I
106TH CONGRESS
1ST SESSION
H. R. 1616
To amend the Internal Revenue Code of 1986 to simplify certain provisions
applicable to real estate investment trusts.
IN THE HOUSE OF REPRESENTATIVES
APRIL 28 1999
Mr. THOMAS (for himself, Mr. CARDIN, Mr. BACHUS, Mr. FOLEY, Mr.
ENGLISH, Mr. MCCRERY, Mr. SAM JOHNSON of Texas, Mr. DAVIS of Vir-
ginia, Mr. FORD, Mrs. THURMAN, Mr. MORAN of Virginia, Mr. WELLER,
Mr. FROST, Mr. CRANE, Mr. HULSHOF, Mr. RAMSTAD, Ms. DUNN, Mr.
NEAL of Massachusetts, Mr. HERGER, Mr. STARK, Mr. REYES, Mr.
HAYWORTH, Mr. LEVIN, Mr. TANNER, Mr. CAMP, Mrs. JOHNSON of Con-
necticut, Mr. MCDERMOTT, Mr. BECERRA, Mr. MCNULTY, Mr.
PORTMAN, Mr. SHAW, and Mr. HOUGHTON) 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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Real Estate Investment Trust Modernization Act of
1999’’.
(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—TREATMENT 
OF 
IN-
COME AND SERVICES PRO-
VIDED BY TAXABLE REIT SUB-
SIDIARIES
SEC. 101. MODIFICATIONS TO ASSET DIVERSIFICATION
TEST.
Subparagraph (B) of section 856(c)(4) is amended
to read as follows:
‘‘(B)(i) not more than 25 percent of the
value of its total assets is represented by securi-
ties (other than those includible under subpara-
graph (A)), and
‘‘(ii) except with respect to a taxable REIT
subsidiary and securities includible under sub-
paragraph (A)—
‘‘(I) not more than 5 percent of the
value of its total assets is represented by
securities of any 1 issuer,
‘‘(II) the trust does not hold securities
possessing more than 10 percent of the
total voting power of the outstanding secu-
rities of any 1 issuer, and
‘‘(III) the trust does not hold securi-
ties having a value of more than 10 per-
cent of the total value of the outstanding
securities of any 1 issuer.’’
SEC. 102. TREATMENT OF INCOME AND SERVICES PRO-
VIDED BY TAXABLE REIT SUBSIDIARIES.
(a) INCOME FROM TAXABLE REIT SUBSIDIARIES
NOT TREATED AS IMPERMISSIBLE TENANT SERVICE IN-
COME.—Clause (i) of section 856(d)(7)(C) (relating to ex-
ceptions to impermissible tenant service income) is amend-
ed by inserting ‘‘or through a taxable REIT subsidiary
of such trust’’ after ‘‘income’’.
(b) CERTAIN INCOME FROM TAXABLE REIT SUB-
SIDIARIES NOT EXCLUDED FROM RENTS FROM REAL
PROPERTY.—
(1) IN
GENERAL.—Subsection (d) of section
856 (relating to rents from real property defined) is
amended by adding at the end the following new
paragraphs:
‘‘(8) SPECIAL RULE FOR TAXABLE REIT SUB-
SIDIARIES.—For 
purposes 
of 
this 
subsection,
amounts paid to a real estate investment trust by a
taxable REIT subsidiary of such trust shall not be
excluded from rents from real property by reason of
paragraph (2)(B) if the requirements of subpara-
graph (A) or (B) are met.
‘‘(A) LIMITED RENTAL EXCEPTION.—The
requirements of this subparagraph are met with
respect to any property if at least 90 percent of
the leased space of the property is rented to
persons other than taxable REIT subsidiaries of
such trust and other than persons described in
section 856(d)(2)(B). The preceding sentence
shall apply only to the extent that the amounts
paid to the trust as rents from real property (as
defined in paragraph (1) without regard to
paragraph (2)(B)) from such property are sub-
stantially comparable to such rents made by the
other tenants of the trust’s property for com-
parable space.
