§ 856. Definition of real estate investment trust

Legislative history

Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.

1. 1960

   Pub. L. 86–779 § 10(a) · 74 Stat. 998

   Enacted · 26 U.S.C. § 856

   Added Pub. L. 86–779, § 10(a), Sept. 14, 1960, 74 Stat. 1004

   Source evidence

   Code source credit
   Added Pub. L. 86–779, § 10(a), Sept. 14, 1960, 74 Stat. 1004

   Enacted provision · exact public law section
   (a) Subchapter M of chapter 1 of the Internal Revenue 26 USC 851. Code of 1954 (relating to regulated investment companies) is amended by adding at the end thereof the following: “PART II— REAL ESTATE INVESTMENT TRUSTS “Sec. 856. Definition of real estate investment trust. “Sec. 857. Taxation of real estate investment trusts and their beneficiaries. “Sec. 858. Dividends paid by real estate investment trust after close of taxable year. “SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST. “(a) In General.— For purposes of this subtitle, the term ‘real estate investment trust’ means an unincorporated trust or an unincorporated association— “(1) which is managed by one or more trustees; “(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; “(3) which (but for the provisions of this part) would be taxable as a domestic corporation; “(4) which does not hold any property primarily for sale to customers in the ordinary course of its trade or business; “(5) the beneficial ownership of which is held by 100 or more persons; “(6) which would not be a personal holding company (as defined in section 542) if all of its gross income constituted personal holding company income (as defined in section 543); and “(7) which meets the requirements of subsection (c). “(b) Determination of Status.— The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. “(c) Limitations.— A trust or association shall not be considered a real estate investment trust for any taxable year unless— “(1) it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year which began after December 31, 1960; “(2) at least 90 percent of its gross income is derived from— “(A) dividends; “(B) interest; “(C) rents from real property; “(D) gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property); and “(E) abatements and refunds of taxes on real property; “(3) at least 75 percent of its gross income is derived from— “(A) rents from real property; “(B) interest on obligations secured by mortgages on real property or on interests in real property; “(C) gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property); “(D) dividends or other distributions on, and gain from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part; and “(E) abatements and refunds of taxes on real property; “(4) less than 30 percent of its gross income is derived from the sale or other disposition of— “(A) stock or securities held for less than 6 months; and “(B) real property (including interests in real property) not compulsorily or involuntarily converted within the meaning of section 1033, held for less than 4 years; and “(5) at the close of each quarter of the taxable year— “(A) at least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and “(B) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer. A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence. “(6) For purposes of this part— Definitions. “(A) The term ‘value’ means, with respect to securities for which market quotations are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the trustees, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, whichever is higher. “(B) The term ‘real estate assets’ means real property (including interests in real property and interests m mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part. “(C) The term ‘interests in real property’ includes fee ownership and co-ownership of land or improvements thereon and leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests. “(D) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as 54 Stat. 847. 15 USC 80a–51. amended. “(d) Rents From Real Property Defined.— For purposes of paragraphs (2) and (3) of subsection (c), the term ‘rents from real property’ includes rents from interests in real property but does not include— “(1) any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term ‘rents from real property’ solely by reason of being based on a fixed percentage or percentages of receipts or sales); “(2) any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly— “(A) in the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or “(B) in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and “(3) any amount received or accrued, directly or indirectly, with respect to any real property, if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. For purposes of this paragraph, the term ‘independent contractor’ means— “(A) a person who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust, or “(B) a person. if a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust. 26 USC 318. For purposes of paragraphs (2) and (3), the rules prescribed by section 318(a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that ‘10 percent’ shall be substituted for ‘50 percent’ in subparagraph (C) of section 318(a) (2). “SEC. 857. TAXATION OF REAL ESTATE INVESTMENT TRUSTS AND THEIR BENEFICIARIES. “(a) Requirements Applicable to Real Estate Investment Trusts.— The provisions of this part (other than subsection (d) of this section) shall not apply to a real estate investment trust for a taxable year unless— “(1) the deduction for dividends paid during the taxable year (as defined in section 561, but without regard to capital gains dividends) equals or exceeds 90 percent of its real estate investment trust taxable income for the taxable year (determined without regard to subsection (b) (2) (C)), and “(2) the real estate investment trust complies for such year with regulations prescribed by the Secretary or his delegate for the purpose of ascertaining the actual ownership of the outstanding shares, or certificates of beneficial interest, of such trust. “(b) Method of Taxation of Real Estate Investment Trusts and Holders of Shares or Certificates of Beneficial Interest.— “(1) Imposition of normal tax and surtax on real estate investment trusts.— There is hereby imposed for each taxable year on the real estate investment trust taxable income of every real estate investment trust a normal tax and surtax computed 26 USC 11. as provided in section 11, as though the real estate investment trust taxable income were the taxable income referred to in section 11. For purposes of computing the normal tax under section 11, the taxable income and the dividends paid deduction of such real estate investment trust for the taxable year (computed without regard to capital gains dividends) shall be reduced by the deduction provided by section 242 (relating to 26 USC 242. partially tax-exempt interest). “(2) Real estate investment trust taxable income.— For purposes of this part, the term ‘real estate investment trust taxable income’ means the taxable income of the real estate investment trust, adjusted as follows: “(A) There shall be excluded the excess, if any, of the net long-term capital gain over the net short-term capital loss. “(B) The deductions for corporations provided in part VIII (except section 248) of subchapter B (section 241 26 USC 248. and following, relating to the deduction for dividends received, etc.) shall not be allowed. “(C) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without 26 USC 561. regard to capital gains dividends. “(D) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on 26 USC 443. change of annual accounting period). “(E) The net operating loss deduction provided in section 172 shall not be allowed. 26 USC 172. “(3) Capital gains.— “(A) Imposition of tax.— There is hereby imposed for each taxable year in the case of every real estate investment trust a tax of 25 percent of the excess, if any, of the net long-term capital gain over the sum of— “(i) the net short-term capital loss; and “(ii) the deduction for dividends paid (as defined in section 561) 26 USC 561. determined with reference to capital gains dividends only. “(B) Treatment of capital gain dividends by shareholders.— A capital gain dividend shall be treated by the shareholders or holders of beneficial interests as a gain from the sale or exchange of a capital asset held for more than 6 months. “(C) Definition of capital gain dividend.— For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by the real estate investment trust as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests at any time before the expiration of 30 days after the close of its taxable year. If the aggregate amount so designated with respect to a Post, p. 1008. taxable year of the trust (including capital gain dividends paid after the close of the taxable year described in section 858) is greater than the excess of the net long-term capital gain over the net short-term capital loss of the tax-able year, the portion of each distribution which shall be a capital gain dividend shall be only that proportion of the amount so designated which such excess of the net long-term capital gain over the net short-term capital loss bears to the aggregate amount so designated. “(4) loss on sale or exchange of stock held less than 31 days.— If— “(A) under subparagraph (B) of paragraph (3) a share-holder of, or a holder of a beneficial interest in, a real estate investment trust is required, with respect to any share or beneficial interest, to treat any amount as a long-term capital gain, and “(B) such share or interest is held by the taxpayer for less than 31 days, then any loss on the sale or exchange of such share or interest shall, to the extent of the amount described in subparagraph (A) of this paragraph, be treated as loss from the sale or exchange of 26 USC 246. a capital asset held for more than 6 months. For purposes of this paragraph, the rules of section 246(c)(3) shall apply in determining whether any share of stock or beneficial interest has been held for less than 31 days; except that ‘30 days’ shall be substituted for the number of days specified in subparagraph (B) of section 246(c) (3). “(c) Restrictions Applicable to Dividends Received From Real Estate Investment Trusts.— For purposes of section 34(a) (relating to credit for dividends received by individuals), section 116 (relating Post, p. 1009. to an exclusion for dividends received by individuals), and section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered as a dividend. “(d) Earnings and Profits.— The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income for such taxable year. For purposes of this subsection, the term ‘real estate investment trust’ includes a domestic unincorporated trust or association which is a real estate investment trust determined without regard to the requirements of subsection (a). “SEC. 858. DIVIDENDS PAID BY REAL ESTATE INVESTMENT TRUST AFTER CLOSE OF TAXABLE YEAR. “(a) General Rule.— For purposes of this part, if a real estate investment trust— “(1) declares a dividend before the time prescribed by law for the filing of its return for a taxable year (including the period of any extension of time granted for filing such return), and “(2) distributes the amount of such dividend to shareholders or holders of beneficial interests in the 12-month period following the close of such taxable year and not later than the date of the first regular dividend payment made after such declaration, the amount so declared and distributed shall, to the extent the trust elects in such return in accordance with regulations prescribed by the Secretary or his delegate, lie considered as having been paid during such taxable year, except as provided in subsections (b) and (c). “(b) Receipt by Shareholder.— Amounts to which subsection (a) applies shall be treated as received by the shareholder or holder of a beneficial interest in the taxable year in which the distribution is made. “(c) Notice to Shareholders.— In the case of amounts to which subsection (a) applies, any notice to shareholders or holders of beneficial interests required under this part with respect to such amounts shall be made not later than 30 days after the close of the taxable 26 USC 851. year in which the distribution is made.”

