H.R. 5746 (112th): Update and Streamline REIT Act of 2012

112th Congress, 2011–2013. Text as of May 15, 2012 (Introduced).

Status & Summary | PDF | Source: GPO

I

112th CONGRESS

2d Session

H. R. 5746

IN THE HOUSE OF REPRESENTATIVES

May 15, 2012

(for himself, Mr. Neal, Mr. Sam Johnson of Texas, Mr. Rangel, Mr. Nunes, Mr. Stark, Mr. Reichert, Mr. Lewis of Georgia, Mr. Roskam, Mr. Blumenauer, Mr. Gerlach, Mr. Kind, Mr. Schock, Mr. Crowley, Ms. Jenkins, and Mr. Paulsen) 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 modify certain rules applicable to real estate investment trusts, and for other purposes.

1.

Short title; etc

(a)

Short title

This Act may be cited as the Update and Streamline REIT Act of 2012 or the US REIT Act of 2012 .

(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.

(c)

Table of contents

The table of contents for this Act is as follows:

Sec. 1. Short title; etc.

Title I—Update of prohibited transaction and related provisions

Sec. 101. Prohibited transaction safe harbors.

Sec. 102. Treatment of taxable REIT subsidiaries.

Title II—Preferential and designated dividends

Sec. 201. Repeal of preferential dividend rule for publicly offered REITs.

Sec. 202. Authority for alternative remedies to address certain failures.

Sec. 203. Treatment of interest-related dividends of specified REITs.

Sec. 204. Limitations on designation of dividends.

Title III—Update and Modification of REIT Income and Asset Tests

Sec. 301. Debt instruments of publicly offered REITs and mortgages treated as real estate assets.

Sec. 302. Asset and income test clarification regarding ancillary personal property.

Sec. 303. Special rules for treatment of timber gains made permanent.

Sec. 304. Treatment of mineral royalty income as qualifying income.

Sec. 305. Hedging provisions.

Title IV—Earnings and Profits of Real Estate Investment Trusts

Sec. 401. Modification of real estate investment trust earnings and profits calculation to avoid duplicate taxation.

I

Update of prohibited transaction and related provisions

101.

Prohibited transaction safe harbors

(a)

Alternative 3-Year averaging test for percentage of assets that can be sold annually

(1)

In general

Clause (iii) of section 857(b)(6)C) is amended by inserting before the semicolon at the end the following: , or (IV) the trust satisfies the requirements of subclause (II) applied by substituting 20 percent for 10 percent and the 3-year average adjusted bases percentage for the taxable year (as defined in subparagraph (G)) does not exceed 10 percent, or (V) the trust satisfies the requirements of subclause (III) applied by substituting 20 percent for 10 percent and the 3-year average fair market value percentage for the taxable year (as defined in subparagraph (H)) does not exceed 10 percent.

(2)

3-year average adjusted bases and fair market value percentages

Paragraph (6) of section 857(b) is amended by redesignating subparagraphs (G) and (H) as subparagraphs (I) and (J), respectively, and by inserting after subparagraph (F) the following new subparagraphs:

(G)

3-year average adjusted bases percentage

The term 3-year average adjusted bases percentage means, with respect to any taxable year, the ratio (expressed as a percentage) of—

(i)

the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by

(ii)

the sum of the aggregate adjusted bases (as so determined) of all of the assets of the trust as of the beginning of each of the 3 taxable years which are part of the period referred to in clause (i).

(H)

3-year average fair market value percentage

The term 3-year average fair market value percentage means, with respect to any taxable year, the ratio (expressed as a percentage) of—

(i)

the fair market value of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by

(ii)

the sum of the fair market value of all of the assets of the trust as of the beginning of each of the 3 taxable years which are part of the period referred to in clause (i).

.

(3)

Conforming amendments

Clause (iv) of section 857(b)(6)(D) is amended by adding or at the end of subclause (III) and by adding at the end the following new subclauses:

(IV)

the trust satisfies the requirements of subclause (II) applied by substituting 20 percent for 10 percent and the 3-year average adjusted bases percentage for the taxable year (as defined in subparagraph (G)) does not exceed 10 percent, or

(V)

the trust satisfies the requirements of subclause (III) applied by substituting 20 percent for 10 percent and the 3-year average fair market value percentage for the taxable year (as defined in subparagraph (H)) does not exceed 10 percent,

.

