Real Estate Investment Trust Simplification Act of 1997 ("REITSA")
Provisions contained in H.R. 2014, the Taxpayer Relief Act of 1997, as signed into law on August 5, 1997
Subtitle D--Provisions Relating to Real Estate Investment Trusts
SEC. 1251. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF SHAREHOLDERS.
RULES RELATING TO DETERMINATION OF OWNERSHIP.
(1) FAILURE TO ISSUE SHAREHOLDER DEMAND LETTER NOT TO DISQUALIFY REIT.-Section 857(a) (relating to requirements applicable to real estate investment trusts) is amended by striking paragraph (2) and by redesignating paragraph (3) as paragraph (2).
(2) SHAREHOLDER DEMAND LETTER REQUIREMENT.-Section 857 (relating to taxation of real estate investment trusts and their beneficiaries) 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 ASCERTAIN OWNERSHIP.-
"(1) IN GENERAL.-Each real estate investment trust shall each taxable year comply with regulations prescribed by the Secretary for the purposes of ascertaining the actual ownership of the outstanding shares, or certificates of beneficial interest, of such trust.
"(2) FAILURE TO COMPLY.-
"(A) IN GENERAL.-If a real estate investment trust fails to comply with the requirements 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 intentional disregard of the requirement under paragraph (1), the penalty under subparagraph (A) shall be $50,000.
"(C) FAILURE TO COMPLY AFTER NOTICE.-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 notice and demand by the Secretary and in the same manner as tax) an additional penalty equal to the penalty determined under subparagraph (A) or (B), whichever is applicable.
"(D) REASONABLE CAUSE.-No penalty shall be imposed under this paragraph with respect to any failure if it is shown that such failure is due to reasonable cause and not to willful neglect.".
(b) COMPLIANCE WITH CLOSELY HELD PROHIBITION.-
(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 corporation, trust, or association--
"(1) which for a taxable year meets the requirements of section 857(f)(1), and
"(2) which does not know, or exercising reasonable 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 subsection (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. 1252. DE MINIMIS RULE FOR TENANT SERVICES INCOME.
(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 income (as defined in paragraph (7)).".
IMPERMISSIBLE TENANT SERVICE INCOME.-Section 856(d) is amended by adding at the end the following new paragraph:
"(7) IMPERMISSIBLE TENANT SERVICE INCOME.-For purposes of paragraph (2)(C)--
"(A) IN GENERAL.-The term 'impermissible 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 for any taxable year exceeds 1 percent of all amounts received or accrued during such taxable 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 subparagraph (A)
"(i) services furnished or rendered, or management or operation provided, through an independent contractor from whom the trust itself does not derive or receive any income shall not be treated as furnished, rendered, or provided by the trust, and
"(ii) there shall not be taken into account 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 IMPERMISSIBLE.-For purposes of subparagraph (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 service (or providing the management or operation).
"(E) COORDINATIONS WITH LIMITATIONS.-For purposes of paragraphs (2) and (3) of subsection (c), amounts described in subparagraph (A) shall be included in the gross income of the corporation, trust, or association.".
SEC. 1253. ATTRIBUTION RULES APPLICABLE TO STOCK OWNERSHIP.
Section 856(d)(5) (relating to constructive ownership of stock) is amended by striking "except that" and all that follows and inserting "except that
"(A) '10 percent' shall be substituted for `50 percent' in subparagraph (C) of paragraphs (2) and (3) of section 318(a), and
"(B) section 318(a)(3)(A) shall be applied in the case of a partnership by taking into account only partners who own (directly or indirectly) 25 percent or more of the capital interest, or the profits interest, in the partnership.".
SEC. 1254. CREDIT FOR TAX PAID BY REIT ON RETAINED CAPITAL GAINS.
GENERAL RULE.-Paragraph (3) of section 857(b) (relating to capital gains) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph:
"(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 or holders of beneficial interests 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 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 subparagraph 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 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 respect 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 earnings and profits of any such shareholder which is a corporation, shall be appropriately adjusted in accordance with regulations 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.".
