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1 (d) CONFORMING AMENDMENT.—Section 29(d) (re2 lating to other definitions and special rules) is amended

3 by adding at the end the following new paragraph:

4 ‘‘(9) DENIAL OF DOUBLE BENEFIT.—No credit

5 shall be allowed under this section with respect to

6 any fuel produced from a facility for any taxable

7 year if the credit under section 45 is allowed in such

8 year or has been allowed in any preceding taxable

9 year with respect to such facility.’’

10 (e) EFFECTIVE DATE.—The amendments made by

11 this section shall take effect on the date of the enactment

12 of this Act.

13 SEC. 108. EXPANSION OF BROWNFIELDS ENVIRONMENTAL

14 REMEDIATION.

15 (a) IN GENERAL.—Section 198(c) is amended to read

16 as follows:

17 ‘‘(c) QUALIFIED CONTAMINATED SITE.—For pur18 poses of this section—

19 ‘‘(1) IN GENERAL.—The term ‘qualified con20 taminated site’ means any area—

21 ‘‘(A) which is held by the taxpayer for use

22 in a trade or business or for the production of

23 income, or which is property described in sec24 tion 1221(1) in the hands of the taxpayer, and
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1 ‘‘(B) at or on which there has been a re2 lease (or threat of release) or disposal of any

3 hazardous substance.

4 ‘‘(2) NATIONAL PRIORITIES LISTED SITES NOT

5 INCLUDED.—Such term shall not include any site

6 which is on, or proposed for, the national priorities

7 list under section 105(a)(8)(B) of the Comprehen8 sive Environmental Response, Compensation, and

9 Liability Act of 1980 (as in effect on the date of the

10 enactment of this section).

11 ‘‘(3) TAXPAYER MUST RECEIVE STATEMENT

12 FROM STATE ENVIRONMENTAL AGENCY.—An area

13 shall be treated as a qualified contaminated site with

14 respect to expenditures paid or incurred during any

15 taxable year only if the taxpayer receives a state16 ment from the appropriate environmental agency of

17 the State in which such area is located that such

18 area meets the requirement of paragraph (1)(B).

19 ‘‘(4) APPROPRIATE STATE AGENCY.—For pur20 poses of paragraph (3), the chief executive officer of

21 each State may, in consultation with the Adminis22 trator of the Environmental Protection Agency, des23 ignate the appropriate State environmental agency

24 within 60 days of the date of the enactment of this

25 section. If the chief executive officer of a State has
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1 not designated an appropriate State environmental

2 agency within such 60-day period, the appropriate

3 environmental agency for such State shall be des4 ignated by the Administrator of the Environmental

5 Protection Agency.’’

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

7 this section shall apply to expenditures paid or incurred

8 after December 31, 1999.

9 SEC. 109. TEMPORARY INCREASE IN AMOUNT OF RUM EX10 CISE TAX COVERED OVER TO PUERTO RICO

11 AND VIRGIN ISLANDS.

12 (a) IN GENERAL.—Section 7652(f)(1) (relating to

13 limitation on cover over of tax on distilled spirits) is

14 amended to read as follows:

15 ‘‘(1) $10.50 ($13.50 in the case of distilled

16 spirits brought into the United States after June 30,

17 1999, and before January 1, 2001), or’’.

18 (b) EFFECTIVE DATE.—

19 (1) IN GENERAL.—The amendment made by

20 this section shall take effect on July 1, 1999.

21 (2) SPECIAL RULE.—

22 (A) IN GENERAL.—For the period begin23 ning after June 30, 1999, and before January

24 1, 2001, the treasury of Puerto Rico shall make

25 a Conservation Trust Fund transfer within 30
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1 days from the date of each cover over payment

2 made during such period to such treasury under

3 section 7652(e) of the Internal Revenue Code of

4 1986.

5 (B) CONSERVATION TRUST FUND TRANS6 FER.—

7 (i) IN GENERAL.—For purposes of

8 this paragraph, the term ‘‘Conservation

9 Trust Fund transfer’’ means a transfer to

10 the Puerto Rico Conservation Trust Fund

11 of an amount equal to 50 cents per proof

12 gallon of the taxes imposed under section

13 5001 or section 7652 of such Code on dis14 tilled spirits that are covered over to the

15 treasury of Puerto Rico under section

16 7652(e) of such Code.

17 (ii) TREATMENT OF TRANSFER.—

18 Each Conservation Trust Fund transfer

19 shall be treated as principal for an endow20 ment, the income from which to be avail21 able for use by the Puerto Rico Conserva22 tion Trust Fund for the purposes for

23 which the Trust Fund was established.

24 (iii) RESULT OF NONTRANSFER.—
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1 (I) IN GENERAL.—Upon notifica2 tion by the Secretary of the Interior

3 that a Conservation Trust Fund

4 transfer has not been made by the

5 treasury of Puerto Rico during the pe6 riod described in subparagraph (A),

7 the Secretary of the Treasury shall,

8 except as provided in subclause (II),

9 deduct and withhold from the next

10 cover over payment to be made to the

11 treasury of Puerto Rico under section

12 7652(e) of such Code an amount

13 equal to the appropriate Conservation

14 Trust Fund transfer and interest

15 thereon at the underpayment rate es16 tablished under section 6621 of such

17 Code as of the due date of such trans18 fer. The Secretary of the Treasury

19 shall transfer such amount deducted

20 and withheld, and the interest there21 on, directly to the Puerto Rico Con22 servation Trust Fund.

23 (II) GOOD CAUSE EXCEPTION.—

24 If the Secretary of the Interior finds,

25 after consultation with the Governor
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1 of Puerto Rico, that the failure by the

2 treasury of Puerto Rico to make a re3 quired transfer was for good cause,

4 and notifies the Secretary of the

5 Treasury of the finding of such good

6 cause before the due date of the next

7 cover over payment following the noti8 fication of nontransfer, then the Sec9 retary of the Treasury shall not de10 duct the amount of such nontransfer

11 from any cover over payment.

12 (C) PUERTO RICO CONSERVATION TRUST

13 FUND.—For purposes of this paragraph, the

14 term ‘‘Puerto Rico Conservation Trust Fund’’

15 means the fund established pursuant to a

16 Memorandum of Understanding between the

17 United States Department of the Interior and

18 the Commonwealth of Puerto Rico, dated De19 cember 24, 1968.

20 SEC. 110. DELAY REQUIREMENT THAT REGISTERED MOTOR

21 FUELS TERMINALS OFFER DYED FUEL AS A

22 CONDITION OF REGISTRATION.

23 Subsection (f)(2) of section 1032 of the Taxpayer Re24 lief Act of 1997, as amended by section 9008 of the Trans-
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1 portation Equity Act for the 21st Century, is amended by

2 striking ‘‘July 1, 2000’’ and inserting ‘‘January 1, 2001’’.

3 SEC. 111. EXTENSION OF PRODUCTION CREDIT FOR FUEL

4 PRODUCED BY CERTAIN GASIFICATION FA5 CILITIES.

6 (a) IN GENERAL.—Section 29(g)(1)(A) (relating to

7 extension for certain facilities) is amended by striking

8 ‘‘July 1, 1998’’ and inserting ‘‘July 1, 2000’’.

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

10 this section shall apply to fuels produced on and after July

11 1, 1998.

12 (c) SPECIAL RULE.—

13 (1) IN GENERAL.—For purposes of the Internal

14 Revenue Code of 1986, the credit determined under

15 section 29 of such Code which is otherwise allowable

16 under such Code by reason of the amendment made

17 by subsection (a) and which is attributable to the

18 suspension period shall not be taken into account

19 prior to October 1, 2004. On or after such date,

20 such credit may be taken into account through the

21 filing of an amended return, an application for expe22 dited refund, an adjustment of estimated taxes, or

23 other means allowed by such Code. Interest shall not

24 be allowed under section 6511(a) of such Code on

25 any overpayment attributable to such credit for any
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1 period before the 45th day after the credit is taken

2 into account under the preceding sentence.

3 (2) SUSPENSION PERIOD.—For purposes of this

4 subsection, the suspension period is the period be5 ginning on July 1, 1998, and ending on September

6 30, 2004.

7 (3) EXPEDITED REFUNDS.—

8 (A) IN GENERAL.—If there is an overpay9 ment of tax with respect to a taxable year by

10 reason of paragraph (1), the taxpayer may file

11 an application for a tentative refund of such

12 overpayment. Such application shall be in such

13 manner and form, and contain such informa14 tion, as the Secretary may prescribe.

15 (B) DEADLINE FOR APPLICATIONS.—Sub16 paragraph (A) shall apply only to applications

17 filed before October 1, 2005.

18 (C) ALLOWANCE OF ADJUSTMENTS.—Not

19 later than 90 days after the date on which an

20 application is filed under this paragraph, the

21 Secretary shall—

22 (i) review the application,

23 (ii) determine the amount of the over24 payment, and
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1 (iii) apply, credit, or refund such over2 payment,

3 in a manner similar to the manner provided in

4 section 6411(b) of such Code.

5 (D) CONSOLIDATED RETURNS.—The provi6 sions of section 6411(c) of such Code shall

7 apply to an adjustment under this paragraph in

8 such manner as the Secretary may provide.

9 (4) CREDIT ATTRIBUTABLE TO SUSPENSION PE10 RIOD.—For purposes of this subsection, in the case

11 of a taxable year which includes a portion of the sus12 pension period, the amount of credit determined

13 under section 29 of such Code for such taxable year

14 which is attributable to such period is the amount

15 which bears the same ratio to the amount of credit

16 determined under such section 29 for such taxable

17 year as the number of months in the suspension pe18 riod which are during such taxable year bears to the

19 number of months in such taxable year.

20 (5) WAIVER OF STATUTE OF LIMITATIONS.—If,

21 on October 1, 2004 (or at any time within the 1-

22 year period beginning on such date) credit or refund

23 of any overpayment of tax resulting from the provi24 sions of this subsection is barred by any law or rule

25 of law, credit or refund of such overpayment shall,
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1 nevertheless, be allowed or made if claim therefore

2 is filed before the date 1 year after October 1, 2004.

3 (6) SECRETARY.—For purposes of this sub4 section, the term ‘‘Secretary’’ means the Secretary

5 of the Treasury (or such Secretary’s delegate).

6 TITLE II—REVENUE OFFSET

7 PROVISIONS

8 Subtitle A—General Provisions

9 SEC. 201. MODIFICATION OF INDIVIDUAL ESTIMATED TAX

10 SAFE HARBOR.

11 (a) IN GENERAL.—The table contained in clause (i)

12 of section 6654(d)(1)(C) (relating to limitation on use of

13 preceding year’s tax) is amended by striking all matter

14 beginning with the item relating to 1999 or 2000 and in15 serting the following new items:

‘‘1999 ....................................................................................... 110.5

2000 ....................................................................................... 106

2001 ....................................................................................... 112

2002 ....................................................................................... 110

2003 ....................................................................................... 112

2004 or thereafter ................................................................. 110’’.

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

17 this section shall apply with respect to any installment

18 payment for taxable years beginning after December 31,

19 1999.
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1 SEC. 202. MODIFICATION OF FOREIGN TAX CREDIT CARRY2 OVER RULES.

3 (a) IN GENERAL.—Section 904(c) (relating to limita4 tion on credit) is amended—

5 (1) by striking ‘‘in the second preceding taxable

6 year,’’, and

7 (2) by striking ‘‘or fifth’’ and inserting ‘‘fifth,

8 sixth, or seventh’’.

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

10 subsection (a) shall apply to credits arising in taxable

11 years beginning after December 31, 1999.

12 SEC. 203. CLARIFICATION OF TAX TREATMENT OF INCOME

13 AND LOSS ON DERIVATIVES.

14 (a) IN GENERAL.—Section 1221 (defining capital as15 sets) is amended—

16 (1) by striking ‘‘For purposes’’ and inserting

17 the following:

18 ‘‘(a) IN GENERAL.—For purposes’’,

19 (2) by striking the period at the end of para20 graph (5) and inserting a semicolon, and

21 (3) by adding at the end the following:

22 ‘‘(6) any commodities derivative financial in23 strument held by a commodities derivatives dealer,

24 unless—

25 ‘‘(A) it is established to the satisfaction of

26 the Secretary that such instrument has no con-
25

•S 1792 PCS

1 nection to the activities of such dealer as a

2 dealer, and

3 ‘‘(B) such instrument is clearly identified

4 in such dealer’s records as being described in

5 subparagraph (A) before the close of the day on

6 which it was acquired, originated, or entered

7 into (or such other time as the Secretary may

8 by regulations prescribe);

9 ‘‘(7) any hedging transaction which is clearly

10 identified as such before the close of the day on

11 which it was acquired, originated, or entered into (or

12 such other time as the Secretary may by regulations

13 prescribe); or

14 ‘‘(8) supplies of a type regularly used or con15 sumed by the taxpayer in the ordinary course of a

16 trade or business of the taxpayer.

17 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—

18 ‘‘(1) COMMODITIES DERIVATIVE FINANCIAL IN19 STRUMENTS.—For purposes of subsection (a)(6)—

20 ‘‘(A) COMMODITIES DERIVATIVES DEAL21 ER.—The term ‘commodities derivatives dealer’

22 means a person which regularly offers to enter

23 into, assume, offset, assign, or terminate posi24 tions in commodities derivative financial instru-
26

•S 1792 PCS

1 ments with customers in the ordinary course of

2 a trade or business.