2. 1964

   Revenue Act of 1964

   Pub. L. 88–272 title II § 225(k)(4) · 78 Stat. 19

   Substituted · 26 U.S.C. § 856(a)(6)

   Pub. L. 88–272 substituted “adjusted ordinary gross income (as defined in section 543(b)(2))” for “gross income”

   Source evidence

   Code amendment note
   Subsec. (a)(6). Pub. L. 88–272 substituted “adjusted ordinary gross income (as defined in section 543(b)(2))” for “gross income”.

   Enacted provision · exact public law section
   (4) Real estate investment trusts.— Paragraph (6) of section 74 Stat. 1004. 26 USC 856. 856(a) (relating to definition of real estate investment trust) is amended by striking out “gross income” and inserting in lieu thereof “adjusted ordinary gross income (as defined in section 543(b)(2))”

3. 1964

   Pub. L. 88–554 § 4(b)(4) · 78 Stat. 761

   Inserted · 26 U.S.C. § 856(d)

   Pub. L. 88–554 inserted reference to subparagraph (C) of section 318(a)(3) of this title

   Source evidence

   Code amendment note
   Subsec. (d). Pub. L. 88–554 inserted reference to subparagraph (C) of section 318(a)(3) of this title.

   Enacted provision · exact public law section
   (4) Section 856(d) of such Code (relating to rents from real property 74 Stat. 1004. 26 USC 856. defined) is amended by striking out “section 318(a)(2)” in the last sentence and inserting in lieu thereof “sections 318(a) (2) and 318 (a)(3)”-

4. 1975

   Pub. L. 93–625 § 6(b) · 88 Stat. 2108

   Inserted · 26 U.S.C. § 856(a)(4)

   Pub. L. 93–625, § 6(b), inserted “(other than foreclosure property, as defined in subsection (e))” after “property”

   Source evidence

   Code amendment note
   Subsec. (a)(4). Pub. L. 93–625, § 6(b), inserted “(other than foreclosure property, as defined in subsection (e))” after “property”.

   Enacted provision · exact public law section
   (b) Modification of Holding for Sale Rule.— Section 856(a) (4) 26 USC 856. (defining real estate investment trust) is amended by inserting after “property” the following: “(other than foreclosure property, as defined in subsection (e))” Ante, p. 2112. 26 USC 857. .

5. 1975

   Pub. L. 93–625 § 6(d)(1) · 88 Stat. 2108

   Added · 26 U.S.C. § 856(c)(2)(F); 26 U.S.C. § 856(c)(3)(F)

   Pub. L. 93–625, § 6(d)(1), added subpar. (F) to pars. (2) and (3)

   Source evidence

   Code amendment note
   Subsec. (c)(2)(F), (3)(F). Pub. L. 93–625, § 6(d)(1), added subpar. (F) to pars. (2) and (3).

   Enacted provision · exact public law section
   (1) Paragraphs (2) and (3) of section 856(c) (relating to limitations) are each amended by striking out “and” at the end of subparagraph (D), by adding “and” at the end of subparagraph (E), and by adding at the end thereof the following new subparagraph: “(F) income and gain derived from foreclosure property 26 USC 857. (as defined in subsection (e));”.

6. 1975

   Pub. L. 93–625 § 6(a) · 88 Stat. 2108

   Added · 26 U.S.C. § 856(e)

   Pub. L. 93–625, § 6(a), added subsec. (e)

   Source evidence

   Code amendment note
   Subsec. (e). Pub. L. 93–625, § 6(a), added subsec. (e).

   Enacted provision · exact public law section
   26 USC 856.(a) Foreclosure Property.— Section 856 (defining real estate investment trust) is amended by adding at the end thereof the following new subsection: “(e) Special Rules for Foreclosure Property.— “(1) Foreclosure property defined.— For purposes of this part, the term ‘foreclosure property’ means any real property (including interests in real property), and any personal property incident to such real property, acquired by the real estate investment trust as the result of such trust having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was default (or default was imminent) on a lease of such property or on an indebtedness which such property secured. “(2) Grace period.— Except as provided in paragraph (3), property shall cease to be foreclosure property with respect to the real estate investment trust on the date which is 2 years after the date such trust acquired such property. “(3) Extensions.— If the real estate investment trust establishes to the satisfaction of the Secretary or his delegate that an extension of the grace period is necessary for the orderly liquidation of the trust’s interest in such property, the Secretary or his delegate may extend the grace period for such property. Any such extension shall be for a period of not more than 1 year, and not more than 2 extensions shall be granted with respect to any property. “(4) Termination of grace period in certain cases.— Any foreclosure property shall cease to be such on the first day (occurr-ing on or after the day on which the real estate investment trust acquired the property) on which— “(A) a lease is entered into with respect to such property which, by its terms, will give rise to income which is not described in subsection (c)(3) (other than subparagraph (F) of such subsection), or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day which is not described in such subsection, “(B) any construction takes place on such property (other than completion of a building, or completion of any other improvement, where more than 10 percent of the construction of such building or other improvement was completed before default became imminent), or “(C) if such day is more than 90 days after the day on which such property was acquired by the real estate investment trust and the property is used in a trade or business which is conducted by the trust (other than through an independent contractor (within the meaning of section (d) (3)) from whom the trust itself does not derive or receive any income). “(5) Taxpayer must make election.— Property shall be treated as foreclosure property for purposes of this part only if the real estate investment trust so elects (in the manner provided in regulations prescribed by the Secretary or his delegate) on or before the due date (including any extensions of time) for filing its return of tax under this chapter for the taxable year in which such trust acquires such property. Any such election shall be irrevocable.”

