II 

109TH CONGRESS 

2D SESSION S. 4030 

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

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

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 29, 2006 

Mr. HATCH introduced the following bill; which was read twice and referred 

to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to simplify 

certain provisions applicable to real estate investment 

trusts, 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 2006’’. 

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 provi10 sion, the reference shall be considered to be made to a 


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1 section or other provision of the Internal Revenue Code 

2 of 1986. 

3 TITLE I—FOREIGN CURRENCY 

4 AND OTHER QUALIFIED AC5 TIVITIES 

6 SEC. 101. REVISIONS TO REIT INCOME TESTS. 

7 (a) ADDITION OF PERMISSIBLE INCOME CAT8 EGORIES.—Section 856(c) (relating to limitations) is 

9 amended— 

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

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

12 following new subparagraphs: 

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

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

15 determined by the Secretary;’’, and 

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

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

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

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

20 and 

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

22 determined by the Secretary; and’’. 

23 (b) RULES REGARDING FOREIGN CURRENCY TRANS24 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), 

12 ‘‘(ii) the acquisition or ownership of 

13 obligations secured by mortgages on real 

14 property or on interests in real property 

15 (other than foreign currency gains de16 scribed in clause (i)), or 

17 ‘‘(iii) becoming or being the obligor 

18 under obligations secured by mortgages on 

19 real property or on interests in real prop20 erty (other than foreign currency gains de21 scribed in clause (i)), 

22 ‘‘(B) gains described in section 987 attrib23 utable to a qualified business unit (as defined 

24 by section 989) of the real estate investment 


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1 trust, but only if such qualified business unit 

2 meets the requirements under— 

3 ‘‘(i) subsection (c)(3) for the taxable 

4 year; and 

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

6 of each quarter that the real estate invest7 ment trust has directly or indirectly held 

8 the qualified business unit, and 

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

10 determined by the Secretary. 

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

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

13 foreign exchange gains’ means— 

14 ‘‘(A) gains described under paragraph (1), 

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

16 section 988(b)(1)) which are attributable to any 

17 item described in subsection (c)(2) (other than 

18 those items includible under subparagraph (A)), 

19 and 

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

21 determined by the Secretary.’’. 

22 (c) ADDITION TO REIT HEDGING RULE.—Subpara23 graph (G) of section 856(c)(5) is amended to read as fol24 lows: 


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1 ‘‘(G) TREATMENT OF CERTAIN HEDGING

2 INSTRUMENTS.—Except to the extent as deter3 mined by the Secretary— 

4 ‘‘(i) any income of a real estate in5 vestment trust from a hedging transaction 

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

7 1221(b)(2)(A)) which is clearly identified 

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

9 gain from the sale or disposition of such a 

10 transaction, shall not constitute gross in11 come under paragraphs (2) and (3) to the 

12 extent that the transaction hedges any in13 debtedness incurred or to be incurred by 

14 the trust to acquire or carry real estate as15 sets, and 

16 ‘‘(ii) any income of a real estate in17 vestment trust from a transaction entered 

18 into by the trust primarily to manage risk 

19 of currency fluctuations with respect to 

20 any item described in paragraphs (2) and 

21 (3), including gain from the termination of 

22 such a transaction, shall not constitute 

23 gross income under paragraphs (2) and 

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

25 identified as such before the close of the 


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1 day on which it was acquired, originated, 

2 or entered into (or such other time as the 

3 Secretary may prescribe).’’. 

4 (d) AUTHORITY TO EXCLUDE ITEMS OF INCOME

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

6 amended by adding at the end the following new subpara7 graph: 

8 ‘‘(H) SECRETARIAL AUTHORITY TO EX9 CLUDE OTHER ITEMS OF INCOME.—The Sec10 retary is authorized to determine whether any 

11 item of income or gain which does not otherwise 

12 qualify under paragraph (2) or (3) may be con13 sidered as not constituting gross income solely 

14 for purposes of this part.’’. 

15 SEC. 102. REVISIONS TO REIT ASSET TESTS. 

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

17 sentence in the matter following section 

18 856(c)(4)(B)(iii)(III) is amended by inserting ‘‘(including 

19 a discrepancy caused solely by the change in the foreign 

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

21 after ‘‘such requirements’’. 

22 (b) CLARIFICATION OF PERMISSIBLE ASSET CAT23 EGORY.—Section 856(c)(5), as amended by section 

24 101(d), is amended by adding at the end the following new 

25 subparagraph: 


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1 ‘‘(I) CASH.—For purposes of this part, the 

2 term ‘cash’ includes foreign currency if the real 

3 estate investment trust or its qualified business 

4 unit (as defined in section 989) uses such for5 eign currency as its functional currency (as de6 fined in section 985(b)).’’. 

7 SEC. 103. CONFORMING FOREIGN CURRENCY REVISIONS. 

8 (a) NET INCOME FROM FORECLOSURE PROPERTY.— 

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

10 follows: 

11 ‘‘(i) gain (including any foreign cur12 rency gain, as defined in section 988(b)(1)) 

13 from the sale or other disposition of fore14 closure property described in section 

15 1221(a)(1) and the gross income for the 

16 taxable year derived from foreclosure prop17 erty (as defined in section 856(e)), but 

18 only to the extent such gross income is not 

19 described in (or, in the case of foreign cur20 rency gain, not attributable to gross in21 come described in) section 856(c)(3) other 

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

23 (b) NET INCOME FROM PROHIBITED TRANS24 ACTIONS.—Clause (i) of section 857(b)(6)(B) is amended 

25 to read as follows: 


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

2 prohibited transactions’ means the excess 

3 of the gain (including any foreign currency 

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

5 prohibited transactions over the deductions 

6 (including any foreign currency loss, as de7 fined in section 988(b)(2)) allowed by this 

8 chapter which are directly connected with 

9 prohibited transactions;’’. 

