S 2002 ISCommentsClose CommentsPermalink

To amend the Internal Revenue Code of 1986 to simplify certain provisions applicable to real estate investment trusts, and for other purposes.CommentsClose CommentsPermalink

August 3, 2007

Mr. HATCH (for himself, Mr. SALAZAR, Mr. SMITH, and Mr. KERRY) introduced the following bill; which was read twice and referred to the Committee on FinanceCommentsClose CommentsPermalink

To amend the Internal Revenue Code of 1986 to simplify certain provisions applicable to real estate investment trusts, and for other purposes.CommentsClose CommentsPermalink

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,CommentsClose CommentsPermalink

SECTION 1. SHORT TITLE.

This Act may be cited as the `REIT Investment Diversification and Empowerment Act of 2007'.CommentsClose CommentsPermalink

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.CommentsClose CommentsPermalink

TITLE I--FOREIGN CURRENCY AND OTHER QUALIFIED ACTIVITIES

SEC. 101. REVISIONS TO REIT INCOME TESTS.

(a) Addition of Permissible Income Categories- Section 856(c) (relating to limitations) is amended--CommentsClose CommentsPermalink





(1) by striking `and' at the end of paragraph (2)(G) and by inserting after paragraph (2)(H) the following new subparagraphs:CommentsClose CommentsPermalink





`(I) passive foreign exchange gains; andCommentsClose CommentsPermalink





`(J) any other item of income or gain as determined by the Secretary;', andCommentsClose CommentsPermalink





(2) by striking `and' at the end of paragraphs (3)(H) and (3)(I) and by inserting after paragraph (3)(I) the following new subparagraphs:CommentsClose CommentsPermalink





`(J) real estate foreign exchange gains; andCommentsClose CommentsPermalink





`(K) any other item of income or gain as determined by the Secretary; and'.CommentsClose CommentsPermalink





(b) Rules Regarding Foreign Currency Transactions- Section 856 (defining real estate investment trust) is amended by adding at the end the following new subsection:CommentsClose CommentsPermalink





`(n) Rules Regarding Foreign Currency Transactions- With respect to any taxable year--CommentsClose CommentsPermalink





`(1) REAL ESTATE FOREIGN EXCHANGE GAINS- For purposes of subsection (c)(3)(J), the term `real estate foreign exchange gains' means--CommentsClose CommentsPermalink





`(A) foreign currency gains (as defined in section 988(b)(1)) which are attributable to--CommentsClose CommentsPermalink





`(i) any item described in subsection (c)(3) (other than in subparagraph (J) thereof),CommentsClose CommentsPermalink





`(ii) the acquisition or ownership of obligations secured by mortgages on real property or on interests in real property (other than foreign currency gains attributable to any item described in clause (i)), orCommentsClose CommentsPermalink





`(iii) becoming or being the obligor under obligations secured by mortgages on real property or on interests in real property (other than foreign currency gains attributable to any item described in clause (i)),CommentsClose CommentsPermalink





`(B) gains described in section 987 attributable to a qualified business unit (as defined by section 989) of the real estate investment trust, but only if such qualified business unit meets the requirements under--CommentsClose CommentsPermalink





`(i) subsection (c)(3) (without regard to subparagraph (J) thereof) for the taxable year, andCommentsClose CommentsPermalink





`(ii) subsection (c)(4)(A) at the close of each quarter that the real estate investment trust has directly or indirectly held the qualified business unit, andCommentsClose CommentsPermalink





`(C) any other foreign currency gains as determined by the Secretary.CommentsClose CommentsPermalink





`(2) PASSIVE FOREIGN EXCHANGE GAINS- For purposes of subsection (c)(2)(I), the term `passive foreign exchange gains' means--CommentsClose CommentsPermalink





`(A) real estate foreign exchange gains,CommentsClose CommentsPermalink





`(B) foreign currency gains (as defined in section 988(b)(1)) which are not described in subparagraph (A) and which are attributable to any item described in subsection (c)(2) (other than in subparagraph (I) thereof), andCommentsClose CommentsPermalink





`(C) any other foreign currency gains as determined by the Secretary.'.CommentsClose CommentsPermalink





(c) Addition to REIT Hedging Rule- Subparagraph (G) of section 856(c)(5) is amended to read as follows:CommentsClose CommentsPermalink





`(G) TREATMENT OF CERTAIN HEDGING INSTRUMENTS- Except to the extent as determined by the Secretary--CommentsClose CommentsPermalink





`(i) 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 paragraphs (2) and (3) to the extent that the transaction hedges any indebtedness incurred or to be incurred by the trust to acquire or carry real estate assets, andCommentsClose CommentsPermalink





`(ii) any income of a real estate investment trust from a transaction entered into by the trust primarily to manage risk of currency fluctuations with respect to any item described in paragraph (2) or (3), including gain from the termination of such a transaction, shall not constitute gross income under paragraphs (2) and (3), but only if such transaction is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may prescribe).'.CommentsClose CommentsPermalink





(d) Authority to Exclude Items of Income From REIT Income Tests- Section 856(c)(5) is amended by adding at the end the following new subparagraph:CommentsClose CommentsPermalink





`(H) SECRETARIAL AUTHORITY TO EXCLUDE OTHER ITEMS OF INCOME- The Secretary is authorized to determine whether any item of income or gain which does not otherwise qualify under paragraph (2) or (3) may be considered as not constituting gross income solely for purposes of this part.'.CommentsClose CommentsPermalink

SEC. 102. REVISIONS TO REIT ASSET TESTS.