7. 1976

   Pub. L. 94–455 title XIV § 1402(b)(1)(O) · 90 Stat. 1520

   1. Substituted · 26 U.S.C. § 856(a)

      Pub. L. 94–455, §§ 1603(a), 1604(f)(1), (2), in introductory provisions substituted “this title” for “this subtitle” in par. (1) inserted “or directors” after “trustees”, and in par. (4) substituted reference to which is neither (A) a financial institution to which section 585, 586, or 593 applies, nor (B) an insurance company to which subchapter L applies for reference to which does not hold any property primarily for sale to customers in the ordinary course of its trade or business

   2. Substituted · 26 U.S.C. § 856(a)

      Pub. L. 94–455, §§ 1603(a), 1604(f)(1), (2), in introductory provisions substituted “a corporation, trust, or association” for “an unincorporated trust or an unincorporated association” in par. (1) inserted “or directors” after “trustees”, and in par. (4) substituted reference to which is neither (A) a financial institution to which section 585, 586, or 593 applies, nor (B) an insurance company to which subchapter L applies for reference to which does not hold any property primarily for sale to customers in the ordinary course of its trade or business

   Source evidence

   Code amendment note
   Subsec. (a). Pub. L. 94–455, §§ 1603(a), 1604(f)(1), (2), in introductory provisions substituted “this title” for “this subtitle” and “a corporation, trust, or association” for “an unincorporated trust or an unincorporated association”, in par. (1) inserted “or directors” after “trustees”, and in par. (4) substituted reference to which is neither (A) a financial institution to which section 585, 586, or 593 applies, nor (B) an insurance company to which subchapter L applies for reference to which does not hold any property primarily for sale to customers in the ordinary course of its trade or business.

   Enacted provision · exact public law section
   (O) Subparagraph (A) of section 856(c)(4) (relating to definition of real estate investment trust).

8. 1976

   Pub. L. 94–455 § 1604(f)(3)(A) · 90 Stat. 1520

   Substituted · 26 U.S.C. § 856(c)

   Pub. L. 94–455, § 1604(f)(3)(A), in introductory provision substituted “A corporation, trust, or association” for “A trust or association”

   Source evidence

   Code amendment note
   Subsec. (c). Pub. L. 94–455, § 1604(f)(3)(A), in introductory provision substituted “A corporation, trust, or association” for “A trust or association”.

   Enacted provision · exact public law section
   (A) So much of section 856(c) (relating to limitations) as precedes paragraph (1) thereof is amended by striking out “A trust or association” and inserting in lieu thereof “A corporation, trust, or association”.

9. 1976

   Pub. L. 94–455 title XIV § 1402(b)(1)(O) · 90 Stat. 1520

   Struck and inserted · 26 U.S.C. § 856(c)(1)

   Pub. L. 94–455, §§ 1604(k)(2)(A), 1901(a)(111)(A), struck out reference to which began after Dec. 31, 1960 and inserted reference to such election has not been terminated or revoked under subsec. (g)

   Source evidence

   Code amendment note
   Subsec. (c)(1). Pub. L. 94–455, §§ 1604(k)(2)(A), 1901(a)(111)(A), struck out reference to which began after Dec. 31, 1960 and inserted reference to such election has not been terminated or revoked under subsec. (g).

   Enacted provision · exact public law section
   (O) Subparagraph (A) of section 856(c)(4) (relating to definition of real estate investment trust).

10. 1976

    Pub. L. 94–455 title XIV § 1402(b)(1)(O) · 90 Stat. 1520

    1. Substituted · 26 U.S.C. § 856(c)(2)

       Pub. L. 94–455, §§ 1603(c)(2), 1604(a), (c)(1), in introductory provision substituted “95 percent (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions)” for “90 percent of its gross income”, in subpar. (D) inserted reference to which is not property not described in section 1221(1)

    2. Added · 26 U.S.C. § 856(c)(2)

       Pub. L. 94–455, §§ 1603(c)(2), 1604(a), (c)(1), in introductory provision added subpar. (G)

    Source evidence

    Code amendment note
    Subsec. (c)(2). Pub. L. 94–455, §§ 1603(c)(2), 1604(a), (c)(1), in introductory provision substituted “95 percent (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions)” for “90 percent of its gross income”, in subpar. (D) inserted reference to which is not property not described in section 1221(1), and added subpar. (G).

    Enacted provision · exact public law section
    (O) Subparagraph (A) of section 856(c)(4) (relating to definition of real estate investment trust).

11. 1976

    Pub. L. 94–455 title XIV § 1402(b)(1)(O) · 90 Stat. 1520

    1. Inserted · 26 U.S.C. § 856(c)(3)

       Pub. L. 94–455, §§ 1603(c)(1), (3), 1604(c)(1), in introductory provision inserted “(excluding gross income from prohibited transactions) 75 percent of its gross income”, in subpar. (C) inserted reference to which is not property described in section 1221(1)

    2. Added · 26 U.S.C. § 856(c)(3)

       Pub. L. 94–455, §§ 1603(c)(1), (3), 1604(c)(1), in introductory provision added subpar. (G)

    Source evidence

    Code amendment note
    Subsec. (c)(3). Pub. L. 94–455, §§ 1603(c)(1), (3), 1604(c)(1), in introductory provision inserted “(excluding gross income from prohibited transactions) 75 percent of its gross income”, in subpar. (C) inserted reference to which is not property described in section 1221(1), and added subpar. (G).

    Enacted provision · exact public law section
    (O) Subparagraph (A) of section 856(c)(4) (relating to definition of real estate investment trust).

12. 1976

    Pub. L. 94–455 § 1402(b)(2) · 90 Stat. 1520

    Changed · 26 U.S.C. § 856(c)(4)

    Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”

    Source evidence

    Code amendment note
    Subsec. (c)(4). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”.

    Enacted provision · exact public law section
    (2) Taxable years beginning after 1977.— Effective with respect to taxable years beginning after December 31, 1977, each provision referred to in paragraph (1) is amended by striking out Ante, p. 1731. “9 months” each place it appears and inserting in lieu thereof “1 year”.

13. 1976

    Pub. L. 94–455 title XIV § 1402(b)(1)(O) · 90 Stat. 1520

    1. Added · 26 U.S.C. § 856(c)(4)

       Pub. L. 94–455, §§ 1402(b)(1)(O), 1604(d), in subpar. (A) provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977, added subpar. (B)

    2. Redesignated · 26 U.S.C. § 856(c)(4)

       Pub. L. 94–455, §§ 1402(b)(1)(O), 1604(d), in subpar. (A) provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977, redesignated former subpar. (B) as (C), and in subpar. (C) as so redesignated

    3. Substituted · 26 U.S.C. § 856(c)(4)

       Pub. L. 94–455, §§ 1402(b)(1)(O), 1604(d), in subpar. (A) provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977, substituted “(including interest in real property and interest in mortgages on real property” for “(including interest in real property)”

    4. Inserted · 26 U.S.C. § 856(c)(4)

       Pub. L. 94–455, §§ 1402(b)(1)(O), 1604(d), in subpar. (A) provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977, inserted reference to property which is foreclosure property within the definition of section 856(e)

    Target inherited from the preceding amendment note.

    Source evidence

    Code amendment note
    Pub. L. 94–455, §§ 1402(b)(1)(O), 1604(d), in subpar. (A) provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977, added subpar. (B), and redesignated former subpar. (B) as (C), and in subpar. (C) as so redesignated, substituted “(including interest in real property and interest in mortgages on real property” for “(including interest in real property)” and inserted reference to property which is foreclosure property within the definition of section 856(e).