‘‘(B) EXCEPTION FOR CERTAIN LODGING
FACILITIES.—The requirements of this subpara-
graph are met with respect to an interest in
real property which is a qualified lodging facil-
ity leased by the trust to a taxable REIT sub-
sidiary of the trust if the property is operated
on behalf of such subsidiary by a person who is
an eligible independent contractor.
‘‘(9) ELIGIBLE INDEPENDENT CONTRACTOR.—
For purposes of paragraph (8)(B)—
‘‘(A) IN
GENERAL.—The term ‘eligible
independent contractor’ means, with respect to
any qualified lodging facility, any independent
contractor if, at the time such contractor enters
into a management agreement or other similar
service contract with the taxable REIT sub-
sidiary to operate the facility, such contractor
(or any related person) is actively engaged in
the trade or business of operating qualified
lodging facilities for any person who is not a re-
lated person with respect to the real estate in-
vestment trust or the taxable REIT subsidiary.
‘‘(B) SPECIAL RULES.—Solely for purposes
of this paragraph and paragraph (8)(B), a per-
son shall not fail to be treated as an inde-
pendent contractor with respect to any qualified
lodging facility by reason of any of the fol-
lowing:
‘‘(i) The taxable REIT subsidiary
bears the expenses for the operation of the
facility pursuant to the management agree-
ment or other similar service contract.
‘‘(ii) The taxable REIT subsidiary re-
ceives the revenues from the operation of
such facility, net of expenses for such oper-
ation and fees payable to the operator pur-
suant to such agreement or contract.
‘‘(iii) The real estate investment trust
receives income from such person with re-
spect to another property that is attrib-
utable to a lease of such other property to
such person that was in effect as on the
later of—
‘‘(I) January 1, 1999, or
‘‘(II) the earliest date that any
taxable REIT subsidiary of such trust
entered into a management agreement
or other similar service contract with
such person with respect to such
qualified lodging facility.
‘‘(C) RENEWALS, 
ETC., 
OF
EXISTING
LEASES.—For 
purposes 
of 
subparagraph
(B)(iii)—
‘‘(i) a lease shall be treated as in ef-
fect on January 1, 1999, without regard to
its renewal after such date, so long as such
renewal is pursuant to the terms of such
lease as in effect on whichever of the dates
under subparagraph (B)(iii) is the latest,
and
‘‘(ii) a lease of a property entered into
after whichever of the dates under sub-
paragraph (B)(iii) is the latest shall be
treated as in effect on such date if—
‘‘(I) on such date, a lease of such
property from the trust was in effect,
and
‘‘(II) under the terms of the new
lease, such trust receives a substan-
tially similar or lesser benefit in com-
parison to the lease referred to in sub-
clause (I).
‘‘(D) QUALIFIED LODGING FACILITY.—For
purposes of this paragraph—
‘‘(i) IN GENERAL.—The term ‘quali-
fied lodging facility’ means any lodging fa-
cility unless wagering activities are con-
ducted at or in connection with such facil-
ity by any person who is engaged in the
business of accepting wagers and who is le-
gally authorized to engage in such business
at or in connection with such facility.
‘‘(ii) LODGING
FACILITY.—The term
‘lodging facility’ means a hotel, motel, or
other establishment more than one-half of
the dwelling units in which are used on a
transient basis.
‘‘(iii) CUSTOMARY AMENITIES AND FA-
CILITIES.—The term ‘lodging facility’ in-
cludes customary amenities and facilities
operated as part of, or associated with, the
lodging facility so long as such amenities
and facilities are customary for other prop-
erties of a comparable size and class owned
by other owners unrelated to such real es-
tate investment trust.
‘‘(E) OPERATE INCLUDES MANAGE.—Ref-
erences in this paragraph to operating a prop-
erty shall be treated as including a reference to
managing the property.
‘‘(F) RELATED PERSON.—Persons shall be
treated as related to each other if such persons
are treated as a single employer under sub-
section (a) or (b) of section 52.’’.
(2) CONFORMING AMENDMENT.—Subparagraph
(B) of section 856(d)(2) is amended by inserting
‘‘except as provided in paragraph (8),’’ after ‘‘(B)’’.
SEC. 103. TAXABLE REIT SUBSIDIARY.