3 ‘‘(B) COMMODITIES DERIVATIVE FINAN4 CIAL INSTRUMENT.—

5 ‘‘(i) IN GENERAL.—The term ‘com6 modities derivative financial instrument’

7 means any contract or financial instrument

8 with respect to commodities (other than a

9 share of stock in a corporation, a beneficial

10 interest in a partnership or trust, a note,

11 bond, debenture, or other evidence of in12 debtedness, or a section 1256 contract (as

13 defined in section 1256(b)), the value or

14 settlement price of which is calculated by

15 or determined by reference to a specified

16 index.

17 ‘‘(ii) SPECIFIED INDEX.—The term

18 ‘specified index’ means any one or more or

19 any combination of—

20 ‘‘(I) a fixed rate, price, or

21 amount, or

22 ‘‘(II) a variable rate, price, or

23 amount,

24 which is based on any current, objectively

25 determinable financial or economic infor-
27

•S 1792 PCS

1 mation with respect to commodities which

2 is not within the control of any of the par3 ties to the contract or instrument and is

4 not unique to any of the parties’ cir5 cumstances.

6 ‘‘(2) HEDGING TRANSACTION.—

7 ‘‘(A) IN GENERAL.—For purposes of this

8 section, the term ‘hedging transaction’ means

9 any transaction entered into by the taxpayer in

10 the normal course of the taxpayer’s trade or

11 business primarily—

12 ‘‘(i) to manage risk of price changes

13 or currency fluctuations with respect to or14 dinary property which is held or to be held

15 by the taxpayer,

16 ‘‘(ii) to manage risk of interest rate or

17 price changes or currency fluctuations with

18 respect to borrowings made or to be made,

19 or ordinary obligations incurred or to be

20 incurred, by the taxpayer, or

21 ‘‘(iii) to manage such other risks as

22 the Secretary may prescribe in regulations.

23 ‘‘(B) TREATMENT OF NONIDENTIFICATION

24 OR IMPROPER IDENTIFICATION OF HEDGING

25 TRANSACTIONS.—Notwithstanding subsection
28

•S 1792 PCS

1 (a)(7), the Secretary shall prescribe regulations

2 to properly characterize any income, gain, ex3 pense, or loss arising from a transaction—

4 ‘‘(i) which is a hedging transaction

5 but which was not identified as such in ac6 cordance with subsection (a)(7), or

7 ‘‘(ii) which was so identified but is not

8 a hedging transaction.

9 ‘‘(3) REGULATIONS.—The Secretary shall pre10 scribe such regulations as are appropriate to carry

11 out the purposes of paragraph (6) and (7) of sub12 section (a) in the case of transactions involving re13 lated parties.’’.

14 (b) MANAGEMENT OF RISK.—

15 (1) Section 475(c)(3) is amended by striking

16 ‘‘reduces’’ and inserting ‘‘manages’’.

17 (2) Section 871(h)(4)(C)(iv) is amended by

18 striking ‘‘to reduce’’ and inserting ‘‘to manage’’.

19 (3) Clauses (i) and (ii) of section 988(d)(2)(A)

20 are each amended by striking ‘‘to reduce’’ and in21 serting ‘‘to manage’’.

22 (4) Paragraph (2) of section 1256(e) is amend23 ed to read as follows:

24 ‘‘(2) DEFINITION OF HEDGING TRANSACTION.—

25 For purposes of this subsection, the term ‘hedging
29

•S 1792 PCS

1 transaction’ means any hedging transaction (as de2 fined in section 1221(b)(2)(A)) if, before the close

3 of the day on which such transaction was entered

4 into (or such earlier time as the Secretary may pre5 scribe by regulations), the taxpayer clearly identifies

6 such transaction as being a hedging transaction.’’.

7 (c) CONFORMING AMENDMENTS.—

8 (1) Each of the following sections are amended

9 by striking ‘‘section 1221’’ and inserting ‘‘section

10 1221(a)’’:

11 (A) Section 170(e)(3)(A).

12 (B) Section 170(e)(4)(B).

13 (C) Section 367(a)(3)(B)(i).

14 (D) Section 818(c)(3).

15 (E) Section 865(i)(1).

16 (F) Section 1092(a)(3)(B)(ii)(II).

17 (G) Subparagraphs (C) and (D) of section

18 1231(b)(1).

19 (H) Section 1234(a)(3)(A).

20 (2) Each of the following sections are amended

21 by striking ‘‘section 1221(1)’’ and inserting ‘‘section

22 1221(a)(1)’’:

23 (A) Section 198(c)(1)(A)(i).

24 (B) Section 263A(b)(2)(A).
30

•S 1792 PCS

1 (C) Clauses (i) and (iii) of section

2 267(f )(3)(B).

3 (D) Section 341(d)(3).

4 (E) Section 543(a)(1)(D)(i).

5 (F) Section 751(d)(1).

6 (G) Section 775(c).

7 (H) Section 856(c)(2)(D).

8 (I) Section 856(c)(3)(C).

9 (J) Section 856(e)(1).

10 (K) Section 856( j)(2)(B).

11 (L) Section 857(b)(4)(B)(i).

12 (M) Section 857(b)(6)(B)(iii).

13 (N) Section 864(c)(4)(B)(iii).

14 (O) Section 864(d)(3)(A).

15 (P) Section 864(d)(6)(A).

16 (Q) Section 954(c)(1)(B)(iii).

17 (R) Section 995(b)(1)(C).

18 (S) Section 1017(b)(3)(E)(i).

19 (T) Section 1362(d)(3)(C)(ii).

20 (U) Section 4662(c)(2)(C).

21 (V) Section 7704(c)(3).

22 (W) Section 7704(d)(1)(D).

23 (X) Section 7704(d)(1)(G).

24 (Y) Section 7704(d)(5).
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•S 1792 PCS

1 (3) Section 818(b)(2) is amended by striking

2 ‘‘section 1221(2)’’ and inserting ‘‘section

3 1221(a)(2)’’.

4 (4) Section 1397B(e)(2) is amended by striking

5 ‘‘section 1221(4)’’ and inserting ‘‘section

6 1221(a)(4)’’.

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

8 this section shall apply to any instrument held, acquired,

9 or entered into, any transaction entered into, and supplies

10 held or acquired on or after the date of the enactment

11 of this Act.

12 SEC. 204. INCLUSION OF CERTAIN VACCINES AGAINST

13 STREPTOCOCCUS PNEUMONIAE TO LIST OF

14 TAXABLE VACCINES.

15 (a) INCLUSION OF VACCINES.—

16 (1) IN GENERAL.—Section 4132(a)(1) (defining

17 taxable vaccine) is amended by adding at the end

18 the following new subparagraph:

19 ‘‘(L) Any conjugate vaccine against strep20 tococcus pneumoniae.’’

21 (2) EFFECTIVE DATE.—

22 (A) SALES.—The amendment made by this

23 subsection shall apply to vaccine sales beginning

24 on the day after the date on which the Centers

25 for Disease Control makes a final recommenda-
32

•S 1792 PCS

1 tion for routine administration to children of

2 any conjugate vaccine against streptococcus

3 pneumoniae, but shall not take effect if sub4 section (b) does not take effect.

5 (B) DELIVERIES.—For purposes of sub6 paragraph (A), in the case of sales on or before

7 the date described in such subparagraph for

8 which delivery is made after such date, the de9 livery date shall be considered the sale date.

10 (b) VACCINE TAX AND TRUST FUND AMEND11 MENTS.—

12 (1) Sections 1503 and 1504 of the Vaccine In13 jury Compensation Program Modification Act (and

14 the amendments made by such sections) are hereby

15 repealed.

16 (2) Subparagraph (A) of section 9510(c)(1) is

17 amended by striking ‘‘August 5, 1997’’ and insert18 ing ‘‘October 21, 1998’’.

19 (3) The amendments made by this subsection

20 shall take effect as if included in the provisions of

21 the Omnibus Consolidated and Emergency Supple22 mental Appropriations Act, 1999 to which they re23 late.

24 (c) REPORT.—Not later than January 31, 2000, the

25 Comptroller General of the United States shall prepare
33

•S 1792 PCS

1 and submit a report to the Committee on Ways and Means

2 of the House of Representatives and the Committee on

3 Finance of the Senate on the operation of the Vaccine In4 jury Compensation Trust Fund and on the adequacy of

5 such Fund to meet future claims made under the Vaccine

6 Injury Compensation Program.

7 SEC. 205. EXPANSION OF REPORTING OF CANCELLATION

8 OF INDEBTEDNESS INCOME.

9 (a) IN GENERAL.—Paragraph (2) of section

10 6050P(c) (relating to definitions and special rules) is

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

12 (B), by striking the period at the end of subparagraph

13 (C) and inserting ‘‘, and’’, and by inserting after subpara14 graph (C) the following new subparagraph:

15 ‘‘(D) any organization a significant trade

16 or business of which is the lending of money.’’

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

18 subsection (a) shall apply to discharges of indebtedness

19 after December 31, 1999.

20 SEC. 206. IMPOSITION OF LIMITATION ON PREFUNDING OF

21 CERTAIN EMPLOYEE BENEFITS.

22 (a) BENEFITS TO WHICH EXCEPTION APPLIES.—

23 Section 419A(f)(6)(A) (relating to exception for 10 or

24 more employer plans) is amended to read as follows:
34

•S 1792 PCS

1 ‘‘(A) IN GENERAL.—This subpart shall not

2 apply to a welfare benefit fund which is part of

3 a 10 or more employer plan if the only benefits

4 provided through the fund are 1 or more of the

5 following:

6 ‘‘(i) Medical benefits.

7 ‘‘(ii) Disability benefits.

8 ‘‘(iii) Group term life insurance bene9 fits which do not provide directly or indi10 rectly for any cash surrender value or

11 other money that can be paid, assigned,

12 borrowed, or pledged for collateral for a

13 loan.

14 The preceding sentence shall not apply to any

15 plan which maintains experience-rating arrange16 ments with respect to individual employers.’’

17 (b) LIMITATION ON USE OF AMOUNTS FOR OTHER

18 PURPOSES.—Section 4976(b) (defining disqualified ben19 efit) is amended by adding at the end the following new

20 paragraph:

21 ‘‘(5) SPECIAL RULE FOR 10 OR MORE EM22 PLOYER PLANS EXEMPTED FROM PREFUNDING LIM23 ITS.—For purposes of paragraph (1)(C), if—

24 ‘‘(A) subpart D of part I of subchapter D

25 of chapter 1 does not apply by reason of section
35

•S 1792 PCS

1 419A(f)(6) to contributions to provide 1 or

2 more welfare benefits through a welfare benefit

3 fund under a 10 or more employer plan, and

4 ‘‘(B) any portion of the welfare benefit

5 fund attributable to such contributions is used

6 for a purpose other than that for which the con7 tributions were made,

8 then such portion shall be treated as reverting to the

9 benefit of the employers maintaining the fund.’’

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

11 this section shall apply to contributions paid or accrued

12 after June 9, 1999, in taxable years ending after such

13 date.

14 SEC. 207. INCREASE IN ELECTIVE WITHHOLDING RATE FOR

15 NONPERIODIC DISTRIBUTIONS FROM DE16 FERRED COMPENSATION PLANS.

17 (a) IN GENERAL.—Section 3405(b)(1) (relating to

18 withholding) is amended by striking ‘‘10 percent’’ and in19 serting ‘‘15 percent’’.

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

21 subsection (a) shall apply to distributions after December

22 31, 2000.
36

•S 1792 PCS

1 SEC. 208. LIMITATION ON CONVERSION OF CHARACTER OF

2 INCOME FROM CONSTRUCTIVE OWNERSHIP

3 TRANSACTIONS.

4 (a) IN GENERAL.—Part IV of subchapter P of chap5 ter 1 (relating to special rules for determining capital

6 gains and losses) is amended by inserting after section

7 1259 the following new section:

8 ‘‘SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP

9 TRANSACTIONS.

10 ‘‘(a) IN GENERAL.—If the taxpayer has gain from

11 a constructive ownership transaction with respect to any

12 financial asset and such gain would (without regard to this

13 section) be treated as a long-term capital gain—

14 ‘‘(1) such gain shall be treated as ordinary in15 come to the extent that such gain exceeds the net

16 underlying long-term capital gain, and

17 ‘‘(2) to the extent such gain is treated as a

18 long-term capital gain after the application of para19 graph (1), the determination of the capital gain rate

20 (or rates) applicable to such gain under section 1(h)

21 shall be determined on the basis of the respective

22 rate (or rates) that would have been applicable to

23 the net underlying long-term capital gain.

24 ‘‘(b) INTEREST CHARGE ON DEFERRAL OF GAIN

25 RECOGNITION.—
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•S 1792 PCS

1 ‘‘(1) IN GENERAL.—If any gain is treated as

2 ordinary income for any taxable year by reason of

3 subsection (a)(1), the tax imposed by this chapter

4 for such taxable year shall be increased by the

5 amount of interest determined under paragraph (2)

6 with respect to each prior taxable year during any

7 portion of which the constructive ownership trans8 action was open. Any amount payable under this

9 paragraph shall be taken into account in computing

10 the amount of any deduction allowable to the tax11 payer for interest paid or accrued during such tax12 able year.