    Enacted provision · exact public law section
    (O) Subparagraph (A) of section 856(c)(4) (relating to definition of real estate investment trust).

14. 1976

    Pub. L. 94–455 § 1604(e) · 90 Stat. 1520

    Inserted · 26 U.S.C. § 856(c)(6)(C)

    Pub. L. 94–455, § 1604(e), inserted reference to options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon

    Source evidence

    Code amendment note
    Subsec. (c)(6)(C). Pub. L. 94–455, § 1604(e), inserted reference to options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon.

    Enacted provision · exact public law section
    (e) Options To Purchase Real Property Treated as Interests in Real Property.— Section 856(c)(6)(C) (relating to limitations) is 26 USC 856. amended to read as follows: “(C) The term ‘interests in real property’ includes fee ownership “Interests in real property.” and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests.”

15. 1976

    Pub. L. 94–455 § 1901(a)(111)(B) · 90 Stat. 1520

    Inserted · 26 U.S.C. § 856(c)(6)(D)

    Pub. L. 94–455, § 1901(a)(111)(B), inserted “(15 U.S.C. 80a–1 and following)” after “, as amended”

    Source evidence

    Code amendment note
    Subsec. (c)(6)(D). Pub. L. 94–455, § 1901(a)(111)(B), inserted “(15 U.S.C. 80a–1 and following)” after “, as amended”.

    Enacted provision · exact public law section
    (B) Section 856(c)(6)(D) (relating to definition of other terms) is amended by inserting after “Investment Company Act of 1940, as amended” the following: “(15 U.S.C. 80a–1 and following)”.

16. 1976

    Pub. L. 94–455 § 1602(a) · 90 Stat. 1520

    Added · 26 U.S.C. § 856(c)(7)

    Pub. L. 94–455, § 1602(a), added par. (7)

    Source evidence

    Code amendment note
    Subsec. (c)(7). Pub. L. 94–455, § 1602(a), added par. (7).

    Enacted provision · exact public law section
    (a) Disqualification Not Applied.— Section 856(c) (relating to limitations) is amended by adding at the end thereof the following new paragraph: “(7) A corporation, trust, or association which fails to meet the requirements of paragraph (2) or (3), or of both such paragraphs, for any taxable year shall nevertheless be considered to nave satisfied the requirements of such paragraphs for such taxable year if— “(A) the nature and amount of each item of its gross income described in such paragraphs is set forth in a schedule attached to its income tax return for such taxable year: “(B) the inclusion of any incorrect information in the schedule referred to in subparagraph (A) is not due to fraud with intent to evade tax; and “(C) the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, is due to reasonable cause and not due to willful neglect.”.

17. 1976

    Pub. L. 94–455 § 1604(b) · 90 Stat. 1520

    Inserted · 26 U.S.C. § 856(d)

    Pub. L. 94–455, § 1604(b), among other changes, inserted provisions including in definition of rents from real property charges for services customarily furnished or rendered in connection with rental of real property and rent attributable to personal property which is leased under, or in connection with, a lease of real property, provisions relating to the computation of the amount of rent attributable to personal property, and provisions relating to the special rule for certain contingent rents

    Source evidence

    Code amendment note
    Subsec. (d). Pub. L. 94–455, § 1604(b), among other changes, inserted provisions including in definition of rents from real property charges for services customarily furnished or rendered in connection with rental of real property and rent attributable to personal property which is leased under, or in connection with, a lease of real property, provisions relating to the computation of the amount of rent attributable to personal property, and provisions relating to the special rule for certain contingent rents.

    Enacted provision · exact public law section
    (b) Apportionment of Rental Income and Charges for Customary Services; Change in Definition of Independent Contractor.— Subsection (d) of section 856 (defining rents from real property) is amended to read as follows: “(d) Rents From Real Property Defined.— “(1) Amounts included.— For purposes of paragraphs (2) and (3) of subsection (c), the term ‘rents from real property’ includes (subject to paragraph (2))— “(A) rents from interests in real property, “(B) charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and “(C) rent attributable to personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal property for the taxable year does not exceed 15 percent of the total rent for the taxable year attributable to both the real and personal property leased under, or in connection with, such lease. For purposes of subparagraph (C), with respect to each lease of real property, rent attributable to personal property for the taxable year is that amount which bears the same ratio to total rent for the taxable year as the average of the adjusted bases of the persona] property at the beginning and at the end of the taxable year boa is to the average of the aggregate adjusted bases of both the real property and the personal property at the beginning and at the end of such taxable year. “(2) Amounts excluded.— For purposes of paragraphs (2) and (3) of subsection (c), the term ‘rents from real property’ does not include— “(A) except as provided in paragraph (4), any amount received or accrued, directly or indirectly, with respect to any real or personal property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term ‘rents from real property’ solely by reason of being based on a fixed percentage or percentages of receipts or sales); “(B) any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly— “(i) in the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power or all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or “(ii) in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and “(C) any amount received or accrued, directly or indirectly, with respect to any real or personal property if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. “(3) Independent contractor defined.— For purposes of this subsection and subsection (e), the term ‘independent contractor’ means any person— “(A) who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust; and “(B) if such person is a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if such person is not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust. “(4) Special rule for certain contingent rents.— Where a real estate investment trust receives or accrues, with respect to real or personal property, any amount which would be excluded from the term ‘rents from real property’ solely because the tenant of the real estate investment trust receives or accrues, directly or indirectly, from subtenants any amount the determination of which depends in whole or in part on the income or profits derived by any person from such property, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from that tenant will be excluded from the term ‘rents from real property’. “(5) Constructive ownership of stock.— For purposes of this subsection, the rules prescribed by section 318 (a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that ‘10 percent’ shall be substituted for ‘50 percent’ in subparagraph (C) of section 318 (a)(2) and 318(a)(3).”

18. 1976

    Pub. L. 94–455 § 1603(c)(4) · 90 Stat. 1520

    Inserted · 26 U.S.C. § 856(e)(1)

    Pub. L. 94–455, § 1603(c)(4), inserted provision relating to the exclusion, from definition of foreclosure property, of property acquired by the real estate investment trust or other disposition of property of the trust described in section 1221(1) of this title

    Source evidence

    Code amendment note
    Subsec. (e)(1). Pub. L. 94–455, § 1603(c)(4), inserted provision relating to the exclusion, from definition of foreclosure property, of property acquired by the real estate investment trust or other disposition of property of the trust described in section 1221(1) of this title.

    Enacted provision · exact public law section
    (4) Section 856(e)(1)(defining foreclosure property) is amended by adding at the end thereof the following sentence: “Such term does not include property acquired by the real estate investment trust as a result of indebtedness arising from the sale or other disposition of property of the trust described in section 1221(1) which was not originally acquired as foreclosure property,”

19. 1976

    Pub. L. 94–455 § 1906(b)(13)(A) · 90 Stat. 1520

    Struck · 26 U.S.C. § 856(e)(3); 26 U.S.C. § 856(e)(5)

    Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary” each time appearing

    Source evidence

    Code amendment note
    Subsec. (e)(3), (5). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary” each time appearing.

    Enacted provision · exact public law section
    (A) The Internal Revenue Code of 1954, as amended by this Act, is amended by striking out “Secretary or his delegate” each place it appears and inserting in lieu thereof “Secretary”.

20. 1976

    Pub. L. 94–455 § 1604(g) · 90 Stat. 1520

    Added · 26 U.S.C. § 856(f)

    Pub. L. 94–455, § 1604(g), added subsec. (f)

    Source evidence

    Code amendment note
    Subsec. (f). Pub. L. 94–455, § 1604(g), added subsec. (f).