(b)

Application of safe harbors independent of determination whether real estate asset is inventory property

(1)

In general

Subparagraphs (C) and (D) of section 857(b)(6) are each amended by striking and which is described in section 1221(a)(1) in the matter preceding clause (i).

(2)

No inference from safe harbors

Subparagraph (F) of section 857(b)(6) is amended to read as follows:

(F)

No inference with respect to treatment as inventory property

The determination of whether property is described in section 1221(a)(1) shall be made without regard to this paragraph.

.

(c)

Effective dates

(1)

In general

The amendments made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act.

(2)

Application of safe harbors

(A)

In general

Except as provided in subparagraph (B), the amendments made by subsection (b) shall take effect as if included in section 3051 of the Housing Assistance Tax Act of 2008.

(B)

Retroactive application of no inference not applicable to certain timber property previously treated as not inventory property

The amendment made by subsection (b)(2) shall not apply to any sale of property to which section 857(b)(6)(G) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act) applies.

102.

Treatment of taxable REIT subsidiaries

(a)

Taxable REIT subsidiaries treated in same manner as independent contractors for certain purposes

(1)

Marketing and development expenses under rental property safe harbor

Clause (v) of section 857(b)(6)(C) is amended by inserting or by a taxable REIT subsidiary before the period at the end.

(2)

Rule for marketing expenses under timber property safe harbor reinstated and made permanent

Clause (v) of section 857(b)(6)(D) is amended by striking , or, in the case of a sale on or before the termination date, and inserting or by .

(3)

Foreclosure property grace period

Subparagraph (C) of section 856(e)(4) is amended by inserting or through a taxable REIT subsidiary after receive any income.

(b)

Tax on redetermined TRS service income

(1)

In general

Subparagraph (A) of section 857(b)(7) is amended by striking and excess interest and inserting excess interest, and redetermined TRS service income.

(2)

Redetermined TRS service income

Paragraph (7) of section 857(b) is amended by redesignating subparagraphs (E) and (F) as subparagraphs (F) and (G), respectively, and inserting after subparagraph (D) the following new subparagraph:

(E)

Redetermined TRS service income

(i)

In general

The term redetermined TRS service income means gross income of a taxable REIT subsidiary of a real estate investment trust attributable to services provided to, or on behalf of, such trust (less deductions properly allocable thereto) to the extent the amount of such income (less such deductions) would (but for subparagraph (F)) be increased on distribution, apportionment, or allocation under section 482.

(ii)

Coordination with redetermined rents

Clause (i) shall not apply with respect to gross income attributable to services furnished or rendered to a tenant of the real estate investment trust (or to deductions properly allocable thereto).

.

(3)

Conforming amendments

Subparagraphs (B)(i) and (C) of section 857(b)(7) are each amended by striking subparagraph (E) and inserting subparagraph (F).

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

II

Preferential and designated dividends

201.

Repeal of preferential dividend rule for publicly offered REITs

(a)

In general

Subsection (c) of section 562 is amended by inserting or a publicly offered REIT (as defined in section 856(c)(5)(K)) after a publicly offered regulated investment company (as defined in section 67(c)(2)(B)).

(b)

Effective date

The amendment made by this section shall apply to distributions in taxable years beginning after the date of the enactment of this Act.

202.

Authority for alternative remedies to address certain failures

(a)

In general

Subsection (e) of section 562 is amended—

(1)

by striking In the case of a real estate investment trust and inserting the following:

(1)

Determination of earnings and profits for purposes of dividends paid deduction

In the case of a real estate investment trust

, and

(2)

by adding at the end the following new paragraph:

(2)

Authority to provide alternative remedies for certain failures

In the case of a failure of a distribution by a real estate investment trust to comply with the requirements of subsection (c), the Secretary may provide an appropriate remedy to cure such failure in lieu of not considering the distribution to be a dividend for purposes of computing the dividends paid deduction if—

(A)

the Secretary determines that such failure is inadvertent or is due to reasonable cause and not due to willful neglect, or

(B)

such failure is of a type of failure which the Secretary has identified for purposes of this paragraph as being described in subparagraph (A).

