H. R. 2488—194 
‘‘(I) RETURNS.—In the event the corporation 
ceases to be treated as a REIT by operation of 
clause (ii), the corporation shall file any appro-
priate amended returns reflecting the change in 
status within 3 months of the close of the extended 
eligibility period. 
‘‘(II) INTEREST.—Interest shall be payable on 
any tax imposed by reason of clause (ii) for any 
taxable year but, unless there was a finding under 
subparagraph (D), no substantial underpayment 
penalties shall be imposed. 
‘‘(III) NOTICE.—The corporation shall, at the 
same time it files its returns under subclause (I), 
notify its shareholders and any other persons 
whose tax position is, or may reasonably be 
expected to be, affected by the change in status 
so they also may file any appropriate amended 
returns to conform their tax treatment consistent 
with the corporation’s loss of REIT status. 
‘‘(IV) REGULATIONS.—The Secretary shall pro-
vide appropriate regulations setting forth trans-
feree liability and other provisions to ensure collec-
tion of tax and the proper administration of this 
provision. 
‘‘(iv) Clauses (ii) and (iii) shall not apply if the 
corporation allows its incubator REIT status to lapse 
at the end of the initial 2-year eligibility period without 
engaging in a going public transaction if the corpora-
tion is not a controlled entity as of the beginning 
of its fourth taxable year. In such a case, the corpora-
tion’s directors may still be liable for the penalties 
described in subparagraph (D) during the eligibility 
period. 
‘‘(D) SPECIAL PENALTIES.—If the Secretary determines 
that an incubator REIT election was filed for a principal 
purpose other than as part of a reasonable plan to under-
take a going public transaction, an excise tax of $20,000 
shall be imposed on each of the corporation’s directors 
for each taxable year for which an election was in effect. 
‘‘(E) GOING PUBLIC TRANSACTION.—For purposes of this 
paragraph, a going public transaction means— 
‘‘(i) a public offering of shares of the stock of the 
incubator REIT; 
‘‘(ii) a transaction, or series of transactions, that 
results in the stock of the incubator REIT being regu-
larly traded on an established securities market and 
that results in at least 50 percent of such stock being 
held by shareholders who are unrelated to persons 
who held such stock before it began to be so regularly 
traded; or 
‘‘(iii) any transaction resulting in ownership of the 
REIT by 200 or more persons (excluding the largest 
single shareholder) who in the aggregate own at least 
50 percent of the stock of the REIT. 
For the purposes of this subparagraph, the rules of para-
graph (3) shall apply in determining the ownership of stock. 
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H. R. 2488—195 
‘‘(F) DEFINITIONS.—The term ‘established securities 
market’ shall have the meaning set forth in the regulations 
under section 897.’’. 
(c) CONFORMING AMENDMENT.—Paragraph (2) of section 856(h) 
is amended by striking ‘‘and (6)’’ each place it appears and inserting 
‘‘, (6), and (7)’’. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section 
shall apply to taxable years ending after July 14, 1999. 
(2) EXCEPTION FOR EXISTING CONTROLLED ENTITIES.—The 
amendments made by this section shall not apply to any entity 
which is a controlled entity (as defined in section 856(l) of 
the Internal Revenue Code of 1986, as added by this section) 
as of July 14, 1999, which is a real estate investment trust 
for the taxable year which includes such date, and which has 
significant business assets or activities as of such date. For 
purposes of the preceding sentence, an entity shall be treated 
as such a controlled entity on July 14, 1999, if it becomes 
such an entity after such date in a transaction— 
(A) made pursuant to a written agreement which was 
binding on such date and at all times thereafter, or 
(B) described on or before such date in a filing with 
the Securities and Exchange Commission required solely 
by reason of the transaction. 
SEC. 1506. TREATMENT OF GAIN FROM CONSTRUCTIVE OWNERSHIP 
TRANSACTIONS. 
(a) IN GENERAL.—Part IV of subchapter P of chapter 1 (relating 
to special rules for determining capital gains and losses) is amended 
by inserting after section 1259 the following new section: 
‘‘SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS. 
‘‘(a) IN GENERAL.—If the taxpayer has gain from a constructive 
ownership transaction with respect to any financial asset and such 
gain would (without regard to this section) be treated as a long- 
term capital gain— 
‘‘(1) such gain shall be treated as ordinary income to the 
extent that such gain exceeds the net underlying long-term 
capital gain, and 
‘‘(2) to the extent such gain is treated as a long-term 
capital gain after the application of paragraph (1), the deter-
mination of the capital gain rate (or rates) applicable to such 
gain under section 1(h) shall be determined on the basis of 
the respective rate (or rates) that would have been applicable 
to the net underlying long-term capital gain. 
‘‘(b) INTEREST CHARGE ON DEFERRAL OF GAIN RECOGNITION.— 
‘‘(1) IN GENERAL.—If any gain is treated as ordinary income 
for any taxable year by reason of subsection (a)(1), the tax 
imposed by this chapter for such taxable year shall be increased 
by the amount of interest determined under paragraph (2) 
with respect to each prior taxable year during any portion 
of which the constructive ownership transaction was open. Any 
amount payable under this paragraph shall be taken into 
account in computing the amount of any deduction allowable 
to the taxpayer for interest paid or accrued during such taxable 
year. 