    Enacted provision · exact public law section
    (g) Interest.— Section 856 (relating to definition of real estate investment trust) is amended by adding after subsection (e) the following new subsection: “(f) Interest.— For purposes of paragraphs (2)(B) and (3)(B) of “Interest.” subsection (c), the term ‘interest’ does not include any amount received or accrued, directly or indirectly, if the determination of such amount depends in whole or in part on the income or profits of any person except that: “(1) any amount so received or accrued shall not be excluded from the term ‘interest’ solely by reason of being based on a fixed percentage or percentages of receipts or sales, and “(2) where a real estate investment trust receives or accrues any amount which would be excluded from the term ‘interest’ solely because the debtor of the real est ate investment trust receives or accrues any amount the determination, of which depends in whole or in part on the income or profits of any person, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from such debtor will be excluded from the term ‘interest’. The provisions of this subsection shall apply only with respect to amounts received or accrued pursuant to loans made after May 27, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28, 1976, if such loan is made pursuant to a binding commitment entered into before May 28, 1976.”

21. 1976

    Pub. L. 94–455 § 1604(k)(1) · 90 Stat. 1520

    Added · 26 U.S.C. § 856(g)

    Pub. L. 94–455, § 1604(k)(1), added subsec. (g)

    Source evidence

    Code amendment note
    Subsec. (g). Pub. L. 94–455, § 1604(k)(1), added subsec. (g).

    Enacted provision · exact public law section
    (1) In general.— Section 856 (relating to definition of real 26 USC 856. estate investment trust) is amended by adding after subsection (f)(as added by section 1604(g) of this Act) the following new subsection: “(g) Termination of Election.— “(1) Failure to qualify.— An election under subsection (c)(1) made by a corporation, trust, or association shall terminate if the corporation, trust, or association is not a real estate investment trust to which the provisions of this part apply for the taxable year with respect to which the election is made, or for any succeeding taxable year. Such termination shall be effective for the taxable year for which the corporation, trust, or association is not a real estate investment trust to which the provisions of this part apply, and for all succeeding taxable years. “(2) Revocation.— An election under subsection (c)(1) made by a corporation, trust, or association may be revoked by it for any taxable year after the first taxable year for which the election is effective. A revocation under this paragraph shall be effective for the taxable year in which made and for all succeeding taxable years. Such revocation must be made on or before the 90th day after the first day of the first taxable year for which the revocation is to be effective. Such revocation shall be made in such Regulations. manner as the Secretary shall prescribe by regulations. “(3) Election after termination or revocation.— Except as provided in paragraph (4), if a corporation, trust, or association has made an election under subsection (c)(1) and such election has been terminated or revoked under paragraph (1) or paragraph (2), such corporation, trust, or association (and any successor corporation, trust, or association) shall not be eligible to make an election under subsection (c)(1) for any taxable year prior to the fifth taxable year which begins after the first taxable year for which such termination or revocation is effective. “(4) Exception.— If the election of a corporation, trust, or association has been terminated under paragraph (1), paragraph (8) shall not apply if— “(A) the corporation, trust, or association does not will-fully fail to file within the time prescribed by law an income tax return for the taxable year with respect to which the termination of the election under subsection (c)(1) occurs; “(B) the inclusion of any incorrect information in the return referred to in subparagraph (A) is not due to fraud with intent to evade tax; and “(C) the corporation, trust, or association establishes to the satisfaction of the Secretary that its failure to qualify as a real estate investment trust to which the provisions of this part apply is due to reasonable cause and not due to willful neglect.”

22. 1978

    Pub. L. 95–600 § 363(a)(1) · 92 Stat. 2763

    Added · 26 U.S.C. § 856(c)(2)(H)

    Pub. L. 95–600, § 363(a)(1), added subpar. (H)

    Source evidence

    Code amendment note
    Subsec. (c)(2)(H). Pub. L. 95–600, § 363(a)(1), added subpar. (H).

    Enacted provision · exact public law section
    (1) 26 USC 856. Section 856(c)(2) (relating to limitations) is amended by striking out the word “and” at the end of subparagraph (F), by inserting the word “and” at the end of subparagraph (G), and by adding the following new subparagraph at the end thereof: “(H) gain from the sale or other disposition of a real estate asset which is not a prohibited transaction solely by reason 26 USC 857. 26 USC 856. of section 857(b)(6);”.

23. 1978

    Pub. L. 95–600 § 701(t)(2) · 92 Stat. 2763

    Inserted · 26 U.S.C. § 856(c)(3)(D)

    Pub. L. 95–600, § 701(t)(2), inserted “(other than gain from prohibited transactions)” after “on, and gain”

    Source evidence

    Code amendment note
    Subsec. (c)(3)(D). Pub. L. 95–600, § 701(t)(2), inserted “(other than gain from prohibited transactions)” after “on, and gain”.

    Enacted provision · exact public law section
    (2) 26 USC 856. Amendment of section 856(c)(3)(d).— Subparagraph (D) of section 856(c)(3) is amended by inserting “(other than gain from prohibited transactions)” after “and gain”.

24. 1978

    Pub. L. 95–600 § 363(a)(2) · 92 Stat. 2763

    Added · 26 U.S.C. § 856(c)(3)(H)

    Pub. L. 95–600, § 363(a)(2), added subpar. (H)

    Source evidence

    Code amendment note
    Subsec. (c)(3)(H). Pub. L. 95–600, § 363(a)(2), added subpar. (H).

    Enacted provision · exact public law section
    (2) Section 856(c)(3) (relating to limitations) is amended by striking out the word “and” at the end of subparagraph (F), by inserting the word “and” at the end of subparagraph (G), and by adding the following new subparagraph at the end thereof: “(H) gain from the sale or other disposition of a real estate asset which is not a prohibited transaction solely by reason of section 857(b)(6);”.

25. 1978

    Pub. L. 95–600 § 363(a)(3) · 92 Stat. 2763

    Substituted · 26 U.S.C. § 856(c)(4)(B)

    Pub. L. 95–600, § 363(a)(3), substituted “property in a transaction which is a prohibited transaction” for “section 1221(1) property (other than foreclosure property)”

    Source evidence

    Code amendment note
    Subsec. (c)(4)(B). Pub. L. 95–600, § 363(a)(3), substituted “property in a transaction which is a prohibited transaction” for “section 1221(1) property (other than foreclosure property)”.

    Enacted provision · exact public law section
    (3) 26 USC 856. Subparagraph (B) of section 856(c)(4) (relating to limitations) is amended to read as follows: “(B) property in a transaction which is a prohibited transaction; ana”.

26. 1978

    Pub. L. 95–600 § 363(c) · 92 Stat. 2763

    1. Substituted · 26 U.S.C. § 856(e)(3)

       Pub. L. 95–600, § 363(c), substituted “the Secretary may grant one or more extensions of the grace period for such property” for “the Secretary may extend the grace period for such property”

    2. Substituted · 26 U.S.C. § 856(e)(3)

       Pub. L. 95–600, § 363(c), substituted “shall not extend the grace period beyond the date which is 6 years after the date such trust acquired such property” for “shall be for a period of not more than one year, and not more than two extensions shall be granted with respect to any property”

    Source evidence

    Code amendment note
    Subsec. (e)(3). Pub. L. 95–600, § 363(c), substituted “the Secretary may grant one or more extensions of the grace period for such property” for “the Secretary may extend the grace period for such property” and “shall not extend the grace period beyond the date which is 6 years after the date such trust acquired such property” for “shall be for a period of not more than one year, and not more than two extensions shall be granted with respect to any property”.