13 ‘‘(2) AMOUNT OF INTEREST.—The amount of

14 interest determined under this paragraph with re15 spect to a prior taxable year is the amount of inter16 est which would have been imposed under section

17 6601 on the underpayment of tax for such year

18 which would have resulted if the gain (which is

19 treated as ordinary income by reason of subsection

20 (a)(1)) had been included in gross income in the tax21 able years in which it accrued (determined by treat22 ing the income as accruing at a constant rate equal

23 to the applicable Federal rate as in effect on the day

24 the transaction closed). The period during which

25 such interest shall accrue shall end on the due date
38

•S 1792 PCS

1 (without extensions) for the return of tax imposed

2 by this chapter for the taxable year in which such

3 transaction closed.

4 ‘‘(3) APPLICABLE FEDERAL RATE.—For pur5 poses of paragraph (2), the applicable Federal rate

6 is the applicable Federal rate determined under

7 1274(d) (compounded semiannually) which would

8 apply to a debt instrument with a term equal to the

9 period the transaction was open.

10 ‘‘(4) NO CREDITS AGAINST INCREASE IN TAX.—

11 Any increase in tax under paragraph (1) shall not

12 be treated as tax imposed by this chapter for pur13 poses of determining—

14 ‘‘(A) the amount of any credit allowable

15 under this chapter, or

16 ‘‘(B) the amount of the tax imposed by

17 section 55.

18 ‘‘(c) FINANCIAL ASSET.—For purposes of this

19 section—

20 ‘‘(1) IN GENERAL.—The term ‘financial asset’

21 means—

22 ‘‘(A) any equity interest in any pass-thru

23 entity, and

24 ‘‘(B) to the extent provided in

25 regulations—
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•S 1792 PCS

1 ‘‘(i) any debt instrument, and

2 ‘‘(ii) any stock in a corporation which

3 is not a pass-thru entity.

4 ‘‘(2) PASS-THRU ENTITY.—For purposes of

5 paragraph (1), the term ‘pass-thru entity’ means—

6 ‘‘(A) a regulated investment company,

7 ‘‘(B) a real estate investment trust,

8 ‘‘(C) an S corporation,

9 ‘‘(D) a partnership,

10 ‘‘(E) a trust,

11 ‘‘(F) a common trust fund,

12 ‘‘(G) a passive foreign investment company

13 (as defined in section 1297 without regard to

14 subsection (e) thereof),

15 ‘‘(H) a foreign personal holding company,

16 ‘‘(I) a foreign investment company (as de17 fined in section 1246(b)), and

18 ‘‘(J) a REMIC.

19 ‘‘(d) CONSTRUCTIVE OWNERSHIP TRANSACTION.—

20 For purposes of this section—

21 ‘‘(1) IN GENERAL.—The taxpayer shall be

22 treated as having entered into a constructive owner23 ship transaction with respect to any financial asset

24 if the taxpayer—
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•S 1792 PCS

1 ‘‘(A) holds a long position under a notional

2 principal contract with respect to the financial

3 asset,

4 ‘‘(B) enters into a forward or futures con5 tract to acquire the financial asset,

6 ‘‘(C) is the holder of a call option, and is

7 the grantor of a put option, with respect to the

8 financial asset and such options have substan9 tially equal strike prices and substantially con10 temporaneous maturity dates, or

11 ‘‘(D) to the extent provided in regulations

12 prescribed by the Secretary, enters into one or

13 more other transactions (or acquires one or

14 more positions) that have substantially the

15 same effect as a transaction described in any of

16 the preceding subparagraphs.

17 ‘‘(2) EXCEPTION FOR POSITIONS WHICH ARE

18 MARKED TO MARKET.—This section shall not apply

19 to any constructive ownership transaction if all of

20 the positions which are part of such transaction are

21 marked to market under any provision of this title

22 or the regulations thereunder.

23 ‘‘(3) LONG POSITION UNDER NOTIONAL PRIN24 CIPAL CONTRACT.—A person shall be treated as

25 holding a long position under a notional principal
41

•S 1792 PCS

1 contract with respect to any financial asset if such

2 person—

3 ‘‘(A) has the right to be paid (or receive

4 credit for) all or substantially all of the invest5 ment yield (including appreciation) on such fi6 nancial asset for a specified period, and

7 ‘‘(B) is obligated to reimburse (or provide

8 credit for) all or substantially all of any decline

9 in the value of such financial asset.

10 ‘‘(4) FORWARD CONTRACT.—The term ‘forward

11 contract’ means any contract to acquire in the fu12 ture (or provide or receive credit for the future value

13 of) any financial asset.

14 ‘‘(e) NET UNDERLYING LONG-TERM CAPITAL

15 GAIN.—For purposes of this section, in the case of any

16 constructive ownership transaction with respect to any fi17 nancial asset, the term ‘net underlying long-term capital

18 gain’ means the aggregate net capital gain that the tax19 payer would have had if—

20 ‘‘(1) the financial asset had been acquired for

21 fair market value on the date such transaction was

22 opened and sold for fair market value on the date

23 such transaction was closed, and
42

•S 1792 PCS

1 ‘‘(2) only gains and losses that would have re2 sulted from the deemed ownership under paragraph

3 (1) were taken into account.

4 The amount of the net underlying long-term capital gain

5 with respect to any financial asset shall be treated as zero

6 unless the amount thereof is established by clear and con7 vincing evidence.

8 ‘‘(f ) SPECIAL RULE WHERE TAXPAYER TAKES DE9 LIVERY.—Except as provided in regulations prescribed by

10 the Secretary, if a constructive ownership transaction is

11 closed by reason of taking delivery, this section shall be

12 applied as if the taxpayer had sold all the contracts, op13 tions, or other positions which are part of such transaction

14 for fair market value on the closing date. The amount of

15 gain recognized under the preceding sentence shall not ex16 ceed the amount of gain treated as ordinary income under

17 subsection (a). Proper adjustments shall be made in the

18 amount of any gain or loss subsequently realized for gain

19 recognized and treated as ordinary income under this sub20 section.

21 ‘‘(g) REGULATIONS.—The Secretary shall prescribe

22 such regulations as may be necessary or appropriate to

23 carry out the purposes of this section, including

24 regulations—
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•S 1792 PCS

1 ‘‘(1) to permit taxpayers to mark to market

2 constructive ownership transactions in lieu of apply3 ing this section, and

4 ‘‘(2) to exclude certain forward contracts which

5 do not convey substantially all of the economic re6 turn with respect to a financial asset.’’

7 (b) CLERICAL AMENDMENT.—The table of sections

8 for part IV of subchapter P of chapter 1 is amended by

9 adding at the end the following new item:

‘‘Sec. 1260. Gains from constructive ownership transactions.’’

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

11 this section shall apply to transactions entered into after

12 July 11, 1999.

13 SEC. 209. TREATMENT OF EXCESS PENSION ASSETS USED

14 FOR RETIREE HEALTH BENEFITS.

15 (a) EXTENSION.—

16 (1) IN GENERAL.—Paragraph (5) of section

17 420(b) (relating to expiration) is amended by strik18 ing ‘‘in any taxable year beginning after December

19 31, 2000’’ and inserting ‘‘made after September 30,

20 2009’’.

21 (2) CONFORMING AMENDMENTS.—

22 (A) Section 101(e)(3) of the Employee Re23 tirement Income Security Act of 1974 (29

24 U.S.C. 1021(e)(3)) is amended by striking

25 ‘‘January 1, 1995’’ and inserting ‘‘the date of
44

•S 1792 PCS

1 the enactment of the Tax Relief Extension Act

2 of 1999’’.

3 (B) Section 403(c)(1) of such Act (29

4 U.S.C. 1103(c)(1)) is amended by striking

5 ‘‘January 1, 1995’’ and inserting ‘‘the date of

6 the enactment of the Tax Relief Extension Act

7 of 1999’’.

8 (C) Paragraph (13) of section 408(b) of

9 such Act (29 U.S.C. 1108(b)(13)) is

10 amended—

11 (i) by striking ‘‘in a taxable year be12 ginning before January 1, 2001’’ and in13 serting ‘‘made before October 1, 2009’’,

14 and

15 (ii) by striking ‘‘January 1, 1995’’

16 and inserting ‘‘the date of the enactment

17 of the Tax Relief Extension Act of 1999’’.

18 (b) APPLICATION OF MINIMUM COST REQUIRE19 MENTS.—

20 (1) IN GENERAL.—Paragraph (3) of section

21 420(c) is amended to read as follows:

22 ‘‘(3) MINIMUM COST REQUIREMENTS.—

23 ‘‘(A) IN GENERAL.—The requirements of

24 this paragraph are met if each group health

25 plan or arrangement under which applicable
45

•S 1792 PCS

1 health benefits are provided provides that the

2 applicable employer cost for each taxable year

3 during the cost maintenance period shall not be

4 less than the higher of the applicable employer

5 costs for each of the 2 taxable years imme6 diately preceding the taxable year of the quali7 fied transfer.

8 ‘‘(B) APPLICABLE EMPLOYER COST.—For

9 purposes of this paragraph, the term ‘applicable

10 employer cost’ means, with respect to any tax11 able year, the amount determined by dividing—

12 ‘‘(i) the qualified current retiree

13 health liabilities of the employer for such

14 taxable year determined—

15 ‘‘(I) without regard to any reduc16 tion under subsection (e)(1)(B), and

17 ‘‘(II) in the case of a taxable

18 year in which there was no qualified

19 transfer, in the same manner as if

20 there had been such a transfer at the

21 end of the taxable year, by

22 ‘‘(ii) the number of individuals to

23 whom coverage for applicable health bene24 fits was provided during such taxable year.
46

•S 1792 PCS

1 ‘‘(C) ELECTION TO COMPUTE COST SEPA2 RATELY.—An employer may elect to have this

3 paragraph applied separately with respect to in4 dividuals eligible for benefits under title XVIII

5 of the Social Security Act at any time during

6 the taxable year and with respect to individuals

7 not so eligible.

8 ‘‘(D) COST MAINTENANCE PERIOD.—For

9 purposes of this paragraph, the term ‘cost

10 maintenance period’ means the period of 5 tax11 able years beginning with the taxable year in

12 which the qualified transfer occurs. If a taxable

13 year is in two or more overlapping cost mainte14 nance periods, this paragraph shall be applied

15 by taking into account the highest applicable

16 employer cost required to be provided under

17 subparagraph (A) for such taxable year.’’.

18 (2) CONFORMING AMENDMENTS.—

19 (A) Clause (iii) of section 420(b)(1)(C) is

20 amended by striking ‘‘benefits’’ and inserting

21 ‘‘cost’’.

22 (B) Subparagraph (D) of section 420(e)(1)

23 is amended by striking ‘‘and shall not be sub24 ject to the minimum benefit requirements of

25 subsection (c)(3)’’ and inserting ‘‘or in calcu-
47

•S 1792 PCS

1 lating applicable employer cost under subsection

2 (c)(3)(B)’’.

3 (c) EFFECTIVE DATES.—

4 (1) IN GENERAL.—The amendments made by

5 this section shall apply to qualified transfers occur6 ring after the date of the enactment of this Act.

7 (2) TRANSITION RULE.—If the cost mainte8 nance period for any qualified transfer after the date

9 of the enactment of this Act includes any portion of

10 a benefit maintenance period for any qualified trans11 fer on or before such date, the amendments made by

12 subsection (b) shall not apply to such portion of the

13 cost maintenance period (and such portion shall be

14 treated as a benefit maintenance period).

15 SEC. 210. MODIFICATION OF INSTALLMENT METHOD AND

16 REPEAL OF INSTALLMENT METHOD FOR AC17 CRUAL METHOD TAXPAYERS.

18 (a) REPEAL OF INSTALLMENT METHOD FOR AC19 CRUAL BASIS TAXPAYERS.—

20 (1) IN GENERAL.—Subsection (a) of section

21 453 (relating to installment method) is amended to

22 read as follows:

23 ‘‘(a) USE OF INSTALLMENT METHOD.—

24 ‘‘(1) IN GENERAL.—Except as otherwise pro25 vided in this section, income from an installment
48

•S 1792 PCS

1 sale shall be taken into account for purposes of this

2 title under the installment method.

3 ‘‘(2) ACCRUAL METHOD TAXPAYER.—The in4 stallment method shall not apply to income from an

5 installment sale if such income would be reported

6 under an accrual method of accounting without re7 gard to this section. The preceding sentence shall

8 not apply to a disposition described in subparagraph

9 (A) or (B) of subsection (l)(2).’’

10 (2) CONFORMING AMENDMENTS.—Sections

11 453(d)(1), 453(i)(1), and 453(k) are each amended

12 by striking ‘‘(a)’’ each place it appears and inserting

13 ‘‘(a)(1)’’.