‘‘(2) AMOUNT OF INTEREST.—The amount of interest deter-
mined under this paragraph with respect to a prior taxable 
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H. R. 2488—196 
year is the amount of interest which would have been imposed 
under section 6601 on the underpayment of tax for such year 
which would have resulted if the gain (which is treated as 
ordinary income by reason of subsection (a)(1)) had been 
included in gross income in the taxable years in which it 
accrued (determined by treating the income as accruing at 
a constant rate equal to the applicable Federal rate as in 
effect on the day the transaction closed). The period during 
which such interest shall accrue shall end on the due date 
(without extensions) for the return of tax imposed by this 
chapter for the taxable year in which such transaction closed. 
‘‘(3) APPLICABLE FEDERAL RATE.—For purposes of paragraph 
(2), the applicable Federal rate is the applicable Federal rate 
determined under 1274(d) (compounded semiannually) which 
would apply to a debt instrument with a term equal to the 
period the transaction was open. 
‘‘(4) NO CREDITS AGAINST INCREASE IN TAX.—Any increase 
in tax under paragraph (1) shall not be treated as tax imposed 
by this chapter for purposes of determining— 
‘‘(A) the amount of any credit allowable under this 
chapter, or 
‘‘(B) the amount of the tax imposed by section 55. 
‘‘(c) FINANCIAL ASSET.—For purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘financial asset’ means— 
‘‘(A) any equity interest in any pass-thru entity, and 
‘‘(B) to the extent provided in regulations— 
‘‘(i) any debt instrument, and 
‘‘(ii) any stock in a corporation which is not a 
pass-thru entity. 
‘‘(2) PASS-THRU
ENTITY.—For purposes of paragraph (1), 
the term ‘pass-thru entity’ means— 
‘‘(A) a regulated investment company, 
‘‘(B) a real estate investment trust, 
‘‘(C) an S corporation, 
‘‘(D) a partnership, 
‘‘(E) a trust, 
‘‘(F) a common trust fund, 
‘‘(G) a passive foreign investment company (as defined 
in section 1297 without regard to subsection (e) thereof), 
‘‘(H) a foreign personal holding company, 
‘‘(I) a foreign investment company (as defined in section 
1246(b)), and 
‘‘(J) a REMIC. 
‘‘(d) CONSTRUCTIVE OWNERSHIP TRANSACTION.—For purposes 
of this section— 
‘‘(1) IN GENERAL.—The taxpayer shall be treated as having 
entered into a constructive ownership transaction with respect 
to any financial asset if the taxpayer— 
‘‘(A) holds a long position under a notional principal 
contract with respect to the financial asset, 
‘‘(B) enters into a forward or futures contract to acquire 
the financial asset, 
‘‘(C) is the holder of a call option, and is the grantor 
of a put option, with respect to the financial asset and 
such options have substantially equal strike prices and 
substantially contemporaneous maturity dates, or 
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H. R. 2488—197 
‘‘(D) to the extent provided in regulations prescribed 
by the Secretary, enters into one or more other transactions 
(or acquires one or more positions) that have substantially 
the same effect as a transaction described in any of the 
preceding subparagraphs. 
‘‘(2) EXCEPTION
FOR
POSITIONS
WHICH
ARE
MARKED
TO 
MARKET.—This section shall not apply to any constructive 
ownership transaction if all of the positions which are part 
of such transaction are marked to market under any provision 
of this title or the regulations thereunder. 
‘‘(3) LONG
POSITION
UNDER
NOTIONAL
PRINCIPAL
CON-
TRACT.—A person shall be treated as holding a long position 
under a notional principal contract with respect to any financial 
asset if such person— 
‘‘(A) has the right to be paid (or receive credit for) 
all or substantially all of the investment yield (including 
appreciation) on such financial asset for a specified period, 
and 
‘‘(B) is obligated to reimburse (or provide credit for) 
all or substantially all of any decline in the value of such 
financial asset. 
‘‘(4) FORWARD
CONTRACT.—The term ‘forward contract’ 
means any contract to acquire in the future (or provide or 
receive credit for the future value of) any financial asset. 
‘‘(e) NET UNDERLYING LONG-TERM CAPITAL GAIN.—For purposes 
of this section, in the case of any constructive ownership transaction 
with respect to any financial asset, the term ‘net underlying long- 
term capital gain’ means the aggregate net capital gain that the 
taxpayer would have had if— 
‘‘(1) the financial asset had been acquired for fair market 
value on the date such transaction was opened and sold for 
fair market value on the date such transaction was closed, 
and 
‘‘(2) only gains and losses that would have resulted from 
the deemed ownership under paragraph (1) were taken into 
account. 
The amount of the net underlying long-term capital gain with 
respect to any financial asset shall be treated as zero unless the 
amount thereof is established by clear and convincing evidence. 
‘‘(f ) SPECIAL RULE WHERE TAXPAYER TAKES DELIVERY.—Except 
as provided in regulations prescribed by the Secretary, if a construc-
tive ownership transaction is closed by reason of taking delivery, 
this section shall be applied as if the taxpayer had sold all the 
contracts, options, or other positions which are part of such trans-
action for fair market value on the closing date. The amount of 
gain recognized under the preceding sentence shall not exceed the 
amount of gain treated as ordinary income under subsection (a). 
Proper adjustments shall be made in the amount of any gain 
or loss subsequently realized for gain recognized and treated as 
ordinary income under this subsection. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section, including regulations— 
‘‘(1) to permit taxpayers to mark to market constructive 
ownership transactions in lieu of applying this section, and 
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