I
105TH CONGRESS
1ST SESSION
H. R. 1150
To amend the Internal Revenue Code of 1986 to simplify certain provisions
applicable to real estate investment trusts.
IN THE HOUSE OF REPRESENTATIVES
MARCH 20, 1997
Mr. SHAW (for himself, Mr. MATSUI, Mr. CRANE, Mr. THOMAS, Mr. STARK,
Mrs. JOHNSON of Connecticut, Mr. HOUGHTON, Mr. HERGER, Mr.
LEVIN, Mr. MCCRERY, Mr. CARDIN, Mr. ENSIGN, Mr. CAMP, Mr. COL-
LINS, Mr. ENGLISH of Pennsylvania, Mr. WELLER, Mr. SAM JOHNSON
of Texas, and Ms. DUNN) introduced the following bill; which was re-
ferred 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
1997’’.
(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
received or accrued directly or indirectly by the
real estate investment 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 during such tax-
able year directly or indirectly by the real estate
investment trust with respect to such property,
the impermissible tenant 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
511(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 direct cost
of the trust in furnishing or rendering the serv-
ice (or providing the management or operation).
‘‘(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.’’
TITLE 
II—CONFORMITY 
WITH
REGULATED 
INVESTMENT
COMPANY RULES
SEC. 201. CREDIT FOR TAX PAID BY REIT ON RETAINED
CAPITAL GAINS.
(a) GENERAL RULE.—Paragraph (3) of section
857(b) (relating to capital gains) is amended by redesig-
nating subparagraph (D) as subparagraph (E) and by in-
serting after subparagraph (C) the following new subpara-
graph:
‘‘(D) TREATMENT BY SHAREHOLDERS OF
UNDISTRIBUTED CAPITAL GAINS.—
‘‘(i) Every shareholder of a real estate
investment trust at the close of the trust’s
taxable year shall include, in computing his
long-term capital gains in his return for
his taxable year in which the last day of
the trust’s taxable year falls, such amount
as the trust shall designate in respect of
such shares in a written notice mailed to
its shareholders at any time prior to the
expiration of 60 days after the close of its
taxable year (or mailed to its shareholders
with its annual report for the taxable
year), but the amount so includible by any
shareholder shall not exceed that part of
the amount subjected to tax in subpara-
graph (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 shareholder
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 shareholder
shall be increased with respect to the
amounts required by this subparagraph to
be included in computing his long-term
capital gains, by the difference between the
amount of such includible gains and the
tax deemed paid by such shareholder in re-
spect of such shares 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 interests, 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 the tax deemed
paid by such shareholder in respect of such shares
under clause (ii).’’
SEC. 202. REDUCTION OF DISTRIBUTION REQUIREMENT.
Clauses (i) and (ii) of section 857(a)(1)(A) are each
amended by striking ‘‘95 percent (90 percent for taxable
years beginning before January 1, 1980)’’ and inserting
‘‘90 percent’’.
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 and subsection (a)(2)(B) as made
from the earliest accumulated earnings and
profits (other than earnings and profits to
which subsection (a)(2)(A) applies) rather than