14 (b) MODIFICATION OF PLEDGE RULES.—Paragraph

15 (4) of section 453A(d) (relating to pledges, etc., of install16 ment obligations) is amended by adding at the end the

17 following: ‘‘A payment shall be treated as directly secured

18 by an interest in an installment obligation to the extent

19 an arrangement allows the taxpayer to satisfy all or a por20 tion of the indebtedness with the installment obligation.’’

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

22 this section shall apply to sales or other dispositions occur23 ring on or after the date of the enactment of this Act.
49

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1 SEC. 211. LIMITATION ON USE OF NONACCRUAL EXPERI2 ENCE METHOD OF ACCOUNTING.

3 (a) IN GENERAL.—Section 448(d)(5) (relating to

4 special rule for services) is amended—

5 (1) by inserting ‘‘in fields described in para6 graph (2)(A)’’ after ‘‘services by such person’’, and

7 (2) by inserting ‘‘CERTAIN PERSONAL’’ before

8 ‘‘SERVICES’’ in the heading.

9 (b) EFFECTIVE DATE.—

10 (1) IN GENERAL.—The amendments made by

11 this section shall apply to taxable years ending after

12 the date of the enactment of this Act.

13 (2) CHANGE IN METHOD OF ACCOUNTING.—In

14 the case of any taxpayer required by the amend15 ments made by this section to change its method of

16 accounting for its first taxable year ending after the

17 date of the enactment of this Act—

18 (A) such change shall be treated as initi19 ated by the taxpayer,

20 (B) such change shall be treated as made

21 with the consent of the Secretary of the Treas22 ury, and

23 (C) the net amount of the adjustments re24 quired to be taken into account by the taxpayer

25 under section 481 of the Internal Revenue Code

26 of 1986 shall be taken into account over a pe-
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•S 1792 PCS

1 riod (not greater than 4 taxable years) begin2 ning with such first taxable year.

3 SEC. 212. DENIAL OF CHARITABLE CONTRIBUTION DEDUC4 TION FOR TRANSFERS ASSOCIATED WITH

5 SPLIT-DOLLAR INSURANCE ARRANGEMENTS.

6 (a) IN GENERAL.—Subsection (f ) of section 170 (re7 lating to disallowance of deduction in certain cases and

8 special rules) is amended by adding at the end the fol9 lowing new paragraph:

10 ‘‘(10) SPLIT-DOLLAR LIFE INSURANCE, ANNU11 ITY, AND ENDOWMENT CONTRACTS.—

12 ‘‘(A) IN GENERAL.—Nothing in this sec13 tion or in section 545(b)(2), 556(b)(2), 642(c),

14 2055, 2106(a)(2), or 2522 shall be construed to

15 allow a deduction, and no deduction shall be al16 lowed, for any transfer to or for the use of an

17 organization described in subsection (c) if in

18 connection with such transfer—

19 ‘‘(i) the organization directly or indi20 rectly pays, or has previously paid, any

21 premium on any personal benefit contract

22 with respect to the transferor, or

23 ‘‘(ii) there is an understanding or ex24 pectation that any person will directly or

25 indirectly pay any premium on any per-
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•S 1792 PCS

1 sonal benefit contract with respect to the

2 transferor.

3 ‘‘(B) PERSONAL BENEFIT CONTRACT.—

4 For purposes of subparagraph (A), the term

5 ‘personal benefit contract’ means, with respect

6 to the transferor, any life insurance, annuity, or

7 endowment contract if any direct or indirect

8 beneficiary under such contract is the trans9 feror, any member of the transferor’s family, or

10 any other person (other than an organization

11 described in subsection (c)) designated by the

12 transferor.

13 ‘‘(C) APPLICATION TO CHARITABLE RE14 MAINDER TRUSTS.—In the case of a transfer to

15 a trust referred to in subparagraph (E), ref16 erences in subparagraphs (A) and (F) to an or17 ganization described in subsection (c) shall be

18 treated as a reference to such trust.

19 ‘‘(D) EXCEPTION FOR CERTAIN ANNUITY

20 CONTRACTS.—If, in connection with a transfer

21 to or for the use of an organization described

22 in subsection (c), such organization incurs an

23 obligation to pay a charitable gift annuity (as

24 defined in section 501(m)) and such organiza25 tion purchases any annuity contract to fund
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•S 1792 PCS

1 such obligation, persons receiving payments

2 under the charitable gift annuity shall not be

3 treated for purposes of subparagraph (B) as in4 direct beneficiaries under such contract if—

5 ‘‘(i) such organization possesses all of

6 the incidents of ownership under such con7 tract,

8 ‘‘(ii) such organization is entitled to

9 all the payments under such contract, and

10 ‘‘(iii) the timing and amount of pay11 ments under such contract are substan12 tially the same as the timing and amount

13 of payments to each such person under

14 such obligation (as such obligation is in ef15 fect at the time of such transfer).

16 ‘‘(E) EXCEPTION FOR CERTAIN CON17 TRACTS HELD BY CHARITABLE REMAINDER

18 TRUSTS.—A person shall not be treated for pur19 poses of subparagraph (B) as an indirect bene20 ficiary under any life insurance, annuity, or en21 dowment contract held by a charitable remain22 der annuity trust or a charitable remainder

23 unitrust (as defined in section 664(d)) solely by

24 reason of being entitled to any payment re-
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•S 1792 PCS

1 ferred to in paragraph (1)(A) or (2)(A) of sec2 tion 664(d) if—

3 ‘‘(i) such trust possesses all of the in4 cidents of ownership under such contract,

5 and

6 ‘‘(ii) such trust is entitled to all the

7 payments under such contract.

8 ‘‘(F) EXCISE TAX ON PREMIUMS PAID.—

9 ‘‘(i) IN GENERAL.—There is hereby

10 imposed on any organization described in

11 subsection (c) an excise tax equal to the

12 premiums paid by such organization on

13 any life insurance, annuity, or endowment

14 contract if the payment of premiums on

15 such contract is in connection with a trans16 fer for which a deduction is not allowable

17 under subparagraph (A), determined with18 out regard to when such transfer is made.

19 ‘‘(ii) PAYMENTS BY OTHER PER20 SONS.—For purposes of clause (i), pay21 ments made by any other person pursuant

22 to an understanding or expectation re23 ferred to in subparagraph (A) shall be

24 treated as made by the organization.
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•S 1792 PCS

1 ‘‘(iii) REPORTING.—Any organization

2 on which tax is imposed by clause (i) with

3 respect to any premium shall file an an4 nual return which includes—

5 ‘‘(I) the amount of such pre6 miums paid during the year and the

7 name and TIN of each beneficiary

8 under the contract to which the pre9 mium relates, and

10 ‘‘(II) such other information as

11 the Secretary may require.

12 The penalties applicable to returns re13 quired under section 6033 shall apply to

14 returns required under this clause. Returns

15 required under this clause shall be fur16 nished at such time and in such manner as

17 the Secretary shall by forms or regulations

18 require.

19 ‘‘(iv) CERTAIN RULES TO APPLY.—

20 The tax imposed by this subparagraph

21 shall be treated as imposed by chapter 42

22 for purposes of this title other than sub23 chapter B of chapter 42.

24 ‘‘(G) SPECIAL RULE WHERE STATE RE25 QUIRES SPECIFICATION OF CHARITABLE GIFT
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1 ANNUITANT IN CONTRACT.—In the case of an

2 obligation to pay a charitable gift annuity re3 ferred to in subparagraph (D) which is entered

4 into under the laws of a State which requires,

5 in order for the charitable gift annuity to be ex6 empt from insurance regulation by such State,

7 that each beneficiary under the charitable gift

8 annuity be named as a beneficiary under an an9 nuity contract issued by an insurance company

10 authorized to transact business in such State,

11 the requirements of clauses (i) and (ii) of sub12 paragraph (D) shall be treated as met if—

13 ‘‘(i) such State law requirement was

14 in effect on February 8, 1999,

15 ‘‘(ii) each such beneficiary under the

16 charitable gift annuity is a bona fide resi17 dent of such State at the time the obliga18 tion to pay a charitable gift annuity is en19 tered into, and

20 ‘‘(iii) the only persons entitled to pay21 ments under such contract are persons en22 titled to payments as beneficiaries under

23 such obligation on the date such obligation

24 is entered into.
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1 ‘‘(H) MEMBER OF FAMILY.—For purposes

2 of this paragraph, an individual’s family con3 sists of the individual’s grandparents, the

4 grandparents of such individual’s spouse, the

5 lineal descendants of such grandparents, and

6 any spouse of such a lineal descendant.

7 ‘‘(I) REGULATIONS.—The Secretary shall

8 prescribe such regulations as may be necessary

9 or appropriate to carry out the purposes of this

10 paragraph, including regulations to prevent the

11 avoidance of such purposes.’’

12 (b) EFFECTIVE DATE.—

13 (1) IN GENERAL.—Except as otherwise pro14 vided in this section, the amendment made by this

15 section shall apply to transfers made after February

16 8, 1999.

17 (2) EXCISE TAX.—Except as provided in para18 graph (3) of this subsection, section 170(f )(10)(F)

19 of the Internal Revenue Code of 1986 (as added by

20 this section) shall apply to premiums paid after the

21 date of the enactment of this Act.

22 (3) REPORTING.—Clause (iii) of such section

23 170(f )(10)(F) shall apply to premiums paid after

24 February 8, 1999 (determined as if the tax imposed
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•S 1792 PCS

1 by such section applies to premiums paid after such

2 date).

3 SEC. 213. PREVENTION OF DUPLICATION OF LOSS

4 THROUGH ASSUMPTION OF LIABILITIES GIV5 ING RISE TO A DEDUCTION.

6 (a) IN GENERAL.—Section 358 (relating to basis to

7 distributees) is amended by adding at the end the fol8 lowing new subsection:

9 ‘‘(h) SPECIAL RULES FOR ASSUMPTION OF LIABIL10 ITIES TO WHICH SUBSECTION (d) DOES NOT APPLY.—

11 ‘‘(1) IN GENERAL.—If, after application of the

12 other provisions of this section to an exchange or se13 ries of exchanges, the basis of property to which

14 subsection (a)(1) applies exceeds the fair market

15 value of such property, then such basis shall be re16 duced (but not below such fair market value) by the

17 amount (determined as of the date of the exchange)

18 of any liability—

19 ‘‘(A) which is assumed in exchange for

20 such property, and

21 ‘‘(B) with respect to which subsection

22 (d)(1) does not apply to the assumption.

23 ‘‘(2) EXCEPTION.—Paragraph (1) shall not

24 apply to any liability if the trade or business giving
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1 rise to the liability is transferred to the person as2 suming the liability as part of the exchange.

3 ‘‘(3) LIABILITY.—For purposes of this sub4 section, the term ‘liability’ shall include any obliga5 tion to make payment, without regard to whether

6 the obligation is fixed or contingent or otherwise

7 taken into account for purposes of this title.

8 ‘‘(4) REGULATIONS.—The Secretary shall pre9 scribe such regulations as may be necessary to carry

10 out the provisions of this subsection.’’

11 (b) APPLICATION OF COMPARABLE RULES TO PART12 NERSHIPS.—The Secretary of the Treasury or his delegate

13 shall prescribe rules which provide appropriate adjust14 ments under subchapter K of chapter 1 of the Internal

15 Revenue Code of 1986 to prevent the acceleration or dupli16 cation of losses through the assumption of (or transfer of

17 assets subject to) liabilities described in section 358(h)(3)

18 of such Code (as added by subsection (a)) in transactions

19 involving partnerships.

20 (c) EFFECTIVE DATES.—

21 (1) IN GENERAL.—The amendments made by

22 this section shall apply to assumptions of liability

23 after October 18, 1999.

24 (2) RULES.—The rules prescribed under sub25 section (b) shall apply to assumptions of liability
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1 after October 18, 1999, or such later date as may

2 be prescribed in such rules.

3 SEC. 214. CONSISTENT TREATMENT AND BASIS ALLOCA4 TION RULES FOR TRANSFERS OF INTANGI5 BLES IN CERTAIN NONRECOGNITION TRANS6 ACTIONS.

7 (a) TRANSFERS TO CORPORATIONS.—Section 351

8 (relating to transfer to corporation controlled by trans9 feror) is amended by redesignating subsection (h) as sub10 section (i) and by inserting after subsection (g) the fol11 lowing new subsection:

12 ‘‘(h) TREATMENT OF TRANSFERS OF INTANGIBLE

13 PROPERTY.—

14 ‘‘(1) TRANSFERS OF LESS THAN ALL SUBSTAN15 TIAL RIGHTS.

16 ‘‘(A) IN GENERAL.—A transfer of an inter17 est in intangible property (as defined in section

18 936(h)(3)(B)) shall be treated under this sec19 tion as a transfer of property even if the trans20 fer is of less than all of the substantial rights

21 of the transferor in the property.

22 ‘‘(B) ALLOCATION OF BASIS.—In the case

23 of a transfer of less than all of the substantial

24 rights of the transferor in the intangible prop25 erty, the transferor’s basis immediately before
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1 the transfer shall be allocated among the rights

2 retained by the transferor and the rights trans3 ferred on the basis of their respective fair mar4 ket values.

