I
104TH CONGRESS
1ST SESSION
H. R. 2121
To amend the Internal Revenue Code of 1986 to simplify certain provisions
applicable to real estate investment trusts.
IN THE HOUSE OF REPRESENTATIVES
JULY 26, 1995
Mr. SHAW (for himself, Mr. MATSUI, Mr. CRANE, Mr. THOMAS, Mrs. JOHN-
SON of Connecticut, Mr. ZIMMER, Mr. PORTMAN, Mr. STARK, Mr. JA-
COBS, Mr. LEVIN, Mr. CARDIN, and Ms. DUNN of Washington) intro-
duced 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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Real Estate Investment Trust Tax Simplification Act of
1995’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
TITLE I—REMOVAL OF TAX
TRAPS FOR THE UNWARY
SEC. 101. CLARIFICATION OF LIMITATION ON MAXIMUM
NUMBER OF SHAREHOLDERS.
(a) RULES RELATING TO DETERMINATION OF OWN-
ERSHIP.—
(1) FAILURE TO ISSUE SHAREHOLDER DEMAND
LETTER NOT TO DISQUALIFY REIT.—Section 857(a)
(relating to requirements applicable to real estate in-
vestment trusts) is amended by striking paragraph
(2) and by redesignating paragraph (3) as para-
graph (2).
(2) SHAREHOLDER DEMAND LETTER REQUIRE-
MENT; PENALTY.—Section 857 (relating to taxation
of real estate investment trusts and their bene-
ficiaries) is amended by redesignating subsection (f)
as subsection (g) and by inserting after subsection
(e) the following new subsection:
‘‘(f) REAL ESTATE INVESTMENT TRUSTS TO ASCER-
TAIN OWNERSHIP.—
‘‘(1) IN
GENERAL.—Each real estate invest-
ment trust shall each taxable year comply with regu-
lations prescribed by the Secretary for the purposes
of ascertaining the actual ownership of the outstand-
ing shares, or certificates of beneficial interest, of
such trust.
‘‘(2) FAILURE TO COMPLY.—
‘‘(A) IN GENERAL.—If a real estate invest-
ment trust fails to comply with the require-
ments of paragraph (1) for a taxable year, such
trust shall pay (on notice and demand by the
Secretary and in the same manner as tax) a
penalty of $25,000.
‘‘(B) INTENTIONAL
DISREGARD.—If any
failure under paragraph (1) is due to inten-
tional disregard of the requirement under para-
graph (1), the penalty under subparagraph (A)
shall be $50,000.
‘‘(C) FAILURE
TO
COMPLY
AFTER
NO-
TICE.—The Secretary may require a real estate
investment trust to take such actions as the
Secretary determines appropriate to ascertain
actual ownership if the trust fails to meet the
requirements of paragraph (1). If the trust fails
to take such actions, the trust shall pay (on no-
tice and demand by the Secretary and in the
same manner as tax) an additional penalty
equal to the penalty determined under subpara-
graph (A) or (B), whichever is applicable.
‘‘(D) REASONABLE
CAUSE.—No penalty
shall be imposed under this paragraph with re-
spect to any failure if it is shown that such fail-
ure is due to reasonable cause and not to willful
neglect.’’
(b) COMPLIANCE WITH CLOSELY HELD PROHIBI-
TION.—
(1) IN GENERAL.—Section 856 (defining real
estate investment trust) is amended by adding at the
end the following new subsection:
‘‘(k) REQUIREMENT THAT ENTITY NOT BE CLOSELY
HELD TREATED AS MET IN CERTAIN CASES.—A corpora-
tion, trust, or association—
‘‘(1) which for a taxable year meets the require-
ments of section 857(f)(1), and
‘‘(2) which does not know, or exercising reason-
able diligence would not have known, whether the
entity failed to meet the requirement of subsection
(a)(6),
shall be treated as having met the requirement of sub-
section (a)(6) for the taxable year.’’
(2) CONFORMING AMENDMENT.—Paragraph (6)
of section 856(a) is amended by inserting ‘‘subject
to the provisions of subsection (k),’’ before ‘‘which
is not’’.
SEC. 102. DE MINIMIS RULE FOR TENANT SERVICES IN-
COME.
