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H.R. 1147 (110th): REIT Investment Diversification and Empowerment Act of 2007


The text of the bill below is as of Feb 16, 2007 (Introduced). The bill was not enacted into law.


I

110th CONGRESS

1st Session

H. R. 1147

IN THE HOUSE OF REPRESENTATIVES

February 16, 2007

(for himself, Mr. Cantor, Mr. Pomeroy, and Mr. Reynolds) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

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

1.

Short title

This Act may be cited as the REIT Investment Diversification and Empowerment Act of 2007.

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.

I

Foreign currency and other qualified activities

101.

Revisions to REIT income tests

(a)

Addition of permissible income categories

Section 856(c) (relating to limitations) is amended—

(1)

by striking and at the end of paragraph (2)(G) and by inserting after paragraph (2)(H) the following new subparagraphs:

(I)

passive foreign exchange gains; and

(J)

any other item of income or gain as determined by the Secretary;

, and

(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:

(J)

real estate foreign exchange gains; and

(K)

any other item of income or gain as determined by the Secretary; and

.

(b)

Rules regarding foreign currency transactions

Section 856 (defining real estate investment trust) is amended by adding at the end the following new subsection:

(n)

Rules regarding foreign currency transactions

With respect to any taxable year—

(1)

Real estate foreign exchange gains

For purposes of subsection (c)(3)(J), the term real estate foreign exchange gains means—

(A)

foreign currency gains (as defined in section 988(b)(1)) which are attributable to—

(i)

any item described in subsection (c)(3) (other than in subparagraph (J) thereof),

(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)), or

(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)),

(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—

(i)

subsection (c)(3) (without regard to subparagraph (J) thereof) for the taxable year, and

(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, and

(C)

any other foreign currency gains as determined by the Secretary.

(2)

Passive foreign exchange gains

For purposes of subsection (c)(2)(I), the term passive foreign exchange gains means—

(A)

real estate foreign exchange gains,

(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), and

(C)

any other foreign currency gains as determined by the Secretary.

.

(c)

Addition to REIT hedging rule

Subparagraph (G) of section 856(c)(5) is amended to read as follows:

(G)

Treatment of certain hedging instruments

Except to the extent as determined by the Secretary—

(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, and

(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).

.

(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:

(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.

.

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.

(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:

(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)).

.

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:

(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

.

(b)

Net income from prohibited transactions

Clause (i) of section 857(b)(6)(B) is amended to read as follows:

(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;

.

II

Taxable reit subsidiaries

201.

Conforming taxable REIT subsidiary asset test

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

III

Dealer sales

301.

Holding period under safe harbor

Section 857(b)(6) (relating to income from prohibited transactions) is amended—

(1)

by striking 4 years in subparagraphs (C)(i), (C)(iv), and (D)(i) and inserting 2 years,

(2)

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

(3)

by striking real estate assetand 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.

302.

Determining value of sales under safe harbor

Subparagraphs (C)(iii)(II) and (D)(iv)(II) of section 857(b)(6) are each amended by striking the aggregate adjusted bases and all that follows through the beginning of the taxable year and inserting 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.

IV

Health care reits

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:

(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.

.

(b)

Eligible independent contractor

Subparagraphs (A) and (B) of section 856(d)(9) (relating to eligible independent contractor) are amended to read as follows:

(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.

(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:

(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.

(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.

(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—

(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 or qualified health care property.

.

(c)

Taxable reit subsidiaries

The last sentence of section 856(l)(3) is amended—

(1)

by inserting or a health care facility after a lodging facility, and

(2)

by inserting or health care facility after such lodging facility.

V

Foreign reits

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.

(b)

Qualified foreign REIT

Section 856(c) is amended by adding at the end the following new paragraph:

(8)

Qualified foreign REIT

For purposes of this subsection, the term qualified foreign REIT means a corporation, trust, or association—

(A)

treated as a corporation under section 7701(a)(3),

(B)

the shares or certificates of beneficial interests of which are regularly traded on an established securities market, and

(C)

which is organized in a country under rules that the Secretary determines meet the following criteria:

(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.

(ii)

The entity either receives a dividends paid deduction comparable to section 561 or is exempt from corporate level tax.

(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.

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).

.

502.

Dividends from foreign REITs

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

VI

Effective dates

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.

(b)

REIT income tests

(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.

(2)

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

(3)

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

(c)

Conforming foreign currency revisions

(1)

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

(2)

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

(d)

Dealer sales

The amendments made by Title III shall apply to sales made after the date of the enactment of this Act.