[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1568 Introduced in Senate (IS)]
1st Session
S. 1568
To amend the Internal Revenue Code of 1986 to simplify certain
provisions applicable to real estate investment trusts.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
August 1 (legislative day, July 21), 2003
Mr. Hatch (for himself, Mr. Breaux, Mr. Smith, Mr. Lott, and Ms.
Snowe) introduced the following bill; which was read twice and
referred to the Committee on FinanceYYYYYYYYYYYYYYYYYYYYYYYYYYY
_______________________________________________________________________
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 Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Real Estate Investment Trust
Improvement Act of 2003''.
SEC. 2. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in the Act an
amendment 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 provision of the Internal Revenue Code of
1986.
TITLE I--REIT CORRECTIONS
SEC. 101. REVISIONS TO REIT ASSET TEST.
(a) Expansion of Straight Debt Safe Harbor.--Section 856 (defining
real estate investment trust) is amended--
(1) in subsection (c) by striking paragraph (7), and
(2) by adding at the end the following new subsection:
``(m) Safe Harbor in Applying Subsection (c)(4).--
``(1) In general.--In applying subclause (III) of
subsection (c)(4)(B)(iii), except as otherwise determined by
the Secretary in regulations, the following shall not be
considered securities held by the trust:
``(A) Straight debt securities of an issuer which
meet the requirements of paragraph (2).
``(B) Any loan to an individual or an estate.
``(C) Any section 467 rental agreement (as defined
in section 467(d)), other than with a person described
in subsection (d)(2)(B).
``(D) Any obligation to pay rents from real
property (as defined in subsection (d)(1)).
``(E) Any security issued by a State or any
political subdivision thereof, the District of
Columbia, a foreign government or any political
subdivision thereof, or the Commonwealth of Puerto
Rico, but only if the determination of any payment
received or accrued under such security does not depend
in whole or in part on the profits of any entity not
described in this subparagraph or payments on any
obligation issued by such an entity.
``(F) Any security issued by a real estate
investment trust.
``(G) Any other arrangement as determined by the
Secretary.
``(2) Special rules relating to straight debt securities.--
``(A) In general.--For purposes of paragraph
(1)(A), securities meet the requirements of this
paragraph if such securities are straight debt, as
defined in section 1361(c)(5) (without regard to
subparagraph (B)(iii) thereof).
``(B) Special rules relating to certain
contingencies.--For purposes of subparagraph (A), any
interest or principal shall not be treated as failing
to satisfy section 1361(c)(5)(B)(i) solely by reason of
the fact that the time of payment of such interest or
principal is subject to a contingency, but only if--
``(i) any such contingency does not have
the effect of changing the effective yield to
maturity, as determined under section 1272,
other than a change in the annual yield to
maturity which either--
``(I) does not exceed the greater
of \1/4\ of 1 percent or 5 percent of
the annual yield to maturity, or
``(II) results solely from a
default or the exercise of a prepayment
right by the issuer of the debt, or
``(ii) neither the aggregate issue price
nor the aggregate face amount of the issuer's
debt instruments held by the trust exceeds
$1,000,000 and not more than 12 months of unaccrued interest can be
required to be prepaid thereunder.
``(C) Special rules relating to corporate or
partnership issuers.--In the case of an issuer which is
a corporation or a partnership, securities that
otherwise would be described in paragraph (1)(A) shall
be considered not to be so described if the trust
holding such securities and any of its controlled
taxable REIT subsidiaries (as defined in subsection
(d)(8)(A)(iv)) hold any securities of the issuer
which--
``(i) are not described in paragraph (1)
(prior to the application of paragraph (1)(C)),
and
``(ii) have an aggregate value greater than
1 percent of the issuer's outstanding
securities.
``(3) Look-through rule for partnership securities.--
``(A) In general.--For purposes of applying
subclause (III) of subsection (c)(4)(B)(iii)--
``(i) a trust's interest as a partner in a
partnership (as defined in section 7701(a)(2))
shall not be considered a security, and
``(ii) the trust shall be deemed to own its
proportionate share of each of the assets of
the partnership.
``(B) Determination of trust's interest in
partnership assets.--For purposes of subparagraph (A),
with respect to any taxable year beginning after the
date of the enactment of this subparagraph--
``(i) the trust's interest in the
partnership assets shall be the trust's
proportionate interest in any securities issued
by the partnership (determined without regard
to subparagraph (A)(i) and paragraph (4), but
not including securities described in paragraph
(1)), and
``(ii) the value of any debt instrument
shall be the adjusted issue price thereof, as
defined in section 1272(a)(4).