(a) IN GENERAL.—Section 856 is amended by adding
at the end the following new subsection:
‘‘(l) TAXABLE REIT SUBSIDIARY.—For purposes of
this part—
‘‘(1) IN GENERAL.—The term ‘taxable REIT
subsidiary’ means, with respect to a real estate in-
vestment trust, a corporation (other than a real es-
tate investment trust) if—
‘‘(A) such trust directly or indirectly owns
stock in such corporation, and
‘‘(B) such trust and such corporation joint-
ly elect that such corporation shall be treated as
a taxable REIT subsidiary of such trust for
purposes of this part.
Such an election, once made, shall be irrevocable un-
less both such trust and corporation consent to its
revocation. Such election, and any revocation there-
of, may be made without the consent of the Sec-
retary.
‘‘(2) 35 PERCENT
OWNERSHIP
IN
ANOTHER
TAXABLE
REIT
SUBSIDIARY.—The term ‘taxable
REIT subsidiary’ includes, with respect to any real
estate investment trust, any corporation (other than
a real estate investment trust) with respect to which
a taxable REIT subsidiary of such trust owns di-
rectly or indirectly—
‘‘(A) securities possessing more than 35
percent of the total voting power of the out-
standing securities of such corporation, or
‘‘(B) securities having a value of more
than 35 percent of the total value of the out-
standing securities of such corporation.
The preceding sentence shall not apply to a qualified
REIT subsidiary (as defined in subsection (i)(2)).
‘‘(3) EXCEPTIONS.—The term ‘taxable REIT
subsidiary’ shall not include—
‘‘(A) any corporation which directly or in-
directly operates or manages a lodging facility
or a health care facility, and
‘‘(B) any corporation which directly or in-
directly provides to any other person (under a
franchise, license, or otherwise) rights to any
brand name under which any lodging facility or
health care facility is operated.
Subparagraph (B) shall not apply to rights provided
to an eligible independent contractor to operate or
manage a lodging facility if such rights are held by
such corporation as a franchisee, licensee, or in a
similar capacity and such lodging facility is either
owned by such corporation or is leased to such cor-
poration from the real estate investment trust.
‘‘(4) DEFINITIONS.—For purposes of paragraph
(3)—
‘‘(A) LODGING FACILITY.—The term ‘lodg-
ing facility’ has the meaning given to such term
by paragraph (9)(D)(ii).
‘‘(B) HEALTH CARE FACILITY.—The term
‘health care facility’ has the meaning given to
such term by subsection (e)(6)(D)(ii).’’.
(b) CONFORMING AMENDMENT.—Paragraph (2) of
section 856(i) is amended by adding at the end the fol-
lowing new sentence: ‘‘Such term shall not include a tax-
able REIT subsidiary.’’
SEC. 104. LIMITATION ON EARNINGS STRIPPING.
Paragraph (3) of section 163(j) (relating to limitation
on deduction for interest on certain indebtedness) is
amended by striking ‘‘and’’ at the end of subparagraph
(A), by striking the period at the end of subparagraph
(B) and inserting ‘‘, and’’, and by adding at the end the
following new subparagraph:
‘‘(C) any interest paid or accrued (directly
or indirectly) by a taxable REIT subsidiary (as
defined in section 856(l)) of a real estate invest-
ment trust to such trust.’’.
SEC. 105. 100 PERCENT TAX ON IMPROPERLY ALLOCATED
AMOUNTS.
(a) IN GENERAL.—Subsection (b) of section 857 (re-
lating to method of taxation of real estate investment
trusts and holders of shares or certificates of beneficial
interest) is amended by redesignating paragraphs (7) and
(8) as paragraphs (8) and (9), respectively, and by insert-
ing after paragraph (6) the following new paragraph:
‘‘(7) INCOME FROM REDETERMINED RENTS, RE-
DETERMINED
DEDUCTIONS, AND
EXCESS
INTER-
EST.—
‘‘(A) IMPOSITION OF TAX.—There is here-
by imposed for each taxable year of the real es-
tate investment trust a tax equal to 100 percent
of redetermined rents, redetermined deductions,
and excess interest.
