I 

110TH CONGRESS 

1ST SESSION H. R. 1147 

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

applicable to real estate investment trusts, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

FEBRUARY 16, 2007 

Mr. CROWLEY (for himself, Mr. CANTOR, Mr. POMEROY, and Mr. REYNOLDS) 

introduced the following bill; which was referred to the Committee on 

Ways and Means 

A BILL 

To amend the Internal Revenue Code of 1986 to simplify 

certain provisions applicable to real estate investment 

trusts, 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. 

4 This Act may be cited as the ‘‘REIT Investment Di5 versification and Empowerment Act of 2007’’. 

6 SEC. 2. AMENDMENT OF 1986 CODE. 

7 Except as otherwise expressly provided, whenever in 

8 the Act an amendment or repeal is expressed in terms of 

9 an amendment to, or repeal of, a section or other proviVerDate Aug 31 2005 04:33 Feb 22, 2007 Jkt 059200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H1147.IH H1147

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1 sion, the reference shall be considered to be made to a 

2 section or other provision of the Internal Revenue Code 

3 of 1986. 

4 TITLE I—FOREIGN CURRENCY 

5 AND OTHER QUALIFIED AC6 TIVITIES 

7 SEC. 101. REVISIONS TO REIT INCOME TESTS. 

8 (a) ADDITION OF PERMISSIBLE INCOME CAT9 EGORIES.—Section 856(c) (relating to limitations) is 

10 amended— 

11 (1) by striking ‘‘and’’ at the end of paragraph 

12 (2)(G) and by inserting after paragraph (2)(H) the 

13 following new subparagraphs: 

14 ‘‘(I) passive foreign exchange gains; and 

15 ‘‘(J) any other item of income or gain as 

16 determined by the Secretary;’’, and 

17 (2) by striking ‘‘and’’ at the end of paragraphs 

18 (3)(H) and (3)(I) and by inserting after paragraph 

19 (3)(I) the following new subparagraphs: 

20 ‘‘(J) real estate foreign exchange gains; 

21 and 

22 ‘‘(K) any other item of income or gain as 

23 determined by the Secretary; and’’. 

24 (b) RULES REGARDING FOREIGN CURRENCY TRANS25 ACTIONS.—Section 856 (defining real estate investment 


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1 trust) is amended by adding at the end the following new 

2 subsection: 

3 ‘‘(n) RULES REGARDING FOREIGN CURRENCY

4 TRANSACTIONS.—With respect to any taxable year— 

5 ‘‘(1) REAL ESTATE FOREIGN EXCHANGE

6 GAINS.—For purposes of subsection (c)(3)(J), the 

7 term ‘real estate foreign exchange gains’ means— 

8 ‘‘(A) foreign currency gains (as defined in 

9 section 988(b)(1)) which are attributable to— 

10 ‘‘(i) any item described in subsection 

11 (c)(3) (other than in subparagraph (J) 

12 thereof), 

13 ‘‘(ii) the acquisition or ownership of 

14 obligations secured by mortgages on real 

15 property or on interests in real property 

16 (other than foreign currency gains attrib17 utable to any item described in clause (i)), 

18 or 

19 ‘‘(iii) becoming or being the obligor 

20 under obligations secured by mortgages on 

21 real property or on interests in real prop22 erty (other than foreign currency gains at23 tributable to any item described in clause 

24 (i)), 


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1 ‘‘(B) gains described in section 987 attrib2 utable to a qualified business unit (as defined 

3 by section 989) of the real estate investment 

4 trust, but only if such qualified business unit 

5 meets the requirements under— 

6 ‘‘(i) subsection (c)(3) (without regard 

7 to subparagraph (J) thereof) for the tax8 able year, and 

9 ‘‘(ii) subsection (c)(4)(A) at the close 

10 of each quarter that the real estate invest11 ment trust has directly or indirectly held 

12 the qualified business unit, and 

13 ‘‘(C) any other foreign currency gains as 

14 determined by the Secretary. 

15 ‘‘(2) PASSIVE FOREIGN EXCHANGE GAINS.—For 

16 purposes of subsection (c)(2)(I), the term ‘passive 

17 foreign exchange gains’ means— 

18 ‘‘(A) real estate foreign exchange gains, 

19 ‘‘(B) foreign currency gains (as defined in 

20 section 988(b)(1)) which are not described in 

21 subparagraph (A) and which are attributable to 

22 any item described in subsection (c)(2) (other 

23 than in subparagraph (I) thereof), and 

24 ‘‘(C) any other foreign currency gains as 

25 determined by the Secretary.’’. 