    Enacted provision · exact public law section
    (c) Extensions.— Paragraph (3) of section 856(e) (relating to extensions 26 USC 856. ) is amended to read as follows: “(3) Extensions.— If the real estate investment trust establishes to the satisfaction of the Secretary that an extension of the grace period is necessary for the orderly liquidation of the trust’s interests in such property, the Secretary may grant one or more extensions of the grace period for such property. Any such extension shall not extend the grace period beyond the date which is 6 years after the date such trust acquired such property.”

27. 1984

    Tax Reform Act of 1984

    Pub. L. 98–369 div. A title X § 1001(b)(12) · 98 Stat. 494

    Substituted · 26 U.S.C. § 856(c)(4)(A)

    Pub. L. 98–369 substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below

    Source evidence

    Code amendment note
    Subsec. (c)(4)(A). Pub. L. 98–369 substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.

    Enacted provision · exact public law section
    (12) Subparagraph (A) of section 856(c)(4) (relating to definition 26 USC 856. of real estate investment trust).

28. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 901(d)(4)(E) · 100 Stat. 2085

    Substituted · 26 U.S.C. § 856(a)(4)

    Pub. L. 99–514, § 901(d)(4)(E), substituted “referred to in section 582(c)(5)” for “to which section 585, 586, or 593 applies”

    Source evidence

    Code amendment note
    Subsec. (a)(4). Pub. L. 99–514, § 901(d)(4)(E), substituted “referred to in section 582(c)(5)” for “to which section 585, 586, or 593 applies”.

    Enacted provision · exact public law section
    (E) Paragraph (4) of section 856(a) is amended by striking out “to which section 585, 586, or 593 applies” and inserting in lieu thereof “referred to in section 582(c)(5)”.

29. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 661(a)(1) · 100 Stat. 2085

    Amended · 26 U.S.C. § 856(a)(6)

    Pub. L. 99–514, § 661(a)(1), amended par. (6) generally. Prior to amendment, par. (6) read as follows: “which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b)(2)) constituted personal holding company income (as defined in section 543); and”

    Source evidence

    Code amendment note
    Subsec. (a)(6). Pub. L. 99–514, § 661(a)(1), amended par. (6) generally. Prior to amendment, par. (6) read as follows: “which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b)(2)) constituted personal holding company income (as defined in section 543); and”.

    Enacted provision · exact public law section
    (1) Paragraph (6) of section 856(a) is amended to read as follows: “(6) which is not closely held (as determined under subsection (h)); and”.

30. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 662(b)(1) · 100 Stat. 2085

    Added · 26 U.S.C. § 856(c)(3)(I)

    Pub. L. 99–514, § 662(b)(1), added subpar. (I)

    Source evidence

    Code amendment note
    Subsec. (c)(3)(I). Pub. L. 99–514, § 662(b)(1), added subpar. (I).

    Enacted provision · exact public law section
    (1) Paragraph (3) of section 856(c) is amended by striking out “and” at the end of subparagraph (G), by adding “and” at the end of subparagraph (H), and by inserting after subparagraph (H) the following new subparagraph: “(I) qualified temporary investment income;”.

31. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 662(b)(2) · 100 Stat. 2085

    Inserted · 26 U.S.C. § 856(c)(6)(B)

    Pub. L. 99–514, § 662(b)(2), inserted “Such term also includes any property (not otherwise a real estate asset) attributable to the temporary investment of new capital, but only if such property is stock or a debt instrument, and only for the 1-year period beginning on the date the real estate trust receives such capital.”

    Source evidence

    Code amendment note
    Subsec. (c)(6)(B). Pub. L. 99–514, § 662(b)(2), inserted “Such term also includes any property (not otherwise a real estate asset) attributable to the temporary investment of new capital, but only if such property is stock or a debt instrument, and only for the 1-year period beginning on the date the real estate trust receives such capital.”

    Enacted provision · exact public law section
    (2) Subparagraph (B) of section 856(c)(6) is amended by adding at the end thereof the following new sentence: “Such term also includes any property (not otherwise a real estate asset) attributable to the temporary investment of new capital, but only if such property is stock or a debt instrument, and only for the 1-year period beginning on the date the real estate trust receives such capital.”

32. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 671(b)(1) · 100 Stat. 2085

    Redesignated · 26 U.S.C. § 856(c)(6)(D)

    Pub. L. 99–514, § 671(b)(1), added subpar. (D) relating to REMIC interest. Former subpar. (D) redesignated (E)

    Source evidence

    Code amendment note
    Subsec. (c)(6)(D). Pub. L. 99–514, § 671(b)(1), added subpar. (D) relating to REMIC interest. Former subpar. (D) redesignated (E).

    Enacted provision · exact public law section
    (1) Treatment for reit purposes.— Paragraph (6) of section 856(c) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph: “(D) A regular or residual interest in a REMIC shall be treated as an interest in real property, and any amount includible in gross income with respect to such an interest shall be treated as interest; except that, if less than 95 percent of the assets of such REMIC are interests in real property (determined as if the taxpayer held such assets), such interest shall be so treated only in the proportion which the assets of the REMIC consist of such interests.”

33. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 662(b)(3) · 100 Stat. 2085

    Redesignated · 26 U.S.C. § 856(c)(6)(D)

    Pub. L. 99–514, § 662(b)(3), added subpar. (D) relating to qualified temporary investment income. Former subpar. (D) redesignated (E)

    Target inherited from the preceding amendment note.

    Source evidence

    Code amendment note
    Pub. L. 99–514, § 662(b)(3), added subpar. (D) relating to qualified temporary investment income. Former subpar. (D) redesignated (E).

    Enacted provision · exact public law section
    (3) Paragraph (6) of section 856(c) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph: “(D) Qualified temporary investment income.— “(i) In general.— The term ‘qualified temporary investment income’ means any income which— “(I) is attributable to stock or a debt instrument, “(II) is attributable to the temporary investment of new capital, and “(III) is received or accrued during the 1-year period beginning on the date on which the real estate investment trust receives such capital. “(ii) New capital.— The term ’new capital’ means any amount received by the real estate investment trust— “(I) in exchange for stock in such trust (other than amounts received pursuant to a dividend reinvestment plan), or “(II) in a public offering of debt obligations of such trust which have maturities of at least 5 years.

34. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 title VI · 100 Stat. 2085

    Redesignated · 26 U.S.C. § 856(c)(6)(E)

    Pub. L. 99–514, §§ 662(b)(3), 671(b)(1), made identical redesignations of former subpar. (D) as (E)

    Source evidence

    Code amendment note
    Subsec. (c)(6)(E). Pub. L. 99–514, §§ 662(b)(3), 671(b)(1), made identical redesignations of former subpar. (D) as (E).