``(4) Certain partnership debt instruments not treated as a
security.--For purposes of applying subclause (III) of
subsection (c)(4)(B)(iii)--
``(A) any debt instrument issued by a partnership
and not described in paragraph (1) shall not be
considered a security to the extent of the trust's
interest as a partner in the partnership, and
``(B) any debt instrument issued by a partnership
and not described in paragraph (1) shall not be
considered a security if at least 75 percent of the
partnership's gross income (excluding gross income from
prohibited transactions) is derived from sources
referred to in subsection (c)(3).
``(5) Secretarial guidance.--The Secretary is authorized to
provide guidance (including through the issuance of a written
determination, as defined in section 6110(b)) that an
arrangement shall not be considered a security held by the
trust for purposes of applying subclause (III) of subsection
(c)(4)(B)(iii) notwithstanding that such arrangement otherwise
could be considered a security under subparagraph (F) of
subsection (c)(5).''.
SEC. 102. CLARIFICATION OF APPLICATION OF LIMITED RENTAL EXCEPTION.
Subparagraph (A) of section 856(d)(8) (relating to special rules
for taxable REIT subsidiaries) is amended to read as follows:
``(A) Limited rental exception.--
``(i) In general.--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
paragraph (2)(B).
``(ii) Rents must be substantially
comparable.--Clause (i) 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 substantially
comparable to such rents paid by the other
tenants of the trust's property for comparable
space.
``(iii) Times for testing rent
comparability.--The substantial comparability
requirement of clause (ii) shall be treated as
met with respect to a lease to a taxable REIT
subsidiary of the trust if such requirement is met under the terms of
the lease--
``(I) at the time such lease is
entered into,
``(II) at the time of each
extension of the lease, including a
failure to exercise a right to
terminate, and
``(III) at the time of any
modification of the lease between the
trust and the taxable REIT subsidiary
if the rent under such lease is
effectively increased pursuant to such
modification.
With respect to subclause (III), if the taxable
REIT subsidiary of the trust is a controlled
taxable REIT subsidiary of the trust, the term
`rents from real property' shall not in any
event include rent under such lease to the
extent of the increase in such rent on account
of such modification.
``(iv) Controlled taxable reit
subsidiary.--For purposes of clause (iii), the
term `controlled taxable REIT subsidiary'
means, with respect to any real estate
investment trust, any taxable REIT subsidiary
of such trust if such trust owns directly or
indirectly--
``(I) stock possessing more than 50
percent of the total voting power of
the outstanding stock of such
subsidiary, or
``(II) stock having a value of more
than 50 percent of the total value of
the outstanding stock of such
subsidiary.
``(v) Continuing qualification based on
third party actions.--If the requirements of
clause (i) are met at a time referred to in
clause (iii), such requirements shall continue
to be treated as met so long as there is no
increase in the space leased to any taxable
REIT subsidiary of such trust or to any person
described in paragraph (2)(B).
``(vi) Correction period.--If there is an
increase referred to in clause (v) during any
calendar quarter with respect to any property,
the requirements of clause (iii) shall be
treated as met during the quarter and the
succeeding quarter if such requirements are met
at the close of such succeeding quarter.''.
SEC. 103. DELETION OF CUSTOMARY SERVICES EXCEPTION.
Subparagraph (B) of section 857(b)(7) (relating to redetermined
rents) is amended by striking clause (ii) and by redesignating clauses
(iii), (iv), (v), (vi), and (vii) as clauses (ii), (iii), (iv), (v),
and (vi), respectively.
SEC. 104. CONFORMITY WITH GENERAL HEDGING DEFINITION.
(a) Definition.--Subparagraph (G) of section 856(c)(5) (relating to
treatment of certain hedging instruments) is amended to read as
follows:
``(G) Treatment of certain hedging instruments.--
Except to the extent provided by regulations, any
income of a real estate investment trust from a hedging
transaction (as defined in clause (ii) or (iii) of
section 1221(b)(2)(A)) which is clearly identified
pursuant to section 1221(a)(7), including gain from the
sale or disposition of such a transaction, shall not
constitute gross income under paragraph (2) to the
extent that the transaction hedges any indebtedness
incurred or to be incurred by the trust to acquire or
carry real estate assets.''.
SEC. 105. CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES.
Clause (i) of section 857(b)(5)(A) (relating to imposition of tax
in case of failure to meet certain requirements) is amended by striking
``90 percent'' and inserting ``95 percent''.
SEC. 106. PROHIBITED TRANSACTIONS PROVISIONS.
