REIT Modernization Act of 1999
Senate Bill: S. 1057: Statutory Language (Bill Text)
106th CONGRESS
1st Session
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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
May 14, 1999
Mr. MACK (for himself, Mr. GRAHAM, Mr. HATCH, Mr. CONRAD, Mr. NICKLES, Mr.
KERREY, Mr. GRAMM, Mr. BRYAN, Mr. CHAFEE, Mr. BAUCUS, Mr. MURKOWSKI, Mr.
BREAUX, Mr. JEFFORDS, Mr. ROBB, Mr. COVERDELL, Mr. ROCKEFELLER, Mr.
HELMS, Mr. TORRICELLI, and Mrs. HUTCHISON) introduced the following bill; which was
read twice and referred to the Committee on Finance
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.
(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 otherwise expressly provided, whenever in
this 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--TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE
REIT SUBSIDIARIES
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
securities (other than those includible under subparagraph (A)), and
`(ii) except with respect to a taxable REIT subsidiary and securities includible
under subparagraph (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 securities of any 1 issuer, and
`(III) the trust does not hold securities having a value of more than 10
percent of the total value of the outstanding securities of any 1 issuer.'
SEC. 102. TREATMENT OF INCOME AND SERVICES PROVIDED BY
TAXABLE REIT SUBSIDIARIES.
(a) INCOME FROM TAXABLE REIT SUBSIDIARIES NOT TREATED AS
IMPERMISSIBLE TENANT SERVICE INCOME- Clause (i) of section 856(d)(7)(C)
(relating to exceptions to impermissible tenant service income) is amended by inserting `or
through a taxable REIT subsidiary of such trust' after `income'.
(b) CERTAIN INCOME FROM TAXABLE REIT SUBSIDIARIES 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 SUBSIDIARIES- 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 subparagraph (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 substantially comparable to such rents made by
the other tenants of the trust's property for comparable space.
`(B) EXCEPTION FOR CERTAIN LODGING FACILITIES- The
requirements of this subparagraph are met with respect to an interest in real
property which is a qualified lodging facility leased by the trust to a taxable REIT
subsidiary 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 subsidiary 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 related person with respect
to the real estate investment trust or the taxable REIT subsidiary.
`(B) SPECIAL RULES- Solely for purposes of this paragraph and paragraph
(8)(B), a person shall not fail to be treated as an independent contractor with
respect to any qualified lodging facility by reason of any of the following:
`(i) The taxable REIT subsidiary bears the expenses for the operation of
the
facility pursuant to the management agreement or other similar service contract.
`(ii) The taxable REIT subsidiary receives the revenues from the operation
of such facility, net of expenses for such operation and fees payable to the
operator pursuant to such agreement or contract.
`(iii) The real estate investment trust receives income from such person
with respect to another property that is attributable 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 effect 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
subparagraph (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
substantially similar or lesser benefit in comparison to the lease
referred to in subclause (I).
`(D) QUALIFIED LODGING FACILITY- For purposes of this paragraph--
`(i) IN GENERAL- The term `qualified lodging facility' means any lodging
facility unless wagering activities are conducted at or in connection with
such facility by any person who is engaged in the business of accepting
wagers and who is legally 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 FACILITIES- The term
`lodging facility' includes 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 properties of a comparable size and
class owned by other owners unrelated to such real estate investment
trust.
`(E) OPERATE INCLUDES MANAGE- References in this paragraph to
operating a property 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 subsection (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 investment trust, a corporation (other than a real estate investment trust) if--
`(A) such trust directly or indirectly owns stock in such corporation, and
`(B) such trust and such corporation jointly 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 unless both such trust and
corporation consent to its revocation. Such election, and any revocation thereof, may
be made without the consent of the Secretary.
`(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 directly or indirectly--
`(A) securities possessing more than 35 percent of the total voting power of the
outstanding securities of such corporation, or
`(B) securities having a value of more than 35 percent of the total value of the
outstanding 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 indirectly operates or manages a lodging
facility or a health care facility, and
`(B) any corporation which directly or indirectly 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 corporation from the real estate investment trust.
`(4) DEFINITIONS- For purposes of paragraph (3)--
`(A) LODGING FACILITY- The term `lodging 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 following new sentence: `Such term shall not include a taxable 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 investment trust to such
trust.'.
SEC. 105. 100 PERCENT TAX ON IMPROPERLY ALLOCATED
AMOUNTS.
(a) IN GENERAL- Subsection (b) of section 857 (relating 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 inserting
after paragraph (6) the following new paragraph:
`(7) INCOME FROM REDETERMINED RENTS, REDETERMINED
DEDUCTIONS, AND EXCESS INTEREST-
`(A) IMPOSITION OF TAX- There is hereby imposed for each taxable year of
the real estate investment trust a tax equal to 100 percent of redetermined rents,
redetermined deductions, and excess interest.
`(B) REDETERMINED RENTS-
`(i) IN GENERAL- The term `redetermined rents' means rents from real
property (as defined in subsection 856(d)) the amount of which would
(but for subparagraph (E)) be reduced on distribution, apportionment, 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 investment trust to a tenant of such trust.
`(ii) EXCEPTION FOR CERTAIN SERVICES- Clause (i) shall not
apply to amounts received directly or indirectly by a real estate investment
trust for services described 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 percent
threshold described in section 856(d)(7)(B) with respect to such property.
`(iv) EXCEPTION FOR COMPARABLY PRICED 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) such subsidiary renders a significant amount of similar services
to persons other than such trust and tenants of such trust who are
unrelated (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 SEPARATELY 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 substantially
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 SERVICES 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 investment 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 SECRETARY- The Secretary may
waive the tax otherwise imposed by subparagraph (A) if the trust
establishes to the satisfaction 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, apportionment, 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 enacted.