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1 (c) ADDITION TO REIT HEDGING RULE.—Subpara2 graph (G) of section 856(c)(5) is amended to read as fol3 lows: 

4 ‘‘(G) TREATMENT OF CERTAIN HEDGING

5 INSTRUMENTS.—Except to the extent as deter6 mined by the Secretary— 

7 ‘‘(i) any income of a real estate in8 vestment trust from a hedging transaction 

9 (as defined in clause (ii) or (iii) of section 

10 1221(b)(2)(A)) which is clearly identified 

11 pursuant to section 1221(a)(7), including 

12 gain from the sale or disposition of such a 

13 transaction, shall not constitute gross in14 come under paragraphs (2) and (3) to the 

15 extent that the transaction hedges any in16 debtedness incurred or to be incurred by 

17 the trust to acquire or carry real estate as18 sets, and 

19 ‘‘(ii) any income of a real estate in20 vestment trust from a transaction entered 

21 into by the trust primarily to manage risk 

22 of currency fluctuations with respect to 

23 any item described in paragraph (2) or (3), 

24 including gain from the termination of 

25 such a transaction, shall not constitute 


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1 gross income under paragraphs (2) and 

2 (3), but only if such transaction is clearly 

3 identified as such before the close of the 

4 day on which it was acquired, originated, 

5 or entered into (or such other time as the 

6 Secretary may prescribe).’’. 

7 (d) AUTHORITY TO EXCLUDE ITEMS OF INCOME

8 FROM REIT INCOME TESTS.—Section 856(c)(5) is 

9 amended by adding at the end the following new subpara10 graph: 

11 ‘‘(H) SECRETARIAL AUTHORITY TO EX12 CLUDE OTHER ITEMS OF INCOME.—The Sec13 retary is authorized to determine whether any 

14 item of income or gain which does not otherwise 

15 qualify under paragraph (2) or (3) may be con16 sidered as not constituting gross income solely 

17 for purposes of this part.’’. 

18 SEC. 102. REVISIONS TO REIT ASSET TESTS. 

19 (a) CLARIFICATION OF VALUATION TEST.—The first 

20 sentence in the matter following section 

21 856(c)(4)(B)(iii)(III) is amended by inserting ‘‘(including 

22 a discrepancy caused solely by the change in the foreign 

23 currency exchange rate used to value a foreign asset)’’ 

24 after ‘‘such requirements’’. 


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1 (b) CLARIFICATION OF PERMISSIBLE ASSET CAT2 EGORY.—Section 856(c)(5), as amended by section 

3 101(d), is amended by adding at the end the following new 

4 subparagraph: 

5 ‘‘(I) CASH.—The term ‘cash’ includes for6 eign currency if the real estate investment trust 

7 or its qualified business unit (as defined in sec8 tion 989) uses such foreign currency as its 

9 functional currency (as defined in section 

10 985(b)).’’. 

11 SEC. 103. CONFORMING FOREIGN CURRENCY REVISIONS. 

12 (a) NET INCOME FROM FORECLOSURE PROPERTY.— 

13 Clause (i) of section 857(b)(4)(B) is amended to read as 

14 follows: 

15 ‘‘(i) gain (including any foreign cur16 rency gain, as defined in section 988(b)(1)) 

17 from the sale or other disposition of fore18 closure property described in section 

19 1221(a)(1) and the gross income for the 

20 taxable year derived from foreclosure prop21 erty (as defined in section 856(e)), but 

22 only to the extent such gross income is not 

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1 come described in) section 856(c)(3) other 

2 than subparagraph (F) thereof, over’’. 

3 (b) NET INCOME FROM PROHIBITED TRANS4 ACTIONS.—Clause (i) of section 857(b)(6)(B) is amended 

5 to read as follows: 

6 ‘‘(i) the term ‘net income derived from 

7 prohibited transactions’ means the excess 

8 of the gain (including any foreign currency 

9 gain, as defined in section 988(b)(1)) from 

10 prohibited transactions over the deductions 

11 (including any foreign currency loss, as de12 fined in section 988(b)(2)) allowed by this 

13 chapter which are directly connected with 

14 prohibited transactions;’’. 