.

(b)

Effective date

The amendments made by this section shall apply to distributions in taxable years beginning after the date of the enactment of this Act.

203.

Treatment of interest-related dividends of specified REITs

(a)

Nonresident alien individuals

(1)

In general

Section 871 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:

(n)

Interest-Related dividends of specified REITs

(1)

In general

Except as provided in paragraph (2), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any interest-related dividend received from a specified REIT.

(2)

Exceptions

Paragraph (1) shall not apply to any dividend described in subsection (k)(1)(B) (determined by treating the specified REIT as a regulated investment company).

(3)

Interest-related dividend

For purposes of this subsection—

(A)

In general

The term interest-related dividend means any dividend (or part thereof) which is designated by the specified REIT as an interest-related dividend in a written notice mailed to its shareholders or holders of beneficial interests before the expiration of 60 days after the close of its taxable year.

(B)

Excess reported amount

If the aggregate amount so designated with respect to a taxable year of the trust (including amounts so designated with respect to dividends paid after the close of the taxable year described in section 858) is greater than the qualified net interest income of the trust for such taxable year, the portion of each distribution which shall be an interest-related dividend shall be only that portion of the amounts so designated which such qualified net interest income bears to the aggregate amount so designated.

(C)

Qualified net interest income

The term qualified net interest income has the meaning given such term by subsection (k)(1)(D) (determined by treating the specified REIT as a regulated investment company).

(D)

Termination

The term interest-related dividend shall not include any dividend with respect to any taxable year of the trust beginning after the date set forth in clause (v) of subsection (k)(1)(C).

(4)

Specified REIT

For purposes of this subsection, the term specified REIT means any publicly offered REIT (as defined in section 856(c)(5)(K)) other than any real estate investment trust with respect to which any foreign person owns (within the meaning of section 856(d)(5)) 50 percent or more (determined by vote or value) of the shares, or certificates of beneficial interest, in such trust.

.

(2)

Conforming amendment

Clause (iv) of section 871(k)(1)(E) is amended by striking another regulated investment company and inserting a regulated investment company or a specified REIT (as defined in subsection (n)(4)).

(b)

Foreign corporations

Section 881 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

(f)

Tax not To apply to interest-Related dividends of specified REITs

(1)

In general

Except as provided in paragraph (2), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(n)(3)) received from a specified REIT (as defined in section 871(n)(4)).

(2)

Exceptions and special rules

Rules similar to the rules of subparagraphs (B) and (C) of subsection (e)(1) shall apply for purposes of this subsection (determined by treating the specified REIT as a regulated investment company).

.

(c)

Withholding

(1)

Nonresident aliens

Paragraph (12) of section 1441(c) is amended—

(A)

by striking section 871(k) in subparagraph (A) and inserting subsection (k) or (n) of section 871,

(B)

by inserting or real estate investment trust (as the case may be) after regulated investment company in subparagraph (B), and

(C)

by striking regulated investment companies in the heading thereof and inserting regulated investment companies and real estate investment trusts.

(2)

Foreign corporations

Subsection (a) of section 1442 is amended—

(A)

by striking sections 871(a) and 871(k) and inserting subsections (a), (k), and (n) of section 871,

(B)

by striking sections 881(a) and 881(e) and inserting subsections (a), (e), and (f) of section 881, and

(C)

by inserting or real estate investment trust (as the case may be) after regulated investment company.

(d)

Effective date

(1)

In general

The amendments made by this section shall apply to distributions made after the date of the enactment of this Act.

(2)

Transition rule

In the case of a taxable year which includes the date of the enactment of this Act, qualified net interest income (as defined in section 871(n)(3)(C) of the Internal Revenue Code of 1986, as added by this section) shall be determined by taking into account only items properly includible in gross income for the portion of such taxable year after such date (and deductions properly allocable to such income).

204.

Limitations on designation of dividends

(a)

In general

Section 857 is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection:

(g)

Limitations on designation of dividends

(1)

Overall limitation

The aggregate amount of dividends designated by a real estate investment trust under section 857(b)(3)(C), section 857(c)(2)(A), and section 871(n)(3) with respect to any taxable year may not exceed the dividends paid by such trust with respect to such year. For purposes of the preceding sentence, dividends paid after the close of the taxable year described in section 858 shall be treated as paid with respect to such year.