(a) Clarification of Valuation Test- The first sentence in the matter following section 856(c)(4)(B)(iii)(III) is amended by inserting `(including a discrepancy caused solely by the change in the foreign currency exchange rate used to value a foreign asset)' after `such requirements'.CommentsClose CommentsPermalink





(b) Clarification of Permissible Asset Category- Section 856(c)(5), as amended by section 101(d), is amended by adding at the end the following new subparagraph:CommentsClose CommentsPermalink





`(I) CASH- The term `cash' includes foreign currency if the real estate investment trust or its qualified business unit (as defined in section 989) uses such foreign currency as its functional currency (as defined in section 985(b)).'.CommentsClose CommentsPermalink

SEC. 103. CONFORMING FOREIGN CURRENCY REVISIONS.

(a) Net Income From Foreclosure Property- Clause (i) of section 857(b)(4)(B) is amended to read as follows:CommentsClose CommentsPermalink





`(i) gain (including any foreign currency gain, as defined in section 988(b)(1)) from the sale or other disposition of foreclosure property described in section 1221(a)(1) and the gross income for the taxable year derived from foreclosure property (as defined in section 856(e)), but only to the extent such gross income is not described in (or, in the case of foreign currency gain, not attributable to gross income described in) section 856(c)(3) other than subparagraph (F) thereof, over'.CommentsClose CommentsPermalink





(b) Net Income From Prohibited Transactions- Clause (i) of section 857(b)(6)(B) is amended to read as follows:CommentsClose CommentsPermalink





`(i) the term `net income derived from prohibited transactions' means the excess of the gain (including any foreign currency gain, as defined in section 988(b)(1)) from prohibited transactions over the deductions (including any foreign currency loss, as defined in section 988(b)(2)) allowed by this chapter which are directly connected with prohibited transactions;'.CommentsClose CommentsPermalink

TITLE II--TAXABLE REIT SUBSIDIARIES

SEC. 201. CONFORMING TAXABLE REIT SUBSIDIARY ASSET TEST.

Section 856(c)(4)(B)(ii) is amended by striking `20 percent' and inserting `25 percent'.CommentsClose CommentsPermalink

TITLE III--DEALER SALES

SEC. 301. HOLDING PERIOD UNDER SAFE HARBOR.

Section 857(b)(6) (relating to income from prohibited transactions) is amended--CommentsClose CommentsPermalink





(1) by striking `4 years' in subparagraphs (C)(i), (C)(iv), and (D)(i) and inserting `2 years',CommentsClose CommentsPermalink





(2) by striking `4-year period' in subparagraphs (C)(ii), (D)(ii), and (D)(iii) and inserting `2-year period', andCommentsClose CommentsPermalink





(3) by striking `real estate asset'and all that follows through `if' in the matter preceding clause (i) of subparagraphs (C) and (D), respectively, and inserting `real estate asset (as defined in section 856(c)(5)(B)) and which is described in section 1221(a)(1) if'.CommentsClose CommentsPermalink

SEC. 302. DETERMINING VALUE OF SALES UNDER SAFE HARBOR.

Section 857(b)(6) is amended--CommentsClose CommentsPermalink





(1) by striking the semicolon at the end of subparagraph (C)(iii) and inserting `, or (III) the fair market value 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 fair market value of all of the assets of the trust as of the beginning of the taxable year;', andCommentsClose CommentsPermalink





(2) by adding `or' at the end of subclause (II) of subparagraph (D)(iv) and by adding at the end of such subparagraph the following new subclause:CommentsClose CommentsPermalink





`(III) the fair market value 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 fair market value of all of the assets of the trust as of the beginning of the taxable year,'.CommentsClose CommentsPermalink

TITLE IV--HEALTH CARE REITS

SEC. 401. CONFORMITY FOR HEALTH CARE FACILITIES.