5 ‘‘(2) NONRECOGNITION NOT TO APPLY TO IN6 TANGIBLE PROPERTY DEVELOPED FOR TRANS7 FEREE.—This section shall not apply to a transfer

8 of intangible property developed by the transferor or

9 any related person if such development was pursuant

10 to an arrangement with the transferee.’’

11 (b) TRANSFERS TO PARTNERSHIPS.—Subsection (d)

12 of section 721 is amended to read as follows:

13 ‘‘(d) TRANSFERS OF INTANGIBLE PROPERTY.—

14 ‘‘(1) IN GENERAL.—Rules similar to the rules

15 of section 351(h) shall apply for purposes of this

16 section.

17 ‘‘(2) TRANSFERS TO FOREIGN PARTNER18 SHIPS.—For regulatory authority to treat intangi19 bles transferred to a partnership as sold, see section

20 367(d)(3).’’

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

22 this section shall apply to transfers on or after the date

23 of the enactment of this Act.
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1 SEC. 215. DISTRIBUTIONS BY A PARTNERSHIP TO A COR2 PORATE PARTNER OF STOCK IN ANOTHER

3 CORPORATION.

4 (a) IN GENERAL.—Section 732 (relating to basis of

5 distributed property other than money) is amended by

6 adding at the end the following new subsection:

7 ‘‘(f) CORRESPONDING ADJUSTMENT TO BASIS OF AS8 SETS OF A DISTRIBUTED CORPORATION CONTROLLED BY

9 A CORPORATE PARTNER.—

10 ‘‘(1) IN GENERAL.—If—

11 ‘‘(A) a corporation (hereafter in this sub12 section referred to as the ‘corporate partner’)

13 receives a distribution from a partnership of

14 stock in another corporation (hereafter in this

15 subsection referred to as the ‘distributed cor16 poration’),

17 ‘‘(B) the corporate partner has control of

18 the distributed corporation immediately after

19 the distribution or at any time thereafter, and

20 ‘‘(C) the partnership’s adjusted basis in

21 such stock immediately before the distribution

22 exceeded the corporate partner’s adjusted basis

23 in such stock immediately after the distribution,

24 then an amount equal to such excess shall be applied

25 to reduce (in accordance with subsection (c)) the

26 basis of property held by the distributed corporation
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1 at such time (or, if the corporate partner does not

2 control the distributed corporation at such time, at

3 the time the corporate partner first has such con4 trol).

5 ‘‘(2) EXCEPTION FOR CERTAIN DISTRIBUTIONS

6 BEFORE CONTROL ACQUIRED.—Paragraph (1) shall

7 not apply to any distribution of stock in the distrib8 uted corporation if—

9 ‘‘(A) the corporate partner does not have

10 control of such corporation immediately after

11 such distribution, and

12 ‘‘(B) the corporate partner establishes to

13 the satisfaction of the Secretary that such dis14 tribution was not part of a plan or arrangement

15 to acquire control of the distributed corpora16 tion.

17 ‘‘(3) LIMITATIONS ON BASIS REDUCTION.—

18 ‘‘(A) IN GENERAL.—The amount of the re19 duction under paragraph (1) shall not exceed

20 the amount by which the sum of the aggregate

21 adjusted bases of the property and the amount

22 of money of the distributed corporation exceeds

23 the corporate partner’s adjusted basis in the

24 stock of the distributed corporation.
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1 ‘‘(B) REDUCTION NOT TO EXCEED AD2 JUSTED BASIS OF PROPERTY.—No reduction

3 under paragraph (1) in the basis of any prop4 erty shall exceed the adjusted basis of such

5 property (determined without regard to such re6 duction).

7 ‘‘(4) GAIN RECOGNITION WHERE REDUCTION

8 LIMITED.—If the amount of any reduction under

9 paragraph (1) (determined after the application of

10 paragraph (3)(A)) exceeds the aggregate adjusted

11 bases of the property of the distributed

12 corporation—

13 ‘‘(A) such excess shall be recognized by the

14 corporate partner as long-term capital gain, and

15 ‘‘(B) the corporate partner’s adjusted basis

16 in the stock of the distributed corporation shall

17 be increased by such excess.

18 ‘‘(5) CONTROL.—For purposes of this sub19 section, the term ‘control’ means ownership of stock

20 meeting the requirements of section 1504(a)(2).

21 ‘‘(6) INDIRECT DISTRIBUTIONS.—For purposes

22 of paragraph (1), if a corporation acquires (other

23 than in a distribution from a partnership) stock the

24 basis of which is determined in whole or in part by

25 reference to subsection (a)(2) or (b), the corporation
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1 shall be treated as receiving a distribution of such

2 stock from a partnership.

3 ‘‘(7) SPECIAL RULE FOR STOCK IN CON4 TROLLED CORPORATION.—If the property held by a

5 distributed corporation is stock in a corporation

6 which the distributed corporation controls, this sub7 section shall be applied to reduce the basis of the

8 property of such controlled corporation. This sub9 section shall be reapplied to any property of any

10 controlled corporation which is stock in a corpora11 tion which it controls.

12 ‘‘(8) REGULATIONS.—The Secretary shall pre13 scribe such regulations as may be necessary to carry

14 out the purposes of this subsection, including regula15 tions to avoid double counting and to prevent the

16 abuse of such purposes.’’

17 (b) EFFECTIVE DATE.—

18 (1) IN GENERAL.—Except as provided in para19 graph (2), the amendment made by this section shall

20 apply to distributions made after July 14, 1999.

21 (2) PARTNERSHIPS IN EXISTENCE ON JULY 14,

22 1999.—In the case of a corporation which is a part23 ner in a partnership as of July 14, 1999, the

24 amendment made by this section shall apply to dis-
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1 tributions made to such partner from such partner2 ship after the date of the enactment of this Act.

3 SEC. 216. PROHIBITED ALLOCATIONS OF STOCK IN S COR4 PORATION ESOP.

5 (a) IN GENERAL.—Section 409 (relating to qualifica6 tions for tax credit employee stock ownership plans) is

7 amended by redesignating subsection (p) as subsection (q)

8 and by inserting after subsection (o) the following new

9 subsection:

10 ‘‘(p) PROHIBITED ALLOCATIONS OF SECURITIES IN

11 AN S CORPORATION.—

12 ‘‘(1) IN GENERAL.—An employee stock owner13 ship plan holding employer securities consisting of

14 stock in an S corporation shall provide that no por15 tion of the assets of the plan attributable to (or allo16 cable in lieu of) such employer securities may, dur17 ing a nonallocation year, accrue (or be allocated di18 rectly or indirectly under any plan of the employer

19 meeting the requirements of section 401(a)) for the

20 benefit of any disqualified person.

21 ‘‘(2) FAILURE TO MEET REQUIREMENTS.—

22 ‘‘(A) IN GENERAL.—If a plan fails to meet

23 the requirements of paragraph (1), the plan

24 shall be treated as having distributed to any

25 disqualified person the amount allocated to the
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1 account of such person in violation of para2 graph (1) at the time of such allocation.

3 ‘‘(B) CROSS REFERENCE.—

‘‘For excise tax relating to violations of paragraph

(1) and ownership of synthetic equity, see section

4979A.

4 ‘‘(3) NONALLOCATION YEAR.—For purposes of

5 this subsection—

6 ‘‘(A) IN GENERAL.—The term ‘nonalloca7 tion year’ means any plan year of an employee

8 stock ownership plan if, at any time during

9 such plan year—

10 ‘‘(i) such plan holds employer securi11 ties consisting of stock in an S corpora12 tion, and

13 ‘‘(ii) disqualified persons own at least

14 50 percent of the number of shares of

15 stock in the S corporation.

16 ‘‘(B) ATTRIBUTION RULES.—For purposes

17 of subparagraph (A)—

18 ‘‘(i) IN GENERAL.—The rules of sec19 tion 318(a) shall apply for purposes of de20 termining ownership, except that—

21 ‘‘(I) in applying paragraph (1)

22 thereof, the members of an individ23 ual’s family shall include members of
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1 the family described in paragraph

2 (4)(D), and

3 ‘‘(II) paragraph (4) thereof shall

4 not apply.

5 ‘‘(ii) DEEMED-OWNED SHARES.—Not6 withstanding the employee trust exception

7 in section 318(a)(2)(B)(i), individual shall

8 be treated as owning deemed-owned shares

9 of the individual.

10 Solely for purposes of applying paragraph (5),

11 this subparagraph shall be applied after the at12 tribution rules of paragraph (5) have been ap13 plied.

14 ‘‘(4) DISQUALIFIED PERSON.—For purposes of

15 this subsection—

16 ‘‘(A) IN GENERAL.—The term ‘disqualified

17 person’ means any person if—

18 ‘‘(i) the aggregate number of deemed19 owned shares of such person and the mem20 bers of such person’s family is at least 20

21 percent of the number of deemed-owned

22 shares of stock in the S corporation, or

23 ‘‘(ii) in the case of a person not de24 scribed in clause (i), the number of

25 deemed-owned shares of such person is at
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1 least 10 percent of the number of deemed2 owned shares of stock in such corporation.

3 ‘‘(B) TREATMENT OF FAMILY MEMBERS.—

4 In the case of a disqualified person described in

5 subparagraph (A)(i), any member of such per6 son’s family with deemed-owned shares shall be

7 treated as a disqualified person if not otherwise

8 treated as a disqualified person under subpara9 graph (A).

10 ‘‘(C) DEEMED-OWNED SHARES.—

11 ‘‘(i) IN GENERAL.—The term

12 ‘deemed-owned shares’ means, with respect

13 to any person—

14 ‘‘(I) the stock in the S corpora15 tion constituting employer securities

16 of an employee stock ownership plan

17 which is allocated to such person

18 under the plan, and

19 ‘‘(II) such person’s share of the

20 stock in such corporation which is

21 held by such plan but which is not al22 located under the plan to participants.

23 ‘‘(ii) PERSON’S SHARE OF

24 UNALLOCATED STOCK.—For purposes of

25 clause (i)(II), a person’s share of
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1 unallocated S corporation stock held by

2 such plan is the amount of the unallocated

3 stock which would be allocated to such per4 son if the unallocated stock were allocated

5 to all participants in the same proportions

6 as the most recent stock allocation under

7 the plan.

8 ‘‘(D) MEMBER OF FAMILY.—For purposes

9 of this paragraph, the term ‘member of the

10 family’ means, with respect to any individual—

11 ‘‘(i) the spouse of the individual,

12 ‘‘(ii) an ancestor or lineal descendant

13 of the individual or the individual’s spouse,

14 ‘‘(iii) a brother or sister of the indi15 vidual or the individual’s spouse and any

16 lineal descendant of the brother or sister,

17 and

18 ‘‘(iv) the spouse of any individual de19 scribed in clause (ii) or (iii).

20 A spouse of an individual who is legally sepa21 rated from such individual under a decree of di22 vorce or separate maintenance shall not be

23 treated as such individual’s spouse for purposes

24 of this subparagraph.
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1 ‘‘(5) TREATMENT OF SYNTHETIC EQUITY.—For

2 purposes of paragraphs (3) and (4), in the case of

3 a person who owns synthetic equity in the S corpora4 tion, except to the extent provided in regulations, the

5 shares of stock in such corporation on which such

6 synthetic equity is based shall be treated as out7 standing stock in such corporation and deemed8 owned shares of such person if such treatment of

9 synthetic equity of 1 or more such persons results

10 in—

11 ‘‘(A) the treatment of any person as a dis12 qualified person, or

13 ‘‘(B) the treatment of any year as a non14 allocation year.

15 For purposes of this paragraph, synthetic equity

16 shall be treated as owned by a person in the same

17 manner as stock is treated as owned by a person

18 under the rules of paragraphs (2) and (3) of section

19 318(a). If, without regard to this paragraph, a per20 son is treated as a disqualified person or a year is

21 treated as a nonallocation year, this paragraph shall

22 not be construed to result in the person or year not

23 being so treated.

24 ‘‘(6) DEFINITIONS.—For purposes of this

25 subsection—
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1 ‘‘(A) EMPLOYEE STOCK OWNERSHIP

2 PLAN.—The term ‘employee stock ownership

3 plan’ has the meaning given such term by sec4 tion 4975(e)(7).

5 ‘‘(B) EMPLOYER SECURITIES.—The term

6 ‘employer security’ has the meaning given such

7 term by section 409(l).

8 ‘‘(C) SYNTHETIC EQUITY.—The term ‘syn9 thetic equity’ means any stock option, warrant,

10 restricted stock, deferred issuance stock right,

11 or similar interest or right that gives the holder

12 the right to acquire or receive stock of the S

13 corporation in the future. Except to the extent

14 provided in regulations, synthetic equity also in15 cludes a stock appreciation right, phantom

16 stock unit, or similar right to a future cash

17 payment based on the value of such stock or

18 appreciation in such value.

19 ‘‘(7) REGULATIONS.—The Secretary shall pre20 scribe such regulations as may be necessary to carry

21 out the purposes of this subsection.’’