‘‘(B) REDETERMINED RENTS.—
‘‘(i) IN GENERAL.—The term ‘redeter-
mined rents’ means rents from real prop-
erty (as defined in subsection 856(d)) the
amount of which would (but for subpara-
graph (E)) be reduced on distribution, ap-
portionment, or allocation under section
482 to clearly reflect income as a result of
services furnished or rendered by a taxable
REIT subsidiary of the real estate invest-
ment trust to a tenant of such trust.
‘‘(ii) EXCEPTION FOR CERTAIN SERV-
ICES.—Clause (i) shall not apply to
amounts received directly or indirectly by a
real estate investment trust for services de-
scribed in paragraph (1)(B) or (7)(C)(i) of
section 856(d).
‘‘(iii) EXCEPTION
FOR
DE
MINIMIS
AMOUNTS.—Clause (i) shall not apply to
amounts described in section 856(d)(7)(A)
with respect to a property to the extent
such amounts do not exceed the one per-
cent 
threshold 
described 
in 
section
856(d)(7)(B) with respect to such prop-
erty.
‘‘(iv) EXCEPTION
FOR
COMPARABLY
PRICED
SERVICES.—Clause (i) shall not
apply to any service rendered by a taxable
REIT subsidiary of a real estate invest-
ment trust to a tenant of such trust if—
‘‘(I) such subsidiary renders a
significant amount of similar services
to persons other than such trust and
tenants of such trust who are unre-
lated (within the meaning of section
856(d)(8)(F)) to such subsidiary,
trust, and tenants, but
‘‘(II) only to the extent the
charge for such service so rendered is
substantially comparable to the charge
for the similar services rendered to
persons referred to in subclause (I).
‘‘(v) EXCEPTION FOR CERTAIN SEPA-
RATELY
CHARGED
SERVICES.—Clause (i)
shall not apply to any service rendered by
a taxable REIT subsidiary of a real estate
investment trust to a tenant of such trust
if—
‘‘(I) the rents paid to the trust
by tenants (leasing at least 25 percent
of the net leasable space in the trust’s
property) who are not receiving such
service from such subsidiary are sub-
stantially comparable to the rents
paid by tenants leasing comparable
space who are receiving such service
from such subsidiary, and
‘‘(II) the charge for such service
from such subsidiary is separately
stated.
‘‘(vi) EXCEPTION FOR CERTAIN SERV-
ICES
BASED
ON
SUBSIDIARY’S
INCOME
FROM THE SERVICES.—Clause (i) shall not
apply to any service rendered by a taxable
REIT subsidiary of a real estate invest-
ment trust to a tenant of such trust if the
gross income of such subsidiary from such
service is not less than 150 percent of such
subsidiary’s direct cost in furnishing or
rendering the service.
‘‘(vii) EXCEPTIONS GRANTED BY SEC-
RETARY.—The Secretary may waive the
tax otherwise imposed by subparagraph
(A) if the trust establishes to the satisfac-
tion of the Secretary that rents charged to
tenants were established on an arms’
length basis even though a taxable REIT
subsidiary of the trust provided services to
such tenants.
‘‘(viii) NO INFERENCE WITH RESPECT
TO RENTS NOT WITHIN EXCEPTIONS.—In
determining whether rents are subject to
reduction upon distribution, apportion-
ment, or allocation under section 482 for
purposes of subparagraph (B), the fact
that rents from real property do not meet
the requirements of clauses (ii) through
(vii) shall not be taken into account; and
such determination, in the case of rents
not meeting such requirements, shall be
made as if such clauses had not been en-
acted.
‘‘(ix) NO INFERENCE AS TO WHETHER
REDETERMINED RENT IS RENT FROM REAL
PROPERTY.—Rent received by a real estate
investment trust shall not fail to qualify as
rents from real property under section
856(d) by reason of the fact that all or any
portion of such rent is determined to be re-
determined rent.
‘‘(C) REDETERMINED DEDUCTIONS.—The
term ‘redetermined deductions’ means deduc-
tions (other than redetermined rents) of a tax-
able REIT subsidiary of a real estate invest-
ment trust if the amount of such deductions
would (but for subparagraph (E)) be increased
on distribution, apportionment, or allocation
under section 482 to clearly reflect income as
between such subsidiary and such trust.