Clause (i) of section 857(b)(7)(A) is amended by striking "subparagraph (B)" and inserting "subparagraph (B) or (D)".
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. 1255. REPEAL OF 30-PERCENT GROSS INCOME REQUIREMENT.
GENERAL RULE.-Subsection (c) of section 856 (relating to limitations) is amended- by adding "and" at the end of paragraph (3), by striking paragraphs (4) and (8), and by redesignating paragraphs (5), (6), and (7) as paragraphs (4), (5), and (6), respectively.
(1) Subparagraph (G) of section 856(c)(5), as redesignated by subsection (a), is amended by striking "and such agreement shall be treated as a security for purposes of paragraph (4)(A)".
(2) Paragraph (5) of section 857(b) is amended by striking "section 856(c)(7)" and inserting "section 856(c)(6)".
(3) Subparagraph (C) of section 857(b)(6) is amended by striking "section 856(c)(6)(B)" and inserting "section 856(c)(5)(B)".
SEC. 1256. 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 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)(B).".
SEC. 1257. TREATMENT OF FORECLOSURE PROPERTY.
INITIAL PERIOD.-Paragraph (2) of section 856(e) (relating to special rules for foreclosure property) is amended by striking "on the date which is 2 years after the date the trust acquired such property" and inserting "as of the close of the 3d taxable year following the taxable year in which the trust acquired such property".
EXTENSION.-Paragraph (3) of section 856(e) is amended by striking "or more extensions" and inserting "extension", and
(B) by striking the last sentence and inserting: "Any such extension shall not extend the grace period beyond the close of the 3d taxable year following the last taxable year in the period under paragraph (2).".
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 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 taxable 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.".
CERTAIN ACTIVITIES NOT TO DISQUALIFY PROPERTY.-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 reason 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 received or accrued, directly or indirectly, with respect to such property being treated as other than rents from real property.".
SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS.
Section 856(c)(6)(G) (relating to treatment of certain interest rate agreements), as redesignated by section 1255, 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 investment trust under an interest rate swap or cap agreement, option, futures contract, forward rate agreement, or any similar financial instrument, entered into by the trust in a transaction to reduce the interest rate risks with respect to any indebtedness incurred or to be incurred by the trust to acquire or carry real estate assets, and
"(ii) gain from the sale or other disposition of any such investment, shall be treated as income qualifying under paragraph (2).".
SEC. 1259. 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 subparagraph (C) and inserting a comma, by redesignating subparagraph (C) (as amended by paragraph (2)) as subparagraph (B), and (4) by adding at the end the following new subparagraphs: "(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, exceed "(ii) the amount of money and the fair market value of other property received during the taxable year under such instruments, and "(D) amounts includible in income by reason of cancellation of indebtedness.".
SEC. 1260. PROHIBITED TRANSACTION SAFE HARBOR.
Clause (iii) of section 857(b)(6)(C) (relating to certain sales not to constitute prohibited transactions) is amended by striking "(other than foreclosure property)" in subclauses (I) and (II) and inserting "(other than sales of foreclosure property or sales to which section 1033 applies)".
SEC. 1261. 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 period.--
"(A) IN GENERAL.-For purposes of section 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 jurisdiction 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 seller with the intent to evict or foreclose, or
"(ii) the trust knew or had reason to know that default on the obligation described in paragraph (5)(A) would occur.".
CLARIFICATION OF DEFINITION OF SHARED APPRECIATION PROVISION.-Clause (ii) of section 856(j)(5)(A) is amended by inserting before the period "or appreciation in value as of any specified date".
SEC. 1262. WHOLLY OWNED SUBSIDIARIES.
Section 856(i)(2) (defining qualified REIT subsidiary) is amended by striking "at all times during the period such corporation was in existence".
SEC. 1263. EFFECTIVE DATE.
The amendments made by this part shall apply to taxable years beginning after the date of the enactment of this Act.