(a) Related Party Rentals- Subparagraph (B) of section 856(d)(8) (relating to special rule for taxable REIT subsidiaries) is amended to read as follows:CommentsClose CommentsPermalink





`(B) EXCEPTION FOR CERTAIN LODGING FACILITIES AND HEALTH CARE PROPERTY- The requirements of this subparagraph are met with respect to an interest in real property which is a qualified lodging facility or a qualified health care property (as defined in subsection (e)(6)(D)(i)) 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. For purposes of this section, a taxable REIT subsidiary is not considered to be operating or managing a qualified health care property or qualified lodging facility solely because it directly or indirectly possesses a license, permit or similar instrument enabling it to do so.'.CommentsClose CommentsPermalink





(b) Eligible Independent Contractor- Subparagraphs (A) and (B) of section 856(d)(9) (relating to eligible independent contractor) are amended to read as follows:CommentsClose CommentsPermalink





`(A) IN GENERAL- The term `eligible independent contractor' means, with respect to any qualified lodging facility or qualified health care property (as defined in subsection (e)(6)(D)(i)), 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 such qualified lodging facility or qualified health care property, such contractor (or any related person) is actively engaged in the trade or business of operating qualified lodging facilities or qualified health care properties, respectively, for any person who is not a related person with respect to the real estate investment trust or the taxable REIT subsidiary.CommentsClose CommentsPermalink





`(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 or qualified health care property (as so defined) by reason of the following:CommentsClose CommentsPermalink





`(i) The taxable REIT subsidiary bears the expenses for the operation of such qualified lodging facility or qualified health care property pursuant to the management agreement or other similar service contract.CommentsClose CommentsPermalink





`(ii) The taxable REIT subsidiary receives the revenues from the operation of such qualified lodging facility or qualified health care property, net of expenses for such operation and fees payable to the operator pursuant to such agreement or contract.CommentsClose CommentsPermalink





`(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 of the later of--CommentsClose CommentsPermalink





`(I) January 1, 1999, orCommentsClose CommentsPermalink





`(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 or qualified health care property.'.CommentsClose CommentsPermalink





(c) Taxable Reit Subsidiaries- The last sentence of section 856(l)(3) is amended--CommentsClose CommentsPermalink





(1) by inserting `or a health care facility' after `a lodging facility', andCommentsClose CommentsPermalink





(2) by inserting `or health care facility' after `such lodging facility'.CommentsClose CommentsPermalink

TITLE V--FOREIGN REITS

SEC. 501. STOCK OF FOREIGN REITS AS REAL ESTATE ASSETS.

(a) In General- The first sentence in section 856(c)(5)(B) is amended by inserting `or in a qualified foreign REIT' after `this part'.CommentsClose CommentsPermalink





(b) Qualified Foreign REIT- Section 856(c) is amended by adding at the end the following new paragraph:CommentsClose CommentsPermalink





`(8) QUALIFIED FOREIGN REIT- For purposes of this subsection, the term `qualified foreign REIT' means a corporation, trust, or association--CommentsClose CommentsPermalink





`(A) treated as a corporation under section 7701(a)(3),CommentsClose CommentsPermalink





`(B) the shares or certificates of beneficial interests of which are regularly traded on an established securities market, andCommentsClose CommentsPermalink





`(C) which is organized in a country under rules that the Secretary determines meet the following criteria:CommentsClose CommentsPermalink





`(i) At least 75 percent of the entity's assets must qualify as real estate assets (determined without regard to shares or transferable certificates of beneficial interest in such entity), as determined at the close of the entity's prior taxable year.CommentsClose CommentsPermalink





`(ii) The entity either receives a dividends paid deduction comparable to section 561 or is exempt from corporate level tax.CommentsClose CommentsPermalink





`(iii) The entity is required to distribute at least 85 percent of its annual taxable income (as computed in the jurisdiction in which it is organized) to the holders of its shares or certificates of beneficial interest on an annual basis.CommentsClose CommentsPermalink





In determining whether the rules of a country meet the criteria of a qualified foreign REIT, the Secretary shall take into account non-statutory rules such as stock exchange listing requirements as well as existing practices resulting from market preferences, and may take into account situations that in the judgment of the Secretary present a significant opportunity for a foreign REIT to generate an amount of income that is not compatible with the principles underlying section 856(c)(3).'.CommentsClose CommentsPermalink

SEC. 502. DIVIDENDS FROM FOREIGN REITS.

Section 856(c)(3)(D) is amended by inserting `and in qualified foreign REITs' after `this part'.CommentsClose CommentsPermalink

TITLE VI--EFFECTIVE DATES

SEC. 601 EFFECTIVE DATES.

(a) In General- Except as otherwise provided in this section, the amendments made by this Act shall apply to taxable years beginning after the date of the enactment of this Act.CommentsClose CommentsPermalink





(b) REIT Income Tests-CommentsClose CommentsPermalink





(1) The amendment made by section 101(a) and (b) shall apply to gains and items of income recognized after the date of the enactment of this Act.CommentsClose CommentsPermalink





(2) The amendment made by section 101(c) shall apply to transactions entered into after the date of the enactment of this Act.CommentsClose CommentsPermalink





(3) The amendment made by section 101(d) shall apply after the date of the enactment of this Act.CommentsClose CommentsPermalink





(c) Conforming Foreign Currency Revisions-CommentsClose CommentsPermalink





(1) The amendment made by section 103(a) shall apply to gains recognized after the date of the enactment of this Act.CommentsClose CommentsPermalink





(2) The amendment made by section 103(b) shall apply to gains and deductions recognized after the date of the enactment of this Act.CommentsClose CommentsPermalink





(d) Dealer Sales- The amendments made by Title III shall apply to sales made after the date of the enactment of this Act.CommentsClose CommentsPermalink