`(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 redetermined rent.
`(C) REDETERMINED DEDUCTIONS- The term `redetermined deductions'
means deductions (other than redetermined rents) of a taxable REIT subsidiary
of a real estate investment 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 `excess 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, apportionment, or allocation
under section 482.
`(F) REGULATORY AUTHORITY- The Secretary 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 investment
trusts and their taxable REIT subsidiaries may base their allocations on any
reasonable 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 inserting `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 directly 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 indirectly by such trust as part of a
reorganization (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 SUBSTANTIAL NEW ASSETS-
Subparagraph (A) shall cease to apply to securities of a corporation 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
thereafter 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 defined) with another corporation the
securities 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 corporation to become a taxable REIT
subsidiary, the amendment made by section 101 does not apply to such
corporation by reason of paragraph (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 (relating 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 acquired 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).
`(B) GRACE PERIOD- In the case of a qualified health care property which is
foreclosure property solely by reason of subparagraph (A), in lieu of applying
paragraphs (2) and (3)--
`(i) the qualified health care property shall cease to be foreclosure
property as of the close of the second taxable year after the taxable year
in which such trust acquired such property, and
`(ii) if the real estate investment trust establishes to the satisfaction of the
Secretary that an extension of the grace period in clause (i) is necessary to
the orderly leasing or liquidation of the trust's interest in such qualified
health care property, the Secretary may grant 1 or more extensions of the
grace period for such qualified health care property.
Any such extension shall not extend the grace period beyond the close of the 6th
year after the taxable year in which such trust acquired such qualified health care
property.
`(C) INCOME FROM INDEPENDENT CONTRACTORS- For purposes of
applying paragraph (4)(C) with respect to qualified health care property which is
foreclosure property by reason of subparagraph (A) or paragraph (1), income
derived or received by the trust from an independent contractor shall be
disregarded to the extent such income is attributable to--
`(i) any lease of property in effect on the date the real estate investment
trust acquired the qualified health care property (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 such date), or
`(ii) any lease of property entered into after 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
substantially similar or lesser benefit in comparison to the lease
referred to in subclause (I).
`(D) QUALIFIED HEALTH CARE PROPERTY-
`(i) IN GENERAL- The term `qualified health care property' means any
real property (including interests therein), and any personal property
incident 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.
`(ii) HEALTH CARE FACILITY- For purposes of clause (i), the term
`health care facility' means a hospital, nursing facility, assisted living facility,
congregate care facility, qualified continuing care facility (as defined in
section 7872(g)(4)), or other licensed facility which extends medical or
nursing or ancillary services to patients and which, immediately before the
termination, expiration, default, or breach of the lease of or mortgage
secured by such facility, was operated by a provider of such services
which was eligible for participation in the medicare program under title
XVIII of the Social Security Act with respect to such facility.'
(b) EFFECTIVE DATE- The amendment made by this section shall apply to taxable years
beginning after the date of enactment of this Act.
TITLE III--CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES
SEC. 301. CONFORMITY WITH REGULATED INVESTMENT COMPANY
RULES.
(a) DISTRIBUTION REQUIREMENT- Clauses (i) and (ii) of section 857(a)(1)(A) (relating
to requirements applicable to real estate investment trusts) are each amended by striking `95
percent (90 percent for taxable years beginning before January 1, 1980)' and inserting `90
percent'.
(b) IMPOSITION OF TAX- 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 `95 percent (90 percent
in the case of taxable years beginning before January 1, 1980)' and inserting `90 percent'.
(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years
beginning after the date of enactment of this Act.
TITLE IV--CLARIFICATION OF DEFINITION OF INDEPENDENT CONTRACTOR
SEC. 401. CLARIFICATION OF DEFINITION OF INDEPENDENT
CONTRACTOR.
(a) IN GENERAL- Paragraph (3) of section 856(d) (relating to independent contractor
defined) is amended by adding at the end the following flush sentence:
`In the event that any class of stock of either the real estate investment trust or such
person is regularly traded on an established securities market, only persons who own,
directly or indirectly, more than 5 percent of such class of stock shall be taken into
account as owning any of the stock of such class for purposes of applying the 35
percent limitation set forth in subparagraph (B) (but all of the outstanding stock of such
class shall be considered outstanding in order to compute the denominator for purpose
of determining the applicable percentage of ownership).'
(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 V--MODIFICATION OF EARNINGS AND PROFITS RULES
SEC. 501. MODIFICATION OF EARNINGS AND PROFITS RULES.
(a) RULES FOR DETERMINING WHETHER REGULATED INVESTMENT
COMPANY HAS EARNINGS AND PROFITS FROM NON-RIC YEAR- Subsection (c)
of section 852 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 earnings and profits accumulated in any taxable year to
which the provisions of this part did not apply rather than the most recently
accumulated earnings and profits, and
`(B) to the extent treated under subparagraph (A) as made from accumulated
earnings and profits, shall not be treated as a distribution for purposes of
subsection (b)(2)(D) and section 855.'.
(b) CLARIFICATION OF APPLICATION OF REIT SPILLOVER DIVIDEND RULES
TO DISTRIBUTIONS TO MEET QUALIFICATION REQUIREMENT- Subparagraph
(B) of section 857(d)(3) is amended by inserting before the period `and section 858'.
(c) APPLICATION OF DEFICIENCY DIVIDEND PROCEDURES- Paragraph (1) of
applying subsection (a)(2) to the non-RIC year.'
(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years
beginning before, on, or after the date of the enactment of this Act.