(a) IN GENERAL.—Paragraph (2) of section 856(d)
(defining rents from real property) is amended by striking
subparagraph (C) and the last sentence and inserting:
‘‘(C) any impermissible tenant service in-
come (as defined in paragraph (7)).’’
(b) IMPERMISSIBLE TENANT SERVICE INCOME.—
Section 856(d) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(7) IMPERMISSIBLE
TENANT
SERVICE
IN-
COME.—For purposes of paragraph (2)(C)—
‘‘(A) IN GENERAL.—The term ‘impermis-
sible tenant service income’ means, with respect
to any real or personal property, any amount
(other than amounts described in subparagraph
(B) or (C) of paragraph (1)) received or ac-
crued directly or indirectly by the real estate in-
vestment trust for—
‘‘(i) services furnished or rendered by
the trust to the tenants of such property,
or
‘‘(ii) managing or operating such
property.
‘‘(B) DISQUALIFICATION OF ALL AMOUNTS
WHERE MORE THAN DE MINIMIS AMOUNT.—If
the amount described in subparagraph (A) with
respect to a property exceeds 1 percent of all
amounts received or accrued directly or indi-
rectly by the real estate investment trust with
respect to such property, the impermissible ten-
ant service income of the trust with respect to
the property shall include all such amounts.
‘‘(C) EXCEPTIONS.—For purposes of sub-
paragraph (A)—
‘‘(i) services furnished or rendered, or
management 
or 
operation 
provided,
through an independent contractor from
whom the trust itself does not derive or re-
ceive any income shall not be treated as
furnished, rendered, or provided by the
trust, and
‘‘(ii) there shall not be taken into ac-
count any amount which would be excluded
from unrelated business taxable income
under section 512(b)(3) if received by an
organization 
described 
in 
section
512(a)(2).
‘‘(D) AMOUNT ATTRIBUTABLE TO IMPER-
MISSIBLE SERVICES.—For purposes of subpara-
graph (A), the amount treated as received for
any service (or management or operation) shall
not be less than 150 percent of the actual direct
cost of the trust in furnishing or rendering the
service (or providing the management or oper-
ation).
‘‘(E) 
COORDINATION
WITH
LIMITA-
TIONS.—For purposes of paragraphs (2) and
(3) of subsection (c), amounts described in sub-
paragraph (A) shall be included in the gross in-
come of the corporation, trust, or association.’’
SEC. 103. ATTRIBUTION RULES APPLICABLE TO TENANT
OWNERSHIP.
Section 856(d)(5) (relating to constructive ownership
of stock) is amended by adding at the end the following:
‘‘For purposes of paragraph (2)(B), section 318(a)(3)(A)
shall be applied under the preceding sentence in the case
of a partnership by taking into account only partners who
own (directly or indirectly) 25 percent or more of the cap-
ital interest, or the profits interest, in the partnership.’’
amount so includible by any shareholder
shall not exceed that part of the amount
subjected to tax in subparagraph (A)(ii)
which he would have received if all of such
amount had been distributed as capital
gain dividends by the trust to the holders
of such shares at the close of its taxable
year.
‘‘(ii) For purposes of this title, every
such shareholder shall be deemed to have
paid, for his taxable year under clause (i),
the tax imposed by subparagraph (A)(ii)
on the amounts required by this subpara-
graph to be included in respect of such
shares in computing his long-term capital
gains for that year; and such shareholders
shall be allowed credit or refund as the
case may be, for the tax so deemed to have
been paid by him.
‘‘(iii) The adjusted basis of such
shares in the hands of the holder shall be
increased with respect to the amounts re-
quired by this subparagraph to be included
in computing his long-term capital gains,
by the difference between the amount of
such includible gains and such holder’s
credit or refund determined under clause
(ii).
‘‘(iv) In the event of such designation,
the tax imposed by subparagraph (A)(ii)
shall be paid by the real estate investment
trust within 30 days after the close of its
taxable year.
‘‘(v) The earnings and profits of such
real estate investment trust, and the earn-
ings and profits of any such shareholder
which is a corporation, shall be appro-
priately adjusted in accordance with regu-
lations prescribed by the Secretary.
‘‘(vi) As used in this subparagraph,
the terms ‘shares’ and ‘shareholders’ shall
include beneficial interests and holders of
beneficial interest, respectively.’’