    Enacted provision · exact public law
    TITLE VI— CORPORATE PROVISIONS Subtitle A— Corporate Rate Reductions SEC. 601. CORPORATE RATE REDUCTIONS. (a) General Rule.— Subsection (b) of section 11 is amended to read as follows: “(b) Amount of Tax.— The amount of the tax imposed by subsection (a) shall be the sum of— “(1) 15 percent of so much of the taxable income as does not exceed $50,000, “(2) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000, and “(3) 34 percent of so much of the taxable income as exceeds $75,000. In the case of a corporation which has taxable income in excess of $100,000 for any taxable year, the amount of tax determined under the preceding sentence for such taxable year shall be increased by the lesser of (A) 5 percent of such excess, or (B) $11,750.” (b) Effective Date.— (1) In general.— The amendment made by subsection (a) shall apply to taxable years beginning on or after July 1, 1987. (2) Cross reference.— For treatment of taxable years which include July 1, 1987. see section 15 of the Internal Revenue Code of 1986. Subtitle B— Treatment of Stock and Stock Dividends SEC. 611. REDUCTION IN DIVIDENDS RECEIVED DEDUCTION. (a) General Rule.— The following provisions are each amended by striking out “85 percent” and inserting in lieu thereof “80 percent”: (1) Section 243(a)(1) (relating to dividends received by corporations). (2) Sections 244 (a)(3) and (b)(2) (relating to dividends received on certain preferred stock). (3) Section 246(b)(1) (relating to limitation on aggregate amount of deductions). (4) Section 246A(a)(1) (relating to dividends received deduction reduced where portfolio stock is debt financed). (5) Subparagraph (B) of section 805(a)(4) (relating to dividends received by insurance company). (b) Effective Dates.— (1) In general.— The amendments made by subsection (a) shall apply to dividends received or accrued after December 31, 1986, in taxable years ending after such date. (2) Amendment relating to limitation on deductions.— The amendment made by subsection (a) to section 246(b) of the Internal Revenue Code of 1986 shall apply to taxable years beginning after December 31, 1986. SEC. 612. REPEAL OF PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDIVIDUALS. (a) General Rule.— Section 116 (relating to partial exclusion of dividends received by individuals) is hereby repealed. (b) Technical Amendments.— (1) Subsection (g) of section 301 is amended by striking out paragraph (4). (2) (A) Subsection (c) of section 584 is amended to read as follows: “(c) Income of Participants in Fund.— Each participant in the common trust fund in computing its taxable income shall include, whether or not distributed and whether or not distributable— “(1) as part of its gains and losses from sales or exchanges of capital assets held for not more than 6 months, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for not more than 6 months, “(2) as part of its gains and losses from sales or exchanges of capital assets held for more than 6 months, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for more than 6 months, and “(3) its proportionate share of the ordinary taxable income or the ordinary net loss of the common trust fund, computed as provided in subsection (d).” (B) If the amendments made by section 1001 of the Tax Reform Act of 1984 cease to apply, effective with respect to property to which such amendments do not apply, subsection (c) of section 584 is amended by striking out “6 months” each place it appears and inserting in lieu thereof “1 year”. (3) Section 642 is amended by striking out subsection (j). (4) Paragraph (7) of section 643(a) is hereby repealed. (5) Paragraph (5) of section 702(a) is amended to read as follows: “(5) dividends with respect to which there is a deduction under part VIII of subchapter B,”. (6) Section 854 is amended— (A) by striking out “section 116 (relating to an exclusion for dividends received by individuals), and” in subsection (a), (B) in subsection (b)— (i) by striking out subparagraph (B) of paragraph (1) and redesignating subparagraph (C) as subparagraph (B), (ii) by striking out “or (B)” in subparagraph (B) (as so redesignated), (iii) by striking out “the exclusion under section 116 and” in paragraph (2), and (iv) by amending subparagraph (B) of paragraph (3) to read as follows: “(B) (i) The term ‘aggregate dividends received’ includes only dividends received from domestic corporations. “(ii) For purposes of clause (i), the term ‘dividend’ shall not include any distribution from— “(I) a corporation which, for the taxable year of the corporation in which the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from tax under section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmers’ cooperative associations), or “(II) a real estate investment trust which, for the taxable year of the trust in which the dividend is paid, qualifies under part II of subchapter M (section 856 and following). “(iii) In determining the amount of any dividend for purposes of this subparagraph, a dividend received from a regulated investment company shall be subject to the limitations prescribed in this section.” (7) Subsection (c) of section 857 is amended by striking out “section 116 (relating to an exclusion for dividends received by individuals), and”. (8) The table of sections for part III of subchapter B of chapter 1 is amended by striking out the item relating to section 116. (c) Effective Date.— The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 613. NONDEDUCTIBILITY OF STOCK REDEMPTION EXPENSES. (a) In General.— Section 162 (relating to trade or business expenses) is amended by redesignating subsection (1) as subsection (m) and inserting after subsection (k) the following new subsection: “(l) Stock Redemption Expenses.— “(1) In general.— Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the redemption of its stock. “(2) Exceptions.— Paragraph (1) shall not apply to— “(A) Certain specific deductions.— Any— “(i) deduction allowable under section 163 (relating to interest), or “(ii) deduction for dividends paid (within the meaning of section 561). “(B) of certain regulated investment companies.— Any amount paid or incurred in connection with the redemption of any stock in a regulated investment company which issues only stock which is redeemable upon the demand of the shareholder.” (b) Effective Date.— The amendments made by subsection (a) shall apply to any amount paid or incurred after February 28, 1986, in taxable years ending after such date. SEC. 614. REDUCTION IN STOCK BASIS FOR NONTAXED PORTION OF EXTRAORDINARY DIVIDENDS. (a) 2-Year Holding Requirement.— (1) In general.— Section 1059(a) (relating to corporate share-holder’s basis in stock reduced by nontaxed portion of extraordinary dividends) is amended to read as follows: “(a) General Rule.— If any corporation receives any extraordinary dividend with respect to any share of stock and such corporation has not held such stock for more than 2 years before the dividend announcement date— “(1) Reduction in basis.— The basis of such corporation in such stock shall be reduced (but not below zero) by the nontaxed portion of such dividends. “(2) Recognition upon sale or disposition in certain cases.— In addition to any gain recognized under this chapter, there shall be treated as gain from the sale or exchange of any stock for the taxable year in which the sale or disposition of such stock occurs tm amount equal to the aggregate nontaxed portions of any extraordinary dividends with respect to such stock which did not reduce the basis of such stock by reason of the limitation on reducing basis below zero.” (2) Dividend announcement date.— Section 1059(d) (relating to special rules) is amended by adding at the end thereof the following new paragraph: “(6) Dividend announcement date.— The term ‘dividend announcement date’ means, with respect to any dividend, the date on which the corporation declares, announces, or agrees to the payment of such dividend, whichever is the earliest.” (3) Conforming Amendment.— Section 1059(d)(3) (relating to determination of holding period) is amended by striking out “1 year” and inserting in lieu t hereof “2 years”. (b) Extraordinary Dividend May Be Determined by Reference to Fair Market Value.— Section 1059(c) (defining extraordinary dividend) is amended by adding at the end thereof the following new paragraph: “(4) Fair market value determination.— If the taxpayer establishes to the satisfaction of the Secretary the fair market value of any share of stock as of the day before the ex-dividend date, the taxpayer may elect to apply paragraphs (1) and (3) by substituting such value for the taxpayer’s adjusted basis.” (c) Time for Reduction in Basis.— (1) In general.— Paragraph (1) of section 1059(d) (relating to time for reduction) is amended to read as follows: “(1) Time for reduction.— “(A) In general.— Except as provided in subparagraph (B), any reduction in basis under subsection (a)(1) shall occur immediately before any sale or disposition of the stock. “(B) Special rule for computing extraordinary dividend.