Senate Finance Committee Approves Tax
Legislation Containing REIT Modernization

On October 20, the Senate Finance Committee unanimously approved the Tax Relief Extension Act of 1999 ("TREA") that would extend the life of several expiring tax credits such as for research and development. Included in this bill as revenue-raising measures were the package of REIT Modernization items and two provisions affecting closely-held REITs that had been in the $792 billion tax relief bill that the President vetoed last month.

As discussed in detail in the Government Relations section of, these REIT Modernization provisions would allow REITs to own taxable REIT subsidiaries, restore the 90% distribution test, provide more flexibility in the foreclosure rules for health care REITs, simplify the testing of a publicly traded company as an independent contractor, and remove some traps for the unwary regarding a C-corporation's required distribution of earnings and profits when it elects or merges into a REIT. As with the vetoed tax bill, the changes in the TREA would take effect in taxable years beginning in 2001.

The TREA made only one change to the REIT Modernization provisions. Under the original modernization rule, up to 25% of a REIT's assets could be stock or securities in one or more taxable REIT subsidiaries. Under the TREA, this limit would be reduced to 20%.

The TREA also adopted the two closely-held REIT provisions from the vetoed bill. One provision would prohibit any entity (including a partnership) from owning 50% or more of a REIT's vote or value. The TREA includes all of the exceptions that were in the vetoed bill such as for existing REITs, incubator REITs and UPREITs. The other TREA provision would make a 10% or more owner of a closely-held REIT annualize the REIT dividends for estimated tax purposes. The TREA would defer the effective date to payments made after November 15, 1999 (from the September 15, 1999 date in the vetoed bill).

The future of the TREA is unclear. The Finance Committee needs to wait for a tax bill from the House before it can be referred to the Senate Floor. Also, several Senators oppose any tax bill that contains revenue raisers.