(a) Expansion of Prohibited Transaction Safe Harbor.--Section
857(b)(6) (relating to income from prohibited transactions) is amended
by redesignating subparagraphs (D) and (E) as subparagraphs (E) and
(F), respectively, and by inserting after subparagraph (C) the
following new subparagraph:
``(D) Certain sales not to constitute prohibited
transactions.--For purposes of this part, the term
`prohibited transaction' does not include a sale of
property which is a real estate asset (as defined in
section 856(c)(5)(B)) if--
``(i) the trust held the property for not
less than 4 years in connection with the trade
or business of producing timber,
``(ii) the aggregate expenditures made by
the trust, or a partner of the trust, during
the 4-year period preceding the date of sale
which--
``(I) are includible in the basis
of the property (other than timberland
acquisition expenditures), and
``(II) are directly related to
operation of the property for the
production of timber or for the
preservation of the property for use as
timberland,
do not exceed 30 percent of the net selling
price of the property,
``(iii) the aggregate expenditures made by
the trust, or a partner of the trust, during
the 4-year period preceding the date of sale
which--
``(I) are includible in the basis
of the property (other than timberland
acquisition expenditures), and
``(II) are not directly related to
operation of the property for the
production of timber, or for the
preservation of the property for use as
timberland, do not exceed 5 percent of
the net selling price of the property,
``(iv)(I) during the taxable year the trust
does not make more than 7 sales of property
(other than sales of foreclosure property or
sales to which section 1033 applies), or
``(II) the aggregate adjusted bases (as
determined for purposes of computing earnings
and profits) of property (other than sales of
foreclosure property or sales to which section
1033 applies) sold during the taxable year does
not exceed 10 percent of the aggregate bases
(as so determined) of all of the assets of the
trust as of the beginning of the taxable year,
``(v) in the case that the requirement of
clause (iv)(I) is not satisfied, substantially
all of the marketing expenditures with respect
to the property were made through an
independent contractor (as defined in section
856(d)(3)) from whom the trust itself does not
derive or receive any income, and
``(vi) the sales price of the property sold
by the trust to its taxable REIT subsidiary is
not based in whole or in part on the income or
profits of the subsidiary or the income or
profits that the subsidiary derives from the
sale or operation of such property.''.
SEC. 107. EFFECTIVE DATES.
(a) In General.--Except as provided in subsection (b), the
amendments made by this title shall apply to taxable years beginning
after December 31, 2000.
(b) Sections 103 Through 106.--The amendments made by sections 103,
104, 105 and 106 shall apply to taxable years beginning after the date
of the enactment of this Act.
TITLE II--FIRPTA CORRECTION
SEC. 201. MODIFICATION OF THE TREATMENT OF CERTAIN REIT DISTRIBUTIONS
ATTRIBUTABLE TO GAIN FROM SALES OR EXCHANGES OF UNITED
STATES REAL PROPERTY INTERESTS.
(a) In General.--Paragraph (1) of section 897(h) (relating to look-
through of distributions) is amended by inserting before the period at
the end the following: ``, except that any distribution by a REIT with
respect to any class of stock which is regularly traded on an
established securities market located in the Unites States shall not be
treated as gain recognized from the sale or exchange of a United States
real property interest if the shareholder did not own more than 5
percent of such class of stock during the taxable year.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
TITLE III--REIT SAVINGS PROVISIONS
SEC. 301. REVISIONS TO REIT PROVISIONS.
(a) Rules of Application for Failure To Satisfy Section
856(c)(4).--Section 856(c) (relating to definition of real estate
investment trust), as amended by section 101, is amended by inserting
after paragraph (6) the following new paragraph:
``(7) Rules of application for failure to satisfy paragraph
(4).--
``(A) De minimis failure.--A corporation, trust, or
association that fails to meet the requirements of
paragraph (4)(B)(iii) for a particular quarter shall
nevertheless be considered to have satisfied the
requirements of such paragraph for such quarter if--
``(i) such failure is due to the ownership
of assets the total value of which does not
exceed the lesser of--
``(I) 1 percent of the total value
of the trust's assets at the end of the
quarter for which such measurement is
done, and
``(II) $10,000,000, and
``(ii)(I) the corporation, trust, or
association, following the identification of
such failure, disposes of assets in order to
meet the requirements of such paragraph within
6 months after the last day of the quarter in
which the corporation, trust or association's
identification of the failure to satisfy the
requirements of such paragraph occurred or such
other time period prescribed by the Secretary
and in the manner prescribed by the Secretary,
or
``(II) the requirements of such paragraph
are otherwise met within the time period
specified in subclause (I).