10 TITLE II—TAXABLE REIT 

11 SUBSIDIARIES 

12 SEC. 201. CONFORMING TAXABLE REIT SUBSIDIARY ASSET 

13 TEST. 

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

15 percent’’ and inserting ‘‘25 percent’’. 

16 TITLE III—DEALER SALES 

17 SEC. 301. HOLDING PERIOD UNDER SAFE HARBOR. 

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

19 transactions) is amended— 

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

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

22 (2) by striking ‘‘4-year period’’ in subpara23 graphs (C)(ii), (D)(ii), and (D)(iii) and inserting ‘‘2- 

24 year period’’, and 


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

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

3 (i) of subparagraphs (C) and (D) and inserting ‘‘real 

4 estate asset (as defined in section 856(c)(5)(B) oth5 erwise described in section 1221(a)(1) if’’. 

6 SEC. 302. DETERMINING VALUE OF SALES UNDER SAFE 

7 HARBOR. 

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

9 857(b)(6) are each amended by striking ‘‘the aggregate 

10 adjusted bases’’ and all that follows through ‘‘the begin11 ning of the taxable year’’ and inserting ‘‘the fair market 

12 value of property (other than sales of foreclosure property 

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

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

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

16 of the taxable year’’. 

17 TITLE IV—HEALTH CARE REITS 

18 SEC. 401. CONFORMITY FOR HEALTH CARE FACILITIES. 

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

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

21 REIT subsidiaries) is amended to read as follows: 

22 ‘‘(B) EXCEPTION FOR CERTAIN LODGING

23 FACILITIES AND HEALTH CARE PROPERTY.— 

24 The requirements of this subparagraph are met 

25 with respect to an interest in real property 


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1 which is a qualified lodging facility or a quali2 fied health care property (as defined in sub3 section (e)(6)(D)(i)) leased by the trust to a 

4 taxable REIT subsidiary of the trust if the 

5 property is operated on behalf of such sub6 sidiary by a person who is an eligible inde7 pendent contractor.’’. 

8 (b) ELIGIBLE INDEPENDENT CONTRACTOR.—Sub9 paragraphs (A) and (B) of section 856(d)(9) (relating to 

10 eligible independent contractor) are amended to read as 

11 follows: 

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

13 independent contractor’ means, with respect to 

14 any qualified lodging facility or qualified health 

15 care property (as defined in subsection 

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

17 the time such contractor enters into a manage18 ment agreement or other similar service con19 tract with the taxable REIT subsidiary to oper20 ate such qualified lodging facility or qualified 

21 health care property, such contractor (or any 

22 related person) is actively engaged in the trade 

23 or business of operating qualified lodging facili24 ties or qualified health care properties, respec25 tively, for any person who is not a related perVerDate Aug 31 2005 05:26 Oct 04, 2006 Jkt 049200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\S4030.IS S4030

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1 son with respect to the real estate investment 

2 trust or the taxable REIT subsidiary. 

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

4 of this paragraph and paragraph (8)(B), a per5 son shall not fail to be treated as an inde6 pendent contractor with respect to any qualified 

7 lodging facility or qualified health care property 

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

9 ‘‘(i) The taxable REIT subsidiary 

10 bears the expenses for the operation of 

11 such qualified lodging facility or qualified 

12 health care property pursuant to the man13 agement agreement or other similar service 

14 contract. 

15 ‘‘(ii) The taxable REIT subsidiary re16 ceives the revenues from the operation of 

17 such qualified lodging facility or qualified 

18 health care property, net of expenses for 

19 such operation and fees payable to the op20 erator pursuant to such agreement or con21 tract. 

22 ‘‘(iii) The real estate investment trust 

23 receives income from such person with re24 spect to another property that is attrib25 utable to a lease of such other property to 


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1 such person that was in effect as of the 

2 later of — 

3 ‘‘(I) January 1, 1999, or 

4 ‘‘(II) the earliest date that any 

5 taxable REIT subsidiary of such trust 

6 entered into a management agreement 

7 or other similar service contract with 

8 such person with respect to such 

9 qualified lodging facility or qualified 

10 health care property.’’. 

11 TITLE V—FOREIGN REITS 

12 SEC. 501. STOCK OF FOREIGN REITS AS REAL ESTATE AS13 SETS. 

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

15 856(c)(5)(B) is amended by inserting ‘‘or in a qualified 

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

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

18 amended by adding at the end the following new para19 graph: 

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

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

22 means a corporation, trust, or association— 

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

24 7701(a)(3), 


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

2 interests of which are regularly traded on an es3 tablished securities market, and 

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

5 rules that the Secretary determines meet the 

6 following criteria: 

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

8 assets must qualify as real estate assets 

9 (determined without regard to shares or 

10 transferable certificates of beneficial inter11 est in such entity), as determined at the 

12 close of the entity’s prior taxable year. 

13 ‘‘(ii) The entity either receives a divi14 dends paid deduction comparable to section 

15 561 or is exempt from corporate level tax. 

16 ‘‘(iii) The entity is required to dis17 tribute at least 85 percent of its annual 

18 taxable income (as computed in the juris19 diction in which it is organized) to the 

20 holders of its shares or certificates of bene21 ficial interest on an annual basis.’’. 

22 SEC. 502. DIVIDENDS FROM FOREIGN REITS. 

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

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


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1 TITLE VI—EFFECTIVE DATES 

2 SEC. 601. EFFECTIVE DATES. 

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

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

5 to taxable years beginning after the date of the enactment 

6 of this Act. 

7 (b) REIT HEDGING RULES.—The amendment made 

8 by section 101(c) shall apply to transactions entered into 

9 after the date of the enactment of this Act. 

Æ 


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