— In determining a taxpayer’s adjusted basis for purposes of subsection (c)(D, any reduction in basis under subsection (a)(1) by reason of a prior distribution which was an extraordinary dividend shall be treated as occurring at the beginning of the ex-dividend date for such distribution.” (2) Conforming amendment.— Section 1059(c)(1) is amended by striking out “(determined without regard to this section)”. (d) No Extraordinary Dividend Where Stock Held During Entire Existence of Corporation.— Section 1059(d) (relating to special rules) is amended by adding at the end thereof the following new paragraph: “(7) Exception where stock held during entire existence of corporation.— Subsection (a) shall not apply to any extraordinary dividend with respect to any share of stock of a corporation if— “(A) such stock was held by the taxpayer during the entire period such corporation (and any precedessor corporation) was in existence, “(B) except as provided in regulations, the only earnings and profits of such corporation were earnings and profits accumulated by such corporation (or any predecessor corporation) during such period, and “(C) the application of this paragraph to such dividend is not inconsistent with the purposes of this section.” (e) Certain Liquidations and Redemptions Treated As Extraordinary Dividends; Qualifying Dividends Not Treated as Extraordinary Dividends; Special Rule for Preferred Dividends.— Section 1059 (relating to extraordinary dividends) is amended by redesignating subsection (e) as subsection (f) and by adding after subsection (d) the following new subsection: “(e) Special Rules for Certain Distributions.— “(1) Treatment of partial liquidations and non-pro rata redemptions.—Except as otherwise provided in regulations, in the case of any redemption of stock which is— “(A) part of a partial liquidation (within the meaning of section 302(e)) of the redeeming corporation, or “(B) not pro rata as to all shareholders, any amount treated as a dividend under section 301 with respect to such redemption shall be treated as an extraordinary dividend for purposes of this section (without regard to the holding period of the stock). “(2) Qualifying dividends.— Except as provided in regulations. the term ‘extraordinary dividend’ shall not include any qualifying dividend (within the meaning of section 243(b)(1)). “(3) Qualified preferred dividends.— “(A) In general.— A qualified preferred dividend shall be treated as an extraordinary dividend— “(i) only if the actual rate of return of the taxpayer on the stock with respect to which such dividend was paid exceeds 15 percent, or “(ii) if clause (i) does not apply, and the taxpayer disposes of such stock before the taxpayer has held such stock for more than 5 years, only to the extent the actual rate of return exceeds the stated rate of return. “(B) Rate of return.— For purposes of subparagraph (A)— “(i) Actual rate of return.— The actual rate of return shall be the rate of return for the period for which the taxpayer held the stock, determined— “(I) by only taking into account dividends during such period, and “(II) by using the lesser of the adjusted basis of the taxpayer in such stock or the liquidation preference of such stock. “(ii) Stated rate of return.— The stated rate of return shall be the annual rate of the qualified preferred dividend payable with respect to any share of stock (expressed as a percentage of the amount described in subparagraph (B)(i)(II)). “(C) Definitions and special rules.— For purposes of this paragraph— “(i) Qualified preferred dividend.— The term ‘qualified preferred dividend’ means any dividend payable with respect to any share of stock which— “(I) provides for fixed preferred dividends pay-able not less frequently than annually, and “(II) is not in arrears as to dividends at the time the taxpayer acquires the stock. “(ii) Holding period.— In determining the holding period for purposes of subparagraph (A)(ii), subsection (d)(3) shall be applied by substituting ‘5 years’ for ’2 years’.” (f) Effective Date.— (1) In general.— Except as provided in this subsection, the amendments made by this section shall apply to dividends declared after July 18, 1986, in taxable years ending after such date. (2) Aggregation.— For purposes of section 1059(c)(3) of the Internal Revenue Code of 1986, dividends declared after July 18, 1986, shall not be aggregated with dividends declared on or before July 18, 1986. (3) Redemptions.— Section 1059(e)(l) of the Internal Revenue Code of 1986 (as added by subsection (e)) shall apply to dividends declared after the date of the enactment of this Act, in taxable years ending after such date. Subtitle C— Limitation on Net Operating Loss Carryforwards and Excess Credit Carryforwards SEC. 621. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS. (a) In General.— Section 382 (relating to special limitations on net operating loss carryovers) is amended to read as follows: “SEC. 382. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS AND CERTAIN BUILT-IN LOSSES FOLLOWING OWNERSHIP CHANGE. “(a) General Rule.— The amount of the taxable income of any new loss corporation for any post-change year which may be offset by prechange losses shall not exceed the section 382 limitation for such year. “(b) Section 382 Limitation.— For purposes of this section— “(1) In general.— Except as otherwise provided in this section, the section 382 limitation for any post-change year is an amount equal to— “(A) the value of the old loss corporation, multiplied by “(B) the long-term tax-exempt rate. “(2) Carryforward of unused limitation.— If the section 382 limitation for any post-change year exceeds the taxable income of the new loss corporation for such year which was offset by prechange losses, the section 382 limitation for thenext post-change year shall be increased by the amount of such excess. “(3) Special rule for post-change year which includes change date.— In the case of any post-change year which includes the change date— “(A) Limitation does not apply to taxable income before change.— Subsection (a) shall not apply to the portion of the taxable income for such year which is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, taxable income shall be allocated ratably to each day in the year. “(B) Limitation for period after change.— For purposes of applying the limitation of subsection (a) to the remainder of the taxable income for such year, the section 382 limitation shall be an amount which bears the same ratio to such limitation (determined without regard to this paragraph) as— “(i) the number of days in such year after the change date, bears to “(ii) the total number of days in such year. “(c) Carryforwards Disallowed if Continuity of Business Requirements Not Met.— “(1) In general.— Except as provided in paragraph (2), if the new loss corporation does not continue the business enterprise of the old loss corporation at all times during the 2-year period beginning on the change date, the section 382 limitation for any post-change year shall be zero. “(2) Exception for certain gains.— The section 382 limitation for any post-change year shall not be less than the sum of— “(A) any increase in such limitation under— “(i) subsection (h)(1)(A) for recognized built-in gains for such year, and “(ii) subsection (h)(1)(C) for gain recognized by reason of an election under section 338, plus “(B) any increase in such limitation under subsection (b)(2) for amounts described in subparagraph (A) which are carried forward to such year. “(d) PreChange Loss and Post-Change Year.— For purposes of this section— “(1) Prechange loss.— The term ‘prechange loss’ means— “(A) any net operating loss carryforward of the old loss corporation to the taxable year ending with the ownership change or in which the change date occurs, and “(B) the net operating loss of the old loss corporation for the taxable year in which the ownership change occurs to the extent such loss is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, the net operating loss shall, for purposes of subparagraph (B), be allocated ratably to each day in the year. “(2) Post-change year.— The term ‘post-change year’ means any taxable year ending after the change date. “(e) Value of Old Loss Corporation.— For purposes of this section— “(1) In general.— Except as otherwise provided in this subsection, the value of the old loss corporation is the value of the stock of such corporation (including any stock described in section 1504(a)(4)) immediately before the ownership change. “(2) Special rule in the case of redemption.— If a redemption occurs in connection with an ownership change, the value under paragraph (1) shall be determined after taking such redemption into account. “(f) Long-Term Tax-Exempt Rate.— For purposes of this section— “(1) In general.— The long-term tax-exempt rate shall be the highest of the adjusted Federal long-term rates in effect for any month in the 3-calendar-month period ending with the calendar month in which the change date occurs. “(2) Adjusted federal long-term rate.— For purposes of paragraph (1), the term ‘adjusted Federal long-term rate’ means the Federal long-term rate determined under section 