(b) CONFORMING AMENDMENTS.—
(1) Clause (i) of section 857(b)(7)(A) is amend-
ed by striking ‘‘subparagraph (B)’’ and inserting
‘‘subparagraph (B) or (D)’’.
(2) Clause (iii) of section 852(b)(3)(D) is
amended by striking ‘‘by 65 percent’’ and all that
follows and inserting ‘‘by the difference between the
amount of such includible gains and such holder’s
credit or refund determined under clause (ii).’’
SEC. 202. REPEAL OF 30-PERCENT GROSS INCOME RE-
QUIREMENT.
(a) GENERAL RULE.—Subsection (c) of section 856
(relating to limitations) is amended—
(1) by adding ‘‘and’’ at the end of paragraph
(3),
(2) by striking paragraphs (4) and (8), and
(3) by redesignating paragraphs (5), (6), and
(7) as paragraphs (4), (5), and (6), respectively.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (5) of section 857(b) is amended
by striking ‘‘section 856(c)(7)’’ and inserting ‘‘sec-
tion 856(c)(6)’’.
(2) Subparagraph (C) of section 857(b)(6) is
amended by striking ‘‘section 856(c)(6)(B)’’ and in-
serting ‘‘section 856(c)(5)(B)’’.
TITLE III—OTHER
SIMPLIFICATION
SEC. 301. MODIFICATION OF EARNINGS AND PROFITS
RULES FOR DETERMINING WHETHER REIT
HAS EARNINGS AND PROFITS FROM NON-
REIT YEAR.
Subsection (d) of section 857 is amended by adding
at the end the following new paragraph:
‘‘(3) DISTRIBUTIONS TO MEET REQUIREMENTS
OF SUBSECTION (a)(2)(B).—Any distribution which
is made in order to comply with the requirements of
subsection (a)(2)(B)—
‘‘(A) shall be treated for purposes of this
subsection as made from the earliest accumu-
lated earnings and profits (other than earnings
and profits to which subsection (a)(2)(A) ap-
plies) rather than the most recently accumu-
lated earnings and profits, and
‘‘(B) shall not be treated as a distribution
for purposes of subsection (b)(2)(B).’’
SEC. 302. TREATMENT OF FORECLOSURE PROPERTY.
(a) GRACE PERIODS.—
(1) INITIAL PERIOD.—Paragraph (2) of section
856(e) (relating to special rules for foreclosure prop-
erty) is amended by striking ‘‘on the date which is
2 years after the date the trust acquired such prop-
erty’’ and inserting ‘‘as of the close of the 3d taxable
year following the taxable year in which the trust ac-
quired such property’’.
(2) EXTENSION.—Paragraph (3) of section
856(e) is amended—
(A) by striking ‘‘or more extensions’’ and
inserting ‘‘extension’’, and
(B) by striking the last sentence and in-
serting: ‘‘Any such extension shall not extend
the grace period beyond the close of the 3d tax-
able year following the last taxable year in the
period under paragraph (2).’’
(b) REVOCATION OF ELECTION.—Paragraph (5) of
section 856(e) is amended by striking the last sentence
and inserting: ‘‘A real estate investment trust may revoke
any such election for a taxable year by filing the revocation
(in the manner provided in regulations by the Secretary)
on or before the due date (including any extension of time)
for filing its return of tax under this chapter for the tax-
able year. If a trust revokes an election for any property,
no election may be made by the trust under this paragraph
with respect to the property for any subsequent taxable
year.’’
(c) CERTAIN ACTIVITIES NOT TO DISQUALIFY PROP-
ERTY.—Paragraph (4) of section 856(e) is amended by
adding at the end the following new flush sentence:
‘‘For purposes of subparagraph (C), property shall
not be treated as used in a trade or business by rea-
son of any activities of the real estate investment
trust with respect to such property to the extent
that such activities would not result in amounts re-
ceived or accrued, directly or indirectly, with respect
to such property being treated as other than rents
from real property.’’
SEC. 303. SPECIAL FORECLOSURE RULES FOR HEALTH
CARE PROPERTIES.