(2)

Proportionality

The Secretary may prescribe regulations or other guidance requiring the proportionality of the designation of particular types of dividends among shares or beneficial interests of a real estate investment trust.

.

(b)

Effective date

The amendments made by this section shall apply to distributions in taxable years beginning after the date of the enactment of this Act.

III

Update and Modification of REIT Income and Asset Tests

301.

Debt instruments of publicly offered REITs and mortgages treated as real estate assets

(a)

Debt instruments of publicly offered REITs treated as real estate assets

(1)

In general

Subparagraph (B) of section 856(c)(5) is amended—

(A)

by striking and shares and inserting , shares, and

(B)

by inserting , and debt instruments issued by publicly offered REITs before the period at the end of the first sentence.

(2)

Income from nonqualified debt instruments of publicly offered REITs not qualified for purposes of satisfying the 75 percent gross income test

Subparagraph (H) of section 856(c)(3) is amended by inserting (other than a nonqualified publicly offered REIT debt instrument) after real estate asset.

(3)

25 percent asset limitation on holding of nonqualified debt instruments of publicly offered REITs

Subparagraph (B) of section 856(c)(4) is amended by redesignating clause (iii) as clause (iv) and by inserting after clause (ii) the following new clause:

(iii)

not more than 25 percent of the value of its total assets is represented by nonqualified publicly offered REIT debt instruments, and

.

(4)

Definitions related to debt instruments of publicly offered REITs

Paragraph (5) of section 856(c) is amended by adding at the end the following new subparagraph:

(L)

Definitions related to debt instruments of publicly offered REITs

(i)

Publicly offered REIT

The term publicly offered REIT means any real estate investment trust which meets the requirements of this part and which is required to file annual and periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

(ii)

Nonqualified publicly offered REIT debt instrument

The term nonqualified publicly offered REIT debt instrument means any real estate asset which would cease to be a real estate asset if subparagraph (B) were applied without regard to the reference to debt instruments issued by publicly offered REITs.

.

(b)

Interests in mortgages on interests in real property treated as real estate assets

Subparagraph (B) of section 856(c)(5) is amended by inserting or on interests in real property after interests in mortgages on real property.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

302.

Asset and income test clarification regarding ancillary personal property

(a)

In general

Subsection (c) of section 856 is amended by adding at the end the following new paragraph:

(9)

Special rules for certain personal property which is ancillary to real property

(A)

Certain personal property leased in connection with real property

Personal property shall be treated as a real estate asset for purposes of paragraph (4)(A) to the extent that rents attributable to such personal property are treated as rents from real property under subsection (d)(1)(C).

(B)

Certain personal property mortgaged in connection with real property

In the case of an obligation secured by a mortgage on both real property and personal property, if the fair market value of such personal property does not exceed 15 percent of the total fair market value of all such property, such personal property shall be treated as real property for purposes of applying paragraphs (3)(B) and (4)(A). For purposes of the preceding sentence, the fair market value of all such property shall be determined in the same manner as the fair market value of real property is determined for purposes of apportioning interest income between real property and personal property under paragraph (3)(B).

.

(b)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

303.

Special rules for treatment of timber gains made permanent

(a)

In general

Subparagraph (H) of section 856(c)(5) is amended by striking clause (iii).

(b)

Clarification of exemption from prohibited transaction rules

Subclause (II) of section 856(c)(5)(H)(ii) is amended to read as follows:

(II)

Exemption from prohibited transaction rules

For purposes of this part, income described in this subparagraph shall not be treated as gain from a prohibited transaction.

.

(c)

Conforming amendments

(1)

Subclause (I) of section 856(c)(5)(H)(ii) is amended by inserting Deemed sale of cut timber.— before For purposes of.

(2)

Subsection (c) of section 856, as amended by section 302, is amended by striking paragraph (8) and redesignating paragraph (9) as paragraph (8).

(3)

Paragraph (6) of section 857(b), as amended by section 101(a), is amended by striking subparagraphs (I) and (J).

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

304.