‘‘(D) EXCESS INTEREST.—The term ‘ex-
cess interest’ means any deductions for interest
payments by a taxable REIT subsidiary of a
real estate investment trust to such trust to the
extent that the interest payments are in excess
of a rate that is commercially reasonable.
‘‘(E) COORDINATION WITH SECTION 482.—
The imposition of tax under subparagraph (A)
shall be in lieu of any distribution, apportion-
ment, or allocation under section 482.
‘‘(F) REGULATORY AUTHORITY.—The Sec-
retary shall prescribe such regulations as may
be necessary or appropriate to carry out the
purposes of this paragraph. Until the Secretary
prescribes such regulations, real estate invest-
ment trusts and their taxable REIT subsidi-
aries may base their allocations on any reason-
able method.’’.
(b) AMOUNT SUBJECT TO TAX NOT REQUIRED TO
BE
DISTRIBUTED.—Subparagraph 
(E) 
of 
section
857(b)(2) (relating to real estate investment trust taxable
income) is amended by striking ‘‘paragraph (5)’’ and in-
serting ‘‘paragraphs (5) and (7)’’.
SEC. 106. EFFECTIVE DATE.
(a) IN GENERAL.—The amendments made by this
title shall apply to taxable years beginning after the date
of enactment of this Act.
(b) TRANSITIONAL RULES RELATED
TO SECTION
101.—
(1) EXISTING ARRANGEMENTS.—
(A) IN
GENERAL.—Except as otherwise
provided in this paragraph, the amendment
made by section 101 shall not apply to a real
estate investment trust with respect to—
(i) securities of a corporation held di-
rectly or indirectly by such trust on April
28, 1999,
(ii) securities received by such trust
(or a successor) in exchange for, or with
respect to, securities described in clause (i)
in a transaction in which gain or loss is
not recognized, and
(iii) securities acquired directly or in-
directly by such trust as part of a reorga-
nization (as defined in section 368(a)(1) of
the Internal Revenue Code of 1986) with
respect to such trust if such securities are
described in clause (i) or (ii) with respect
to any other real estate investment trust.
(B) NEW TRADE OR BUSINESS OR SUB-
STANTIAL
NEW
ASSETS.—Subparagraph (A)
shall cease to apply to securities of a corpora-
tion as of the first day after April 28, 1999, on
which such corporation engages in a substantial
new line of business, or acquires any substantial
asset, other than—
(i) pursuant to a binding contract in
effect on such date and at all times there-
after before the acquisition of such asset,
(ii) in a transaction in which gain or
loss is not recognized by reason of section
1031 or 1033 of the Internal Revenue
Code of 1986, or
(iii) in a reorganization (as so de-
fined) with another corporation the securi-
ties of which are described in paragraph
(1)(A) of this subsection.
(2) TAX-FREE CONVERSION.—If—
(A) at the time of an election for a cor-
poration to become a taxable REIT subsidiary,
the amendment made by section 101 does not
apply to such corporation by reason of para-
graph (1), and
(B) such election first takes effect during
the 3-year period beginning on the date of the
enactment of this Act,
such election shall be treated as a reorganization
qualifying under section 368(a)(1)(A) of such Code.
TITLE II—HEALTH CARE REITS
SEC. 201. HEALTH CARE REITS.
(a) SPECIAL FORECLOSURE RULE
FOR HEALTH
CARE PROPERTIES.—Subsection (e) of section 856 (relat-
ing to special rules for foreclosure property) is amended
by adding at the end the following new paragraph:
‘‘(6) SPECIAL RULE FOR QUALIFIED HEALTH
CARE
PROPERTIES.—For 
purposes 
of 
this
subsection—
‘‘(A) ACQUISITION
AT
EXPIRATION
OF
LEASE.—The term ‘foreclosure property’ shall
include any qualified health care property ac-
quired by a real estate investment trust as the
result of the termination of a lease of such
property (other than a termination by reason of
a default, or the imminence of a default, on the
lease).