22 (b) COORDINATION WITH SECTION 4975(e)(7).—The

23 last sentence of section 4975(e)(7) (defining employee

24 stock ownership plan) is amended by inserting ‘‘, section

25 409(p),’’ after ‘‘409(n)’’.
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1 (c) EXCISE TAX.—

2 (1) APPLICATION OF TAX.—Subsection (a) of

3 section 4979A (relating to tax on certain prohibited

4 allocations of employer securities) is amended—

5 (A) by striking ‘‘or’’ at the end of para6 graph (1),

7 (B) by striking the period at the end of

8 paragraph (2) and inserting a comma, and

9 (C) by striking all that follows paragraph

10 (2) and inserting the following:

11 ‘‘(3) there is any allocation of employer securi12 ties which violates the provisions of section 409(p),

13 or a nonallocation year described in subsection

14 (c)(2)(C) with respect to an employee stock owner15 ship plan, or

16 ‘‘(4) any synthetic equity is owned by a dis17 qualified person in any nonallocation year,

18 there is hereby imposed a tax on such allocation or owner19 ship equal to 50 percent of the amount involved.’’

20 (2) LIABILITY.—Section 4979A(c) (defining li21 ability for tax) is amended to read as follows:

22 ‘‘(c) LIABILITY FOR TAX.—The tax imposed by this

23 section shall be paid—

24 ‘‘(1) in the case of an allocation referred to in

25 paragraph (1) or (2) of subsection (a), by—
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1 ‘‘(A) the employer sponsoring such plan, or

2 ‘‘(B) the eligible worker-owned cooperative,

3 which made the written statement described in sec4 tion 664(g)(1)(E) or in section 1042(b)(3)(B) (as

5 the case may be), and

6 ‘‘(2) in the case of an allocation or ownership

7 referred to in paragraph (3) or (4) of subsection (a),

8 by the S corporation the stock in which was so allo9 cated or owned.’’

10 (3) DEFINITIONS.—Section 4979A(e) (relating

11 to definitions) is amended to read as follows:

12 ‘‘(e) DEFINITIONS AND SPECIAL RULES.—For pur13 poses of this section—

14 ‘‘(1) DEFINITIONS.—Except as provided in

15 paragraph (2), terms used in this section have the

16 same respective meanings as when used in sections

17 409 and 4978.

18 ‘‘(2) SPECIAL RULES RELATING TO TAX IM19 POSED BY REASON OF PARAGRAPH (3) OR (4) OF

20 SUBSECTION (a).—

21 ‘‘(A) PROHIBITED ALLOCATIONS.—The

22 amount involved with respect to any tax im23 posed by reason of subsection (a)(3) is the

24 amount allocated to the account of any person

25 in violation of section 409(p)(1).
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1 ‘‘(B) SYNTHETIC EQUITY.—The amount

2 involved with respect to any tax imposed by rea3 son of subsection (a)(4) is the value of the

4 shares on which the synthetic equity is based.

5 ‘‘(C) SPECIAL RULE DURING FIRST NON6 ALLOCATION YEAR.—For purposes of subpara7 graph (A), the amount involved for the first

8 nonallocation year of any employee stock owner9 ship plan shall be determined by taking into ac10 count the total value of all the deemed-owned

11 shares of all disqualified persons with respect to

12 such plan.

13 ‘‘(D) STATUTE OF LIMITATIONS.—The

14 statutory period for the assessment of any tax

15 imposed by this section by reason of paragraph

16 (3) or (4) of subsection (a) shall not expire be17 fore the date which is 3 years from the later

18 of—

19 ‘‘(i) the allocation or ownership re20 ferred to in such paragraph giving rise to

21 such tax, or

22 ‘‘(ii) the date on which the Secretary

23 is notified of such allocation or owner24 ship.’’

25 (d) EFFECTIVE DATES.—
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1 (1) IN GENERAL.—The amendments made by

2 this section shall apply to plan years beginning after

3 December 31, 2000.

4 (2) EXCEPTION FOR CERTAIN PLANS.—In the

5 case of any—

6 (A) employee stock ownership plan estab7 lished after July 14, 1999, or

8 (B) employee stock ownership plan estab9 lished on or before such date if employer securi10 ties held by the plan consist of stock in a cor11 poration with respect to which an election under

12 section 1362(a) of the Internal Revenue Code

13 of 1986 is not in effect on such date,

14 the amendments made by this section shall apply to

15 plan years ending after July 14, 1999.

16 Subtitle B—Provisions Relating to

17 Real Estate Investment Trusts

18 PART I—TREATMENT OF INCOME AND SERVICES

19 PROVIDED BY TAXABLE REIT SUBSIDIARIES

20 SEC. 221. MODIFICATIONS TO ASSET DIVERSIFICATION

21 TEST.

22 (a) IN GENERAL.—Subparagraph (B) of section

23 856(c)(4) is amended to read as follows:

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

25 value of its total assets is represented by securi-
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1 ties (other than those includible under subpara2 graph (A)),

3 ‘‘(ii) not more than 20 percent of the value

4 of its total assets is represented by securities of

5 1 or more taxable REIT subsidiaries, and

6 ‘‘(iii) except with respect to a taxable

7 REIT subsidiary and securities includible under

8 subparagraph (A)—

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

10 value of its total assets is represented by

11 securities of any one issuer,

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

13 possessing more than 10 percent of the

14 total voting power of the outstanding secu15 rities of any one issuer, and

16 ‘‘(III) the trust does not hold securi17 ties having a value of more than 10 per18 cent of the total value of the outstanding

19 securities of any one issuer.’’.

20 (b) EXCEPTION FOR STRAIGHT DEBT SECURITIES.—

21 Subsection (c) of section 856 is amended by adding at the

22 end the following new paragraph:

23 ‘‘(7) STRAIGHT DEBT SAFE HARBOR IN APPLY24 ING PARAGRAPH (4).—Securities of an issuer which

25 are straight debt (as defined in section 1361(c)(5)
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1 without regard to subparagraph (B)(iii) thereof)

2 shall not be taken into account in applying para3 graph (4)(B)(ii)(III) if—

4 ‘‘(A) the issuer is an individual, or

5 ‘‘(B) the only securities of such issuer

6 which are held by the trust or a taxable REIT

7 subsidiary of the trust are straight debt (as so

8 defined), or

9 ‘‘(C) the issuer is a partnership and the

10 trust holds at least a 20 percent profits interest

11 in the partnership.’’.

12 SEC. 222. TREATMENT OF INCOME AND SERVICES PRO13 VIDED BY TAXABLE REIT SUBSIDIARIES.

14 (a) INCOME FROM TAXABLE REIT SUBSIDIARIES

15 NOT TREATED AS IMPERMISSIBLE TENANT SERVICE IN16 COME.—Clause (i) of section 856(d)(7)(C) (relating to ex17 ceptions to impermissible tenant service income) is amend18 ed by inserting ‘‘or through a taxable REIT subsidiary

19 of such trust’’ after ‘‘income’’.

20 (b) CERTAIN INCOME FROM TAXABLE REIT SUB21 SIDIARIES NOT EXCLUDED FROM RENTS FROM REAL

22 PROPERTY.—

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

24 856 (relating to rents from real property defined) is
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1 amended by adding at the end the following new

2 paragraphs:

3 ‘‘(8) SPECIAL RULE FOR TAXABLE REIT SUB4 SIDIARIES.—For purposes of this subsection,

5 amounts paid to a real estate investment trust by a

6 taxable REIT subsidiary of such trust shall not be

7 excluded from rents from real property by reason of

8 paragraph (2)(B) if the requirements of either of the

9 following subparagraphs are met:

10 ‘‘(A) LIMITED RENTAL EXCEPTION.—The

11 requirements of this subparagraph are met with

12 respect to any property if at least 90 percent of

13 the leased space of the property is rented to

14 persons other than taxable REIT subsidiaries of

15 such trust and other than persons described in

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

17 shall apply only to the extent that the amounts

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

19 defined in paragraph (1) without regard to

20 paragraph (2)(B)) from such property are sub21 stantially comparable to such rents made by the

22 other tenants of the trust’s property for com23 parable space.

24 ‘‘(B) EXCEPTION FOR CERTAIN LODGING

25 FACILITIES.—The requirements of this subpara-
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1 graph are met with respect to an interest in

2 real property which is a qualified lodging facil3 ity leased by the trust to a taxable REIT sub4 sidiary of the trust if the property is operated

5 on behalf of such subsidiary by a person who is

6 an eligible independent contractor.

7 ‘‘(9) ELIGIBLE INDEPENDENT CONTRACTOR.—

8 For purposes of paragraph (8)(B)—

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

10 independent contractor’ means, with respect to

11 any qualified lodging facility, any independent

12 contractor if, at the time such contractor enters

13 into a management agreement or other similar

14 service contract with the taxable REIT sub15 sidiary to operate the facility, such contractor

16 (or any related person) is actively engaged in

17 the trade or business of operating qualified

18 lodging facilities for any person who is not a re19 lated person with respect to the real estate in20 vestment trust or the taxable REIT subsidiary.

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

22 of this paragraph and paragraph (8)(B), a per23 son shall not fail to be treated as an inde24 pendent contractor with respect to any qualified
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1 lodging facility by reason of any of the fol2 lowing:

3 ‘‘(i) The taxable REIT subsidiary

4 bears the expenses for the operation of the

5 facility pursuant to the management agree6 ment or other similar service contract.

7 ‘‘(ii) The taxable REIT subsidiary re8 ceives the revenues from the operation of

9 such facility, net of expenses for such oper10 ation and fees payable to the operator pur11 suant to such agreement or contract.

12 ‘‘(iii) The real estate investment trust

13 receives income from such person with re14 spect to another property that is attrib15 utable to a lease of such other property to

16 such person that was in effect as of the

17 later of—

18 ‘‘(I) January 1, 1999, or

19 ‘‘(II) the earliest date that any

20 taxable REIT subsidiary of such trust

21 entered into a management agreement

22 or other similar service contract with

23 such person with respect to such

24 qualified lodging facility.
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1 ‘‘(C) RENEWALS, ETC., OF EXISTING

2 LEASES.—For purposes of subparagraph

3 (B)(iii)—

4 ‘‘(i) a lease shall be treated as in ef5 fect on January 1, 1999, without regard to

6 its renewal after such date, so long as such

7 renewal is pursuant to the terms of such

8 lease as in effect on whichever of the dates

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

10 and

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

12 after whichever of the dates under sub13 paragraph (B)(iii) is the latest shall be

14 treated as in effect on such date if—

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

16 property from the trust was in effect,

17 and

18 ‘‘(II) under the terms of the new

19 lease, such trust receives a substan20 tially similar or lesser benefit in com21 parison to the lease referred to in sub22 clause (I).

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

24 purposes of this paragraph—
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1 ‘‘(i) IN GENERAL.—The term ‘quali2 fied lodging facility’ means any lodging fa3 cility unless wagering activities are con4 ducted at or in connection with such facil5 ity by any person who is engaged in the

6 business of accepting wagers and who is le7 gally authorized to engage in such business

8 at or in connection with such facility.

9 ‘‘(ii) LODGING FACILITY.—The term

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

11 other establishment more than one-half of

12 the dwelling units in which are used on a

13 transient basis.

14 ‘‘(iii) CUSTOMARY AMENITIES AND FA15 CILITIES.—The term ‘lodging facility’ in16 cludes customary amenities and facilities

17 operated as part of, or associated with, the

18 lodging facility so long as such amenities

19 and facilities are customary for other prop20 erties of a comparable size and class owned

21 by other owners unrelated to such real es22 tate investment trust.

23 ‘‘(E) OPERATE INCLUDES MANAGE.—Ref24 erences in this paragraph to operating a prop-
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1 erty shall be treated as including a reference to

2 managing the property.

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

4 treated as related to each other if such persons

5 are treated as a single employer under sub6 section (a) or (b) of section 52.’’.

7 (2) CONFORMING AMENDMENT.—Subparagraph

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

9 ‘‘except as provided in paragraph (8),’’ after ‘‘(B)’’.

10 (3) DETERMINING RENTS FROM REAL PROP11 ERTY.—

12 (A)(i) Paragraph (1) of section 856(d) is

13 amended by striking ‘‘adjusted bases’’ each

14 place it occurs and inserting ‘‘fair market val15 ues’’.

16 (ii) The amendment made by this subpara17 graph shall apply to taxable years beginning

18 after December 31, 2000.

19 (B)(i) Clause (i) of section 856(d)(2)(B) is

20 amended by striking ‘‘number’’ and inserting

21 ‘‘value’’.

22 (ii) The amendment made by this subpara23 graph shall apply to amounts received or ac24 crued in taxable years beginning after Decem25 ber 31, 2000, except for amounts paid pursuant
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1 to leases in effect on July 12, 1999, or pursu2 ant to a binding contract in effect on such date

3 and at all times thereafter.

4 SEC. 223. TAXABLE REIT SUBSIDIARY.

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

6 at the end the following new subsection:

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

8 this part—

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

10 subsidiary’ means, with respect to a real estate in11 vestment trust, a corporation (other than a real es12 tate investment trust) if—

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

14 stock in such corporation, and

15 ‘‘(B) such trust and such corporation joint16 ly elect that such corporation shall be treated as

17 a taxable REIT subsidiary of such trust for

18 purposes of this part.

19 Such an election, once made, shall be irrevocable un20 less both such trust and corporation consent to its

21 revocation. Such election, and any revocation there22 of, may be made without the consent of the Sec23 retary.