15 TITLE II—TAXABLE REIT 

16 SUBSIDIARIES 

17 SEC. 201. CONFORMING TAXABLE REIT SUBSIDIARY ASSET 

18 TEST. 

19 Section 856(c)(4)(B)(ii) is amended by striking ‘‘20 

20 percent’’ and inserting ‘‘25 percent’’. 

21 TITLE III—DEALER SALES 

22 SEC. 301. HOLDING PERIOD UNDER SAFE HARBOR. 

23 Section 857(b)(6) (relating to income from prohibited 

24 transactions) is amended— 


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1 (1) by striking ‘‘4 years’’ in subparagraphs 

2 (C)(i), (C)(iv), and (D)(i) and inserting ‘‘2 years’’, 

3 (2) by striking ‘‘4-year period’’ in subpara4 graphs (C)(ii), (D)(ii), and (D)(iii) and inserting ‘‘2- 

5 year period’’, and 

6 (3) by striking ‘‘real estate asset’’and all that 

7 follows through ‘‘if’’ in the matter preceding clause 

8 (i) of subparagraphs (C) and (D), respectively, and 

9 inserting ‘‘real estate asset (as defined in section 

10 856(c)(5)(B)) and which is described in section 

11 1221(a)(1) if’’. 

12 SEC. 302. DETERMINING VALUE OF SALES UNDER SAFE 

13 HARBOR. 

14 Subparagraphs (C)(iii)(II) and (D)(iv)(II) of section 

15 857(b)(6) are each amended by striking ‘‘the aggregate 

16 adjusted bases’’ and all that follows through ‘‘the begin17 ning of the taxable year’’ and inserting ‘‘the fair market 

18 value of property (other than sales of foreclosure property 

19 or sales to which section 1033 applies) sold during the 

20 taxable year does not exceed 10 percent of the fair market 

21 value of all of the assets of the trust as of the beginning 

22 of the taxable year’’. 


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1 TITLE IV—HEALTH CARE REITS 

2 SEC. 401. CONFORMITY FOR HEALTH CARE FACILITIES. 

3 (a) RELATED PARTY RENTALS.—Subparagraph (B) 

4 of section 856(d)(8) (relating to special rule for taxable 

5 REIT subsidiaries) is amended to read as follows: 

6 ‘‘(B) EXCEPTION FOR CERTAIN LODGING

7 FACILITIES AND HEALTH CARE PROPERTY.— 

8 The requirements of this subparagraph are met 

9 with respect to an interest in real property 

10 which is a qualified lodging facility or a quali11 fied health care property (as defined in sub12 section (e)(6)(D)(i)) leased by the trust to a 

13 taxable REIT subsidiary of the trust if the 

14 property is operated on behalf of such sub15 sidiary by a person who is an eligible inde16 pendent contractor. For purposes of this sec17 tion, a taxable REIT subsidiary is not consid18 ered to be operating or managing a qualified 

19 health care property or qualified lodging facility 

20 solely because it directly or indirectly possesses 

21 a license, permit or similar instrument enabling 

22 it to do so.’’. 

23 (b) ELIGIBLE INDEPENDENT CONTRACTOR.—Sub24 paragraphs (A) and (B) of section 856(d)(9) (relating to 


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1 eligible independent contractor) are amended to read as 

2 follows: 

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

4 independent contractor’ means, with respect to 

5 any qualified lodging facility or qualified health 

6 care property (as defined in subsection 

7 (e)(6)(D)(i)), any independent contractor if, at 

8 the time such contractor enters into a manage9 ment agreement or other similar service con10 tract with the taxable REIT subsidiary to oper11 ate such qualified lodging facility or qualified 

12 health care property, such contractor (or any 

13 related person) is actively engaged in the trade 

14 or business of operating qualified lodging facili15 ties or qualified health care properties, respec16 tively, for any person who is not a related per17 son with respect to the real estate investment 

18 trust or the taxable REIT subsidiary. 

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

20 of this paragraph and paragraph (8)(B), a per21 son shall not fail to be treated as an inde22 pendent contractor with respect to any qualified 

23 lodging facility or qualified health care property 

24 (as so defined) by reason of the following: 


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1 ‘‘(i) The taxable REIT subsidiary 

2 bears the expenses for the operation of 

3 such qualified lodging facility or qualified 

4 health care property pursuant to the man5 agement agreement or other similar service 

6 contract. 

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

9 such qualified lodging facility or qualified 

10 health care property, net of expenses for 

11 such operation and fees payable to the op12 erator pursuant to such agreement or con13 tract. 