Treatment of mineral royalty income as qualifying income

(a)

In general

Subparagraph (I) of section 856(c)(2) is amended to read as follows:

(I)

mineral royalty income (including oil and gas royalties) from real property owned by a real estate investment trust and held, or once held, in connection with the trust’s trade or business of generating rents from real property or producing timber;

.

(b)

Conforming amendment

Paragraph (5) of section 856(c), as amended by section 301, is amended by striking subparagraph (I) and by redesignating subparagraphs (J), (K), and (L) as subparagraphs (I), (J), and (K), respectively.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

305.

Hedging provisions

(a)

Modification To permit the termination of a hedging transaction using an additional hedging instrument

Subparagraph (G) of section 856(c)(5) is amended by striking and at the end of clause (i), by striking the period at the end of clause (ii) and inserting , and, and by adding at the end the following new clause:

(iii)

if—

(I)

a real estate investment trust enters into one or more positions described in clause (i) with respect to indebtedness described in clause (i) or one or more positions described in clause (ii) with respect to property which generates income or gain described in paragraph (2) or (3),

(II)

any portion of such indebtedness is extinguished or any portion of such property is disposed of, and

(III)

in connection with such extinguishment or disposition, such trust enters into one or more hedging transactions (as defined in clause (ii) or (iii) of section 1221(b)(2)(A)) with respect to any position referred to in subclause (I),

any income of such trust from any position referred to in subclause (I) and from any transaction referred to in subclause (III) (including gain from the termination of any such position or transaction) shall not constitute gross income under paragraphs (2) and (3) to the extent that such transaction hedges such position.

.

(b)

Identification requirements

(1)

In general

Subparagraph (G) of section 856(c)(5), as amended by subsection (a), is amended by striking and at the end of clause (ii), by striking the period at the end of clause (iii) and inserting , and, and by adding at the end the following new clause:

(iv)

clauses (i), (ii), and (iii) shall not apply with respect to any transaction unless such transaction satisfies the identification requirement described in section 1221(a)(7) (determined after taking into account any curative provisions provided under the regulations referred to therein).

.

(2)

Conforming amendments

Subparagraph (G) of section 856(c)(5) is amended—

(A)

by striking which is clearly identified pursuant to section 1221(a)(7) in clause (i), and

(B)

by striking , 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) in clause (ii).

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

IV

Earnings and Profits of Real Estate Investment Trusts

401.

Modification of real estate investment trust earnings and profits calculation to avoid duplicate taxation

(a)

Earnings and profits not increased by amounts allowed in computing taxable income in prior years

(1)

In general

Paragraph (1) of section 857(d) is amended to read as follows:

(1)

In general

The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings) shall not be reduced by any amount which—

(A)

is not allowable in computing its taxable income for such taxable year, and

(B)

was not allowable in computing its taxable income for any prior taxable year.

.

(2)

Exception for purposes of determining dividends paid deduction

Paragraph (1) of section 562(e), as amended by section 302, is amended—

(A)

by striking deduction, the earnings and inserting the following:

deduction—

(A)

the earnings

,

(B)

by striking the period at the end and inserting , and, and

(C)

by adding at the end the following new subparagraph:

(B)

section 857(d)(1) shall be applied without regard to subparagraph (B) thereof.

.

(3)

Conforming amendments

Subsection (d) of section 857 is amended by adding at the end the following new paragraphs:

(4)

Real estate investment trust

For purposes of this subsection, the term real estate investment trust includes a domestic corporation, trust, or association which is a real estate investment trust determined without regard to the requirements of subsection (a).

(5)

Special rules for determining earnings and profits for purposes of the deduction for dividends paid

For special rules for determining the earnings and profits of a real estate investment trust for purposes of the deduction for dividends paid, see section 562(e)(1).

.

(b)

Treatment of gain on sales of real property

Subparagraph (A) of section 562(e)(1), as amended by section 202 and subsection (a), is amended to read as follows:

(A)

the earnings and profits of such trust for any taxable year (but not its accumulated earnings) shall be increased by the amount of gain (if any) on the sale or exchange of real property which is taken into account in determining the taxable income of such trust for such taxable year (and not otherwise taken into account in determining such earnings and profits), and

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.