24 ‘‘(2) 35 PERCENT OWNERSHIP IN ANOTHER

25 TAXABLE REIT SUBSIDIARY.—The term ‘taxable
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1 REIT subsidiary’ includes, with respect to any real

2 estate investment trust, any corporation (other than

3 a real estate investment trust) with respect to which

4 a taxable REIT subsidiary of such trust owns di5 rectly or indirectly—

6 ‘‘(A) securities possessing more than 35

7 percent of the total voting power of the out8 standing securities of such corporation, or

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

10 than 35 percent of the total value of the out11 standing securities of such corporation.

12 The preceding sentence shall not apply to a qualified

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

14 The rule of section 856(c)(7) shall apply for pur15 poses of subparagraph (B).

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

17 subsidiary’ shall not include—

18 ‘‘(A) any corporation which directly or in19 directly operates or manages a lodging facility

20 or a health care facility, and

21 ‘‘(B) any corporation which directly or in22 directly provides to any other person (under a

23 franchise, license, or otherwise) rights to any

24 brand name under which any lodging facility or

25 health care facility is operated.
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1 Subparagraph (B) shall not apply to rights provided

2 to an eligible independent contractor to operate or

3 manage a lodging facility if such rights are held by

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

5 similar capacity and such lodging facility is either

6 owned by such corporation or is leased to such cor7 poration from the real estate investment trust.

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

9 (3)—

10 ‘‘(A) LODGING FACILITY.—The term ‘lodg11 ing facility’ has the meaning given to such term

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

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

14 ‘health care facility’ has the meaning given to

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

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

17 section 856(i) is amended by adding at the end the fol18 lowing new sentence: ‘‘Such term shall not include a tax19 able REIT subsidiary.’’.

20 SEC. 224. LIMITATION ON EARNINGS STRIPPING.

21 Paragraph (3) of section 163( j) (relating to limita22 tion on deduction for interest on certain indebtedness) is

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

24 (A), by striking the period at the end of subparagraph
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1 (B) and inserting ‘‘, and’’, and by adding at the end the

2 following new subparagraph:

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

4 or indirectly) by a taxable REIT subsidiary (as

5 defined in section 856(l)) of a real estate invest6 ment trust to such trust.’’.

7 SEC. 225. 100 PERCENT TAX ON IMPROPERLY ALLOCATED

8 AMOUNTS.

9 (a) IN GENERAL.—Subsection (b) of section 857 (re10 lating to method of taxation of real estate investment

11 trusts and holders of shares or certificates of beneficial

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

13 (8) as paragraphs (8) and (9), respectively, and by insert14 ing after paragraph (6) the following new paragraph:

15 ‘‘(7) INCOME FROM REDETERMINED RENTS, RE16 DETERMINED DEDUCTIONS, AND EXCESS INTER17 EST.—

18 ‘‘(A) IMPOSITION OF TAX.—There is here19 by imposed for each taxable year of the real es20 tate investment trust a tax equal to 100 percent

21 of redetermined rents, redetermined deductions,

22 and excess interest.

23 ‘‘(B) REDETERMINED RENTS.—

24 ‘‘(i) IN GENERAL.—The term ‘redeter25 mined rents’ means rents from real prop-
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1 erty (as defined in subsection 856(d)) the

2 amount of which would (but for subpara3 graph (E)) be reduced on distribution, ap4 portionment, or allocation under section

5 482 to clearly reflect income as a result of

6 services furnished or rendered by a taxable

7 REIT subsidiary of the real estate invest8 ment trust to a tenant of such trust.

9 ‘‘(ii) EXCEPTION FOR CERTAIN SERV10 ICES.—Clause (i) shall not apply to

11 amounts received directly or indirectly by a

12 real estate investment trust for services de13 scribed in paragraph (1)(B) or (7)(C)(i) of

14 section 856(d).

15 ‘‘(iii) EXCEPTION FOR DE MINIMIS

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

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

18 with respect to a property to the extent

19 such amounts do not exceed the one per20 cent threshold described in section

21 856(d)(7)(B) with respect to such prop22 erty.

23 ‘‘(iv) EXCEPTION FOR COMPARABLY

24 PRICED SERVICES.—Clause (i) shall not

25 apply to any service rendered by a taxable
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1 REIT subsidiary of a real estate invest2 ment trust to a tenant of such trust if—

3 ‘‘(I) such subsidiary renders a

4 significant amount of similar services

5 to persons other than such trust and

6 tenants of such trust who are unre7 lated (within the meaning of section

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

9 trust, and tenants, but

10 ‘‘(II) only to the extent the

11 charge for such service so rendered is

12 substantially comparable to the charge

13 for the similar services rendered to

14 persons referred to in subclause (I).

15 ‘‘(v) EXCEPTION FOR CERTAIN SEPA16 RATELY CHARGED SERVICES.—Clause (i)

17 shall not apply to any service rendered by

18 a taxable REIT subsidiary of a real estate

19 investment trust to a tenant of such trust

20 if—

21 ‘‘(I) the rents paid to the trust

22 by tenants (leasing at least 25 percent

23 of the net leasable space in the trust’s

24 property) who are not receiving such

25 service from such subsidiary are sub-
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1 stantially comparable to the rents

2 paid by tenants leasing comparable

3 space who are receiving such service

4 from such subsidiary, and

5 ‘‘(II) the charge for such service

6 from such subsidiary is separately

7 stated.

8 ‘‘(vi) EXCEPTION FOR CERTAIN SERV9 ICES BASED ON SUBSIDIARY’S INCOME

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

11 apply to any service rendered by a taxable

12 REIT subsidiary of a real estate invest13 ment trust to a tenant of such trust if the

14 gross income of such subsidiary from such

15 service is not less than 150 percent of such

16 subsidiary’s direct cost in furnishing or

17 rendering the service.

18 ‘‘(vii) EXCEPTIONS GRANTED BY SEC19 RETARY.—The Secretary may waive the

20 tax otherwise imposed by subparagraph

21 (A) if the trust establishes to the satisfac22 tion of the Secretary that rents charged to

23 tenants were established on an arms’

24 length basis even though a taxable REIT
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1 subsidiary of the trust provided services to

2 such tenants.

3 ‘‘(C) REDETERMINED DEDUCTIONS.—The

4 term ‘redetermined deductions’ means deduc5 tions (other than redetermined rents) of a tax6 able REIT subsidiary of a real estate invest7 ment trust if the amount of such deductions

8 would (but for subparagraph (E)) be decreased

9 on distribution, apportionment, or allocation

10 under section 482 to clearly reflect income as

11 between such subsidiary and such trust.

12 ‘‘(D) EXCESS INTEREST.—The term ‘ex13 cess interest’ means any deductions for interest

14 payments by a taxable REIT subsidiary of a

15 real estate investment trust to such trust to the

16 extent that the interest payments are in excess

17 of a rate that is commercially reasonable.

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

19 The imposition of tax under subparagraph (A)

20 shall be in lieu of any distribution, apportion21 ment, or allocation under section 482.

22 ‘‘(F) REGULATORY AUTHORITY.—The Sec23 retary shall prescribe such regulations as may

24 be necessary or appropriate to carry out the

25 purposes of this paragraph. Until the Secretary
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1 prescribes such regulations, real estate invest2 ment trusts and their taxable REIT subsidi3 aries may base their allocations on any reason4 able method.’’.

5 (b) AMOUNT SUBJECT TO TAX NOT REQUIRED TO

6 BE DISTRIBUTED.—Subparagraph (E) of section

7 857(b)(2) (relating to real estate investment trust taxable

8 income) is amended by striking ‘‘paragraph (5)’’ and in9 serting ‘‘paragraphs (5) and (7)’’.

10 SEC. 226. EFFECTIVE DATE.

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

12 part shall apply to taxable years beginning after December

13 31, 2000.

14 (b) TRANSITIONAL RULES RELATED TO SECTION

15 221.—

16 (1) EXISTING ARRANGEMENTS.—

17 (A) IN GENERAL.—Except as otherwise

18 provided in this paragraph, the amendment

19 made by section 221 shall not apply to a real

20 estate investment trust with respect to—

21 (i) securities of a corporation held di22 rectly or indirectly by such trust on July

23 12, 1999,

24 (ii) securities of a corporation held by

25 an entity on July 12, 1999, if such trust
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1 acquires control of such entity pursuant to

2 a written binding contract in effect on such

3 date and at all times thereafter before such

4 acquisition,

5 (iii) securities received by such trust

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

7 respect to, securities described in clause (i)

8 or (ii) in a transaction in which gain or

9 loss is not recognized, and

10 (iv) securities acquired directly or in11 directly by such trust as part of a reorga12 nization (as defined in section 368(a)(1) of

13 the Internal Revenue Code of 1986) with

14 respect to such trust if such securities are

15 described in clause (i), (ii), or (iii) with re16 spect to any other real estate investment

17 trust.

18 (B) NEW TRADE OR BUSINESS OR SUB19 STANTIAL NEW ASSETS.—Subparagraph (A)

20 shall cease to apply to securities of a corpora21 tion as of the first day after July 12, 1999, on

22 which such corporation engages in a substantial

23 new line of business, or acquires any substantial

24 asset, other than—
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1 (i) pursuant to a binding contract in

2 effect on such date and at all times there3 after before the acquisition of such asset,

4 (ii) in a transaction in which gain or

5 loss is not recognized by reason of section

6 1031 or 1033 of the Internal Revenue

7 Code of 1986, or

8 (iii) in a reorganization (as so de9 fined) with another corporation the securi10 ties of which are described in paragraph

11 (1)(A) of this subsection.

12 (C) LIMITATION ON TRANSITION RULES.—

13 Subparagraph (A) shall cease to apply to secu14 rities of a corporation held, acquired, or re15 ceived, directly or indirectly, by a real estate in16 vestment trust as of the first day after July 12,

17 1999, on which such trust acquires any addi18 tional securities of such corporation other

19 than—

20 (i) pursuant to a binding contract in

21 effect on July 12, 1999, and at all times

22 thereafter, or

23 (ii) in a reorganization (as so defined)

24 with another corporation the securities of
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1 which are described in paragraph (1)(A) of

2 this subsection.

3 (2) TAX-FREE CONVERSION.—If—

4 (A) at the time of an election for a cor5 poration to become a taxable REIT subsidiary,

6 the amendment made by section 221 does not

7 apply to such corporation by reason of para8 graph (1), and

9 (B) such election first takes effect before

10 January 1, 2004,

11 such election shall be treated as a reorganization

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

13 PART II—HEALTH CARE REITS

14 SEC. 231. HEALTH CARE REITS.

15 (a) SPECIAL FORECLOSURE RULE FOR HEALTH

16 CARE PROPERTIES.—Subsection (e) of section 856 (relat17 ing to special rules for foreclosure property) is amended

18 by adding at the end the following new paragraph:

19 ‘‘(6) SPECIAL RULE FOR QUALIFIED HEALTH

20 CARE PROPERTIES.—For purposes of this

21 subsection—

22 ‘‘(A) ACQUISITION AT EXPIRATION OF

23 LEASE.—The term ‘foreclosure property’ shall

24 include any qualified health care property ac25 quired by a real estate investment trust as the
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1 result of the termination of a lease of such

2 property (other than a termination by reason of

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

4 lease).

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

6 qualified health care property which is fore7 closure property solely by reason of subpara8 graph (A), in lieu of applying paragraphs (2)

9 and (3)—

10 ‘‘(i) the qualified health care property

11 shall cease to be foreclosure property as of

12 the close of the second taxable year after

13 the taxable year in which such trust ac14 quired such property, and

15 ‘‘(ii) if the real estate investment

16 trust establishes to the satisfaction of the

17 Secretary that an extension of the grace

18 period in clause (i) is necessary to the or19 derly leasing or liquidation of the trust’s

20 interest in such qualified health care prop21 erty, the Secretary may grant one or more

22 extensions of the grace period for such

23 qualified health care property.

24 Any such extension shall not extend the grace

25 period beyond the close of the 6th year after
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1 the taxable year in which such trust acquired

2 such qualified health care property.

3 ‘‘(C) INCOME FROM INDEPENDENT CON4 TRACTORS.—For purposes of applying para5 graph (4)(C) with respect to qualified health

6 care property which is foreclosure property by

7 reason of subparagraph (A) or paragraph (1),

8 income derived or received by the trust from an

9 independent contractor shall be disregarded to

10 the extent such income is attributable to—

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

12 the date the real estate investment trust

13 acquired the qualified health care property

14 (without regard to its renewal after such

15 date so long as such renewal is pursuant to

16 the terms of such lease as in effect on such

17 date), or

18 ‘‘(ii) any lease of property entered

19 into after such date if—

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

21 property from the trust was in effect,

22 and

23 ‘‘(II) under the terms of the new

24 lease, such trust receives a substan25 tially similar or lesser benefit in com-
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1 parison to the lease referred to in sub2 clause (I).

3 ‘‘(D) QUALIFIED HEALTH CARE PROP4 ERTY.—

5 ‘‘(i) IN GENERAL.—The term ‘quali6 fied health care property’ means any real

7 property (including interests therein), and

8 any personal property incident to such real

9 property, which—

10 ‘‘(I) is a health care facility, or

11 ‘‘(II) is necessary or incidental to

12 the use of a health care facility.