Section 856(e) (relating to special rules for fore-
closure property) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(6) SPECIAL RULES FOR QUALIFIED HEALTH
CARE
PROPERTIES.—For purposes of this sub-
section—
‘‘(A) ACQUISITION
BY
LEASE
TERMI-
NATIONS.—The 
term 
‘foreclosure 
property’
shall include any qualified health care property
acquired by a real estate investment trust as
the result of the termination or expiration of a
lease of such property.
‘‘(B) INCOME
FROM
INDEPENDENT
CON-
TRACTORS.—For purposes of applying para-
graph (4)(C) with respect to qualified health
care property which is foreclosure property, in-
come derived or received by the trust from an
independent contractor shall be disregarded to
the extent such income is attributable to other
property.
‘‘(C) QUALIFIED
HEALTH
CARE
PROP-
ERTY.—The term ‘qualified health care prop-
erty’ means any real property (including inter-
ests therein), and any personal property inci-
dent to such real property, which—
‘‘(i) is a health care facility, or
‘‘(ii) is necessary or incidental to the
use of a health care facility.’’
SEC. 304. PAYMENTS UNDER HEDGING INSTRUMENTS.
Section 856(c)(5)(G) (relating to treatment of certain
interest rate agreements), as redesignated by section 202,
is amended to read as follows:
‘‘(G) TREATMENT OF CERTAIN HEDGING
INSTRUMENTS.—Except to the extent provided
by regulations, any—
‘‘(i) payment to a real estate invest-
ment trust under an interest rate swap or
cap agreement, option, futures contract,
forward rate agreement, or any similar fi-
nancial instrument, entered into by the
trust in a transaction to hedge any indebt-
edness incurred or to be incurred by the
trust to acquire or carry real estate assets,
and
‘‘(ii) gain from the sale or other dis-
position of any such investment,
shall be treated as income qualifying under
paragraph (2).’’
SEC. 305. EXCESS NONCASH INCOME.
Section 857(e)(2) (relating to determination of
amount of excess noncash income) is amended—
(1) by striking subparagraph (B),
(2) by striking the period at the end of sub-
paragraph (C) and inserting a comma,
(3) by redesignating subparagraph (C) (as
amended by paragraph (2)) as subparagraph (B),
and
(4) by adding at the end the following new sub-
paragraphs:
‘‘(C) the amount (if any) by which—
‘‘(i) the amounts includible in gross
income with respect to instruments to
which section 860E(a) or 1272 applies, ex-
ceed
‘‘(ii) the amount of money and the
fair market value of other property re-
ceived during the taxable year under such
instruments, and
‘‘(D) amounts includible in income by rea-
son of cancellation of indebtedness.’’
SEC. 306. PROHIBITED TRANSACTION SAFE HARBOR.
Clause (iii) of section 857(b)(6)(C) (relating to cer-
tain sales not to constitute prohibited transactions) is
amended—
(1) by striking ‘‘(other than foreclosure prop-
erty)’’ in subclauses (I) and (II) and inserting
‘‘(other than sales of foreclosure property or sales to
which section 1033 applies)’’, and
(2) by striking ‘‘(as determined for purposes of
computing earnings and profits)’’ in subclause (II)
and inserting ‘‘(determined without regard to any
adjustment for depreciation or amortization)’’.
SEC. 307. SHARED APPRECIATION MORTGAGES.
(a) BANKRUPTCY SAFE HARBOR.—Section 856(j)
(relating to treatment of shared appreciation mortgages)
is amended by redesignating paragraph (4) as paragraph
(5) and by inserting after paragraph (3) the following new
paragraph:
‘‘(4) COORDINATION WITH 4-YEAR HOLDING PE-
RIOD.—
‘‘(A) IN GENERAL.—For purposes of sec-
tion 857(b)(6)(C), if a real estate investment
trust is treated as having sold secured property
under paragraph (3)(A), the trust shall be
treated as having held such property for at
least 4 years if—
‘‘(i) the secured property is sold or
otherwise disposed of pursuant to a case
under title 11 of the United States Code,
‘‘(ii) the seller is under the jurisdic-
tion of the court in such case, and
‘‘(iii) the disposition is required by the
court or is pursuant to a plan approved by
the court.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply if—
‘‘(i) the secured property was acquired
by the trust with the intent to evict or
foreclose, or