``(B) Failures exceeding de minimis amount.--A
corporation, trust, or association that fails to meet
the requirements of paragraph (4) for a particular
quarter shall nevertheless be considered to have
satisfied the requirements of such paragraph for such
quarter if--
``(i) such failure involves the ownership
of assets the total value of which exceeds the
de minimis standard described in subparagraph
(A)(i) at the end of the quarter for which such
measurement is done,
``(ii) following the corporation, trust, or
association's identification of the failure to
satisfy the requirements of such paragraph for
a particular quarter, a description of each
asset that causes the corporation, trust, or
association to fail to satisfy the requirements
of such paragraph at the close of such quarter
of any taxable year is set forth in a schedule
for such quarter filed in accordance with
regulations prescribed by the Secretary,
``(iii) the failure to meet the
requirements of such paragraph for a particular
quarter is due to reasonable cause and not due
to willful neglect,
``(iv) the corporation, trust, or
association pays a tax computed under
subparagraph (C), and
``(v)(I) the corporation, trust, or
association disposes of the assets set forth on
the schedule specified in clause (ii) within 6
months after the last day of the quarter in
which the corporation, trust or association's
identification of the failure to satisfy the
requirements of such paragraph occurred or such
other time period prescribed by the Secretary
and in the manner prescribed by the Secretary,
or
``(II) the requirements of such paragraph
are otherwise met within the time period
specified in subclause (I).
``(C) Tax.--For purposes of subparagraph (B)(iv)--
``(i) Tax imposed.--If a corporation,
trust, or association elects the application of
this subparagraph, there is hereby imposed a
tax on the failure described in subparagraph
(B) of such corporation, trust, or association.
Such tax shall be paid by the corporation,
trust, or association.
``(ii) Tax computed.--The amount of the tax
imposed by clause (i) shall be the greater of--
``(I) $50,000, or
``(II) the amount determined
(pursuant to regulations promulgated by
the Secretary) by multiplying the net
income generated by the assets
described in the schedule specified in
subparagraph (B)(ii) for the period
specified in clause (iii) by the
highest rate of tax specified in
section 11.
``(iii) Period.--For purposes of clause
(ii)(II), the period described in this clause
is the period beginning on the first date that
the failure to satisfy the requirements of such
paragraph (4) occurs as a result of the
ownership of such assets and ending on the
earlier of the date on which the trust disposes
of such assets or the end of the first quarter
when there is no longer a failure to satisfy
such paragraph (4).
``(iv) Administrative provisions.--For
purposes of subtitle F, the taxes imposed by
this subparagraph shall be treated as excise
taxes with respect to which the deficiency
procedures of such subtitle apply.''.
(b) Modification of Rules of Application for Failure To Satisfy
Sections 856(c)(2) or 856(c)(3).--Paragraph (6) of section 856(c)
(relating to definition of real estate investment trust) is amended by
striking subparagraphs (A) and (B), by redesignating subparagraph (C)
as subparagraph (B), and by inserting before subparagraph (B) (as so
redesignated) the following new subparagraph:
``(A) following the corporation, trust, or
association's identification of the failure to meet the
requirements of paragraph (2) or (3), or of both such
paragraphs, for any taxable year, a description of each
item of its gross income described in such paragraphs
is set forth in a schedule for such taxable year filed
in accordance with regulations prescribed by the
Secretary, and''.
(c) Reasonable Cause Exception To Loss of REIT Status if Failure To
Satisfy Requirements.--Subsection (g) of section 856 (relating to
termination of election) is amended--
(1) in paragraph (1) by inserting before the period at the
end of the first sentence the following: ``unless paragraph (5)
applies'', and
(2) by adding at the end the following new paragraph:
``(5) Entities to which paragraph applies.--This paragraph
applies to a corporation, trust, or association--
``(A) which is not a real estate investment trust
to which the provisions of this part apply for the
taxable year due to one or more failures to comply with
one or more of the provisions of this part (other than
subsection (c)(6) or (c)(7) of section 856),
``(B) such failures are due to reasonable cause and
not due to willful neglect, and
``(C) if such corporation, trust, or association
pays (as prescribed by the Secretary in regulations and
in the same manner as tax) a penalty of $50,000 for
each failure to satisfy a provision of this part due to
reasonable cause and not willful neglect.''.
(d) Deduction of Tax Paid From Amount Required To Be Distributed.--
Subparagraph (E) of section 857(b)(2) is amended by striking ``(7)''
and inserting ``(7) of this subsection, section 856(c)(7)(B)(iii), and
section 856(g)(1).''.
(e) Expansion of Deficiency Dividend Procedure.--Subsection (e) of
section 860 is amended by striking ``or'' at the end of paragraph (2),
by striking the period at the end of paragraph (3) and inserting ``;
or'', and by adding at the end the following new paragraph:
``(4) a statement by the taxpayer attached to its amendment
or supplement to a return of tax for the relevant tax year.''.
(f) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after date of the enactment of this
Act.
<all>
Introduced in Senate
Sponsor introductory remarks on measure. (CR S10917-10918)
Read twice and referred to the Committee on Finance.
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