13 ‘‘(ii) HEALTH CARE FACILITY.—For

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

15 care facility’ means a hospital, nursing fa16 cility, assisted living facility, congregate

17 care facility, qualified continuing care facil18 ity (as defined in section 7872(g)(4)), or

19 other licensed facility which extends med20 ical or nursing or ancillary services to pa21 tients and which, immediately before the

22 termination, expiration, default, or breach

23 of the lease of or mortgage secured by

24 such facility, was operated by a provider of

25 such services which was eligible for partici-
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1 pation in the medicare program under title

2 XVIII of the Social Security Act with re3 spect to such facility.’’.

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

5 this section shall apply to taxable years beginning after

6 December 31, 2000.

7 PART III—CONFORMITY WITH REGULATED

8 INVESTMENT COMPANY RULES

9 SEC. 241. CONFORMITY WITH REGULATED INVESTMENT

10 COMPANY RULES.

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

12 (ii) of section 857(a)(1)(A) (relating to requirements ap13 plicable to real estate investment trusts) are each amended

14 by striking ‘‘95 percent (90 percent for taxable years be15 ginning before January 1, 1980)’’ and inserting ‘‘90 per16 cent’’.

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

18 857(b)(5)(A) (relating to imposition of tax in case of fail19 ure to meet certain requirements) is amended by striking

20 ‘‘95 percent (90 percent in the case of taxable years begin21 ning before January 1, 1980)’’ and inserting ‘‘90 per22 cent’’.

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

24 this section shall apply to taxable years beginning after

25 December 31, 2000.
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1 PART IV—CLARIFICATION OF EXCEPTION FROM

2 IMPERMISSIBLE TENANT SERVICE INCOME

3 SEC. 251. CLARIFICATION OF EXCEPTION FOR INDE4 PENDENT OPERATORS.

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

6 (relating to independent contractor defined) is amended

7 by adding at the end the following flush sentence:

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

9 real estate investment trust or such person is regu10 larly traded on an established securities market, only

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

12 percent of such class of stock shall be taken into ac13 count as owning any of the stock of such class for

14 purposes of applying the 35 percent limitation set

15 forth in subparagraph (B) (but all of the out16 standing stock of such class shall be considered out17 standing in order to compute the denominator for

18 purpose of determining the applicable percentage of

19 ownership).’’.

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

21 this section shall apply to taxable years beginning after

22 December 31, 2000.
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1 PART V—MODIFICATION OF EARNINGS AND

2 PROFITS RULES

3 SEC. 261. 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 distributions after December 31,

15 2000.

16 PART VI—MODIFICATION OF ESTIMATED TAX

17 RULES

18 SEC. 271. MODIFICATION OF ESTIMATED TAX RULES FOR

19 CLOSELY HELD REAL ESTATE INVESTMENT

20 TRUSTS.

21 (a) IN GENERAL.—Subsection (e) of section 6655

22 (relating to estimated tax by corporations) is amended by

23 adding at the end the following new paragraph:

24 ‘‘(5) TREATMENT OF CERTAIN REIT DIVI25 DENDS.—
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1 ‘‘(A) IN GENERAL.—Any dividend received

2 from a closely held real estate investment trust

3 by any person which owns (after application of

4 subsections (d)(5) and (l)(3)(B) of section 856)

5 10 percent or more (by vote or value) of the

6 stock or beneficial interests in the trust shall be

7 taken into account in computing annualized in8 come installments under paragraph (2) in a

9 manner similar to the manner under which

10 partnership income inclusions are taken into ac11 count.

12 ‘‘(B) CLOSELY HELD REIT.—For purposes

13 of subparagraph (A), the term ‘closely held real

14 estate investment trust’ means a real estate in15 vestment trust with respect to which 5 or fewer

16 persons own (after application of subsections

17 (d)(5) and (l)(3)(B) of section 856) 50 percent

18 or more (by vote or value) of the stock or bene19 ficial interests in the trust.’’

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

21 subsection (a) shall apply to estimated tax payments due

22 on or after November 15, 1999.
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1 PART VII—MODIFICATION OF TREATMENT OF

2 CLOSELY-HELD REITS

3 SEC. 281. CONTROLLED ENTITIES INELIGIBLE FOR REIT

4 STATUS.

5 (a) IN GENERAL.—Subsection (a) of section 856 (re6 lating to definition of real estate investment trust) is

7 amended by striking ‘‘and’’ at the end of paragraph (6),

8 by redesignating paragraph (7) as paragraph (8), and by

9 inserting after paragraph (6) the following new paragraph:

10 ‘‘(7) which is not a controlled entity (as defined

11 in subsection (l)); and’’.

12 (b) CONTROLLED ENTITY.—Section 856 is amended

13 by adding at the end the following new subsection:

14 ‘‘(l) CONTROLLED ENTITY.—

15 ‘‘(1) IN GENERAL.—For purposes of subsection

16 (a)(7), an entity is a controlled entity if, at any time

17 during the taxable year, one person (other than a

18 qualified entity)—

19 ‘‘(A) in the case of a corporation, owns

20 stock—

21 ‘‘(i) possessing at least 50 percent of

22 the total voting power of the stock of such

23 corporation, or

24 ‘‘(ii) having a value equal to at least

25 50 percent of the total value of the stock

26 of such corporation, or
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1 ‘‘(B) in the case of a trust, owns beneficial

2 interests in the trust which would meet the re3 quirements of subparagraph (A) if such inter4 ests were stock.

5 ‘‘(2) QUALIFIED ENTITY.—For purposes of

6 paragraph (1), the term ‘qualified entity’ means—

7 ‘‘(A) any real estate investment trust, and

8 ‘‘(B) any partnership in which one real es9 tate investment trust owns at least 50 percent

10 of the capital and profits interests in the part11 nership.

12 ‘‘(3) ATTRIBUTION RULES.—For purposes of

13 this paragraphs (1) and (2)—

14 ‘‘(A) IN GENERAL.—Rules similar to the

15 rules of subsections (d)(5) and (h)(3) shall

16 apply; except that section 318(a)(3)(C) shall

17 not be applied under such rules to treat stock

18 owned by a qualified entity as being owned by

19 a person which is not a qualified entity.

20 ‘‘(B) STAPLED ENTITIES.—A group of en21 tities which are stapled entities (as defined in

22 section 269B(c)(2)) shall be treated as one per23 son.

24 ‘‘(4) EXCEPTION FOR CERTAIN NEW REITS.—
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1 ‘‘(A) IN GENERAL.—The term ‘controlled

2 entity’ shall not include an incubator REIT.

3 ‘‘(B) INCUBATOR REIT.—A corporation

4 shall be treated as an incubator REIT for any

5 taxable year during the eligibility period if it

6 meets all the following requirements for such

7 year:

8 ‘‘(i) The corporation elects to be treat9 ed as an incubator REIT.

10 ‘‘(ii) The corporation has only voting

11 common stock outstanding.

12 ‘‘(iii) Not more than 50 percent of the

13 corporation’s real estate assets consist of

14 mortgages.

15 ‘‘(iv) From not later than the begin16 ning of the last half of the second taxable

17 year, at least 10 percent of the corpora18 tion’s capital is provided by lenders or eq19 uity investors who are unrelated to the cor20 poration’s largest shareholder.

21 ‘‘(v) The corporation annually in22 creases the value of its real estate assets

23 by at least 10 percent.
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1 ‘‘(vi) The directors of the corporation

2 adopt a resolution setting forth an intent

3 to engage in a going public transaction.

4 No election may be made with respect to any

5 REIT if an election under this subsection was

6 in effect for any predecessor of such REIT. The

7 requirement of clause (ii) shall not fail to be

8 met merely because a going public transaction

9 is accomplished through a transaction described

10 in section 368(a)(1) with another corporation

11 which had another class of stock outstanding

12 prior to the transaction.

13 ‘‘(C) ELIGIBILITY PERIOD.—

14 ‘‘(i) IN GENERAL.—The eligibility pe15 riod (for which an incubator REIT election

16 can be made) begins with the REIT’s sec17 ond taxable year and ends at the close of

18 the REIT’s third taxable year, except that

19 the REIT may, subject to clauses (ii), (iii),

20 and (iv), elect to extend such period for an

21 additional 2 taxable years.

22 ‘‘(ii) GOING PUBLIC TRANSACTION.—

23 A REIT may not elect to extend the eligi24 bility period under clause (i) unless it en25 ters into an agreement with the Secretary
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1 that if it does not engage in a going public

2 transaction by the end of the extended eli3 gibility period, it shall pay Federal income

4 taxes for the 2 years of the extended eligi5 bility period as if it had not made an incu6 bator REIT election and had ceased to

7 qualify as a REIT for those 2 taxable

8 years.

9 ‘‘(iii) RETURNS, INTEREST, AND NO10 TICE.—

11 ‘‘(I) RETURNS.—In the event the

12 corporation ceases to be treated as a

13 REIT by operation of clause (ii), the

14 corporation shall file any appropriate

15 amended returns reflecting the change

16 in status within 3 months of the close

17 of the extended eligibility period.

18 ‘‘(II) INTEREST.—Interest shall

19 be payable on any tax imposed by rea20 son of clause (ii) for any taxable year

21 but, unless there was a finding under

22 subparagraph (D), no substantial un23 derpayment penalties shall be im24 posed.
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1 ‘‘(III) NOTICE.—The corporation

2 shall, at the same time it files its re3 turns under subclause (I), notify its

4 shareholders and any other persons

5 whose tax position is, or may reason6 ably be expected to be, affected by the

7 change in status so they also may file

8 any appropriate amended returns to

9 conform their tax treatment consistent

10 with the corporation’s loss of REIT

11 status.

12 ‘‘(IV) REGULATIONS.—The Sec13 retary shall provide appropriate regu14 lations setting forth transferee liabil15 ity and other provisions to ensure col16 lection of tax and the proper adminis17 tration of this provision.

18 ‘‘(iv) Clauses (ii) and (iii) shall not

19 apply if the corporation allows its incu20 bator REIT status to lapse at the end of

21 the initial 2-year eligibility period without

22 engaging in a going public transaction if

23 the corporation is not a controlled entity as

24 of the beginning of its fourth taxable year.

25 In such a case, the corporation’s directors
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1 may still be liable for the penalties de2 scribed in subparagraph (D) during the eli3 gibility period.

4 ‘‘(D) SPECIAL PENALTIES.—If the Sec5 retary determines that an incubator REIT elec6 tion was filed for a principal purpose other than

7 as part of a reasonable plan to undertake a

8 going public transaction, an excise tax of

9 $20,000 shall be imposed on each of the cor10 poration’s directors for each taxable year for

11 which an election was in effect.

12 ‘‘(E) GOING PUBLIC TRANSACTION.—For

13 purposes of this paragraph, a going public

14 transaction means—

15 ‘‘(i) a public offering of shares of the

16 stock of the incubator REIT;

17 ‘‘(ii) a transaction, or series of trans18 actions, that results in the stock of the in19 cubator REIT being regularly traded on an

20 established securities market and that re21 sults in at least 50 percent of such stock

22 being held by shareholders who are unre23 lated to persons who held such stock before

24 it began to be so regularly traded; or
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1 ‘‘(iii) any transaction resulting in

2 ownership of the REIT by 200 or more

3 persons (excluding the largest single share4 holder) who in the aggregate own at least

5 50 percent of the stock of the REIT.

6 For the purposes of this subparagraph, the

7 rules of paragraph (3) shall apply in deter8 mining the ownership of stock.

9 ‘‘(F) DEFINITIONS.—The term ‘established

10 securities market’ shall have the meaning set

11 forth in the regulations under section 897.’’

12 (c) CONFORMING AMENDMENT.—Paragraph (2) of

13 section 856(h) is amended by striking ‘‘and (6)’’ each

14 place it appears and inserting ‘‘, (6), and (7)’’.

15 (d) EFFECTIVE DATE.—

16 (1) IN GENERAL.—The amendments made by

17 this section shall apply to taxable years ending after

18 July 14, 1999.

19 (2) EXCEPTION FOR EXISTING CONTROLLED

20 ENTITIES.—The amendments made by this section

21 shall not apply to any entity which is a controlled

22 entity (as defined in section 856(l) of the Internal

23 Revenue Code of 1986, as added by this section) as

24 of July 14, 1999, which is a real estate investment

25 trust for the taxable year which includes such date,
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1 and which has significant business assets or activi2 ties as of such date. For purposes of the preceding

3 sentence, an entity shall be treated as such a con4 trolled entity on July 14, 1999, if it becomes such

5 an entity after such date in a transaction—

6 (A) made pursuant to a written agreement

7 which was binding on such date and at all times

8 thereafter, or

9 (B) described on or before such date in a

10 filing with the Securities and Exchange Com11 mission required solely by reason of the trans12 action.

13 TITLE III—BUDGET PROVISION

14 SEC. 301. EXCLUSION FROM PAYGO SCORECARD.

15 Any net deficit increase or net surplus increase re16 sulting from the enactment of this Act shall not be count17 ed for purposes of section 252 of the Balanced Budget

18 and Emergency Deficit Control Act of 1985 (2 U.S.C.

19 902).