14 ‘‘(iii) The real estate investment trust 

15 receives income from such person with re16 spect to another property that is attrib17 utable to a lease of such other property to 

18 such person that was in effect as of the 

19 later of— 

20 ‘‘(I) January 1, 1999, or 

21 ‘‘(II) the earliest date that any 

22 taxable REIT subsidiary of such trust 

23 entered into a management agreement 

24 or other similar service contract with 

25 such person with respect to such 


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1 qualified lodging facility or qualified 

2 health care property.’’. 

3 (c) TAXABLE REIT SUBSIDIARIES.—The last sen4 tence of section 856(l)(3) is amended— 

5 (1) by inserting ‘‘or a health care facility’’ after 

6 ‘‘a lodging facility’’, and 

7 (2) by inserting ‘‘or health care facility’’ after 

8 ‘‘such lodging facility’’. 

9 TITLE V—FOREIGN REITS 

10 SEC. 501. STOCK OF FOREIGN REITS AS REAL ESTATE AS11 SETS. 

12 (a) IN GENERAL.—The first sentence in section 

13 856(c)(5)(B) is amended by inserting ‘‘or in a qualified 

14 foreign REIT’’ after ‘‘this part’’. 

15 (b) QUALIFIED FOREIGN REIT.—Section 856(c) is 

16 amended by adding at the end the following new para17 graph: 

18 ‘‘(8) QUALIFIED FOREIGN REIT.—For purposes 

19 of this subsection, the term ‘qualified foreign REIT’ 

20 means a corporation, trust, or association— 

21 ‘‘(A) treated as a corporation under section 

22 7701(a)(3), 

23 ‘‘(B) the shares or certificates of beneficial 

24 interests of which are regularly traded on an es25 tablished securities market, and 


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1 ‘‘(C) which is organized in a country under 

2 rules that the Secretary determines meet the 

3 following criteria: 

4 ‘‘(i) At least 75 percent of the entity’s 

5 assets must qualify as real estate assets 

6 (determined without regard to shares or 

7 transferable certificates of beneficial inter8 est in such entity), as determined at the 

9 close of the entity’s prior taxable year. 

10 ‘‘(ii) The entity either receives a divi11 dends paid deduction comparable to section 

12 561 or is exempt from corporate level tax. 

13 ‘‘(iii) The entity is required to dis14 tribute at least 85 percent of its annual 

15 taxable income (as computed in the juris16 diction in which it is organized) to the 

17 holders of its shares or certificates of bene18 ficial interest on an annual basis. 

19 In determining whether the rules of a country 

20 meet the criteria of a qualified foreign REIT, 

21 the Secretary shall take into account non-statu22 tory rules such as stock exchange listing re23 quirements as well as existing practices result24 ing from market preferences, and may take into 

25 account situations that in the judgment of the 


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1 Secretary present a significant opportunity for 

2 a foreign REIT to generate an amount of in3 come that is not compatible with the principles 

4 underlying section 856(c)(3).’’. 

5 SEC. 502. DIVIDENDS FROM FOREIGN REITS. 

6 Section 856(c)(3)(D) is amended by inserting ‘‘and 

7 in qualified foreign REITs’’ after ‘‘this part’’. 

8 TITLE VI—EFFECTIVE DATES 

9 SEC. 601 EFFECTIVE DATES. 

10 (a) IN GENERAL.—Except as otherwise provided in 

11 this section, the amendments made by this Act shall apply 

12 to taxable years beginning after the date of the enactment 

13 of this Act. 

14 (b) REIT INCOME TESTS.— 

15 (1) The amendment made by section 101(a) 

16 and (b) shall apply to gains and items of income rec17 ognized after the date of the enactment of this Act. 

18 (2) The amendment made by section 101(c) 

19 shall apply to transactions entered into after the 

20 date of the enactment of this Act. 

21 (3) The amendment made by section 101(d) 

22 shall apply after the date of the enactment of this 

23 Act. 

24 (c) CONFORMING FOREIGN CURRENCY REVISIONS.— 


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1 (1) The amendment made by section 103(a) 

2 shall apply to gains recognized after the date of the 

3 enactment of this Act. 

4 (2) The amendment made by section 103(b) 

5 shall apply to gains and deductions recognized after 

6 the date of the enactment of this Act. 

7 (d) DEALER SALES.—The amendments made by 

8 Title III shall apply to sales made after the date of the 

9 enactment of this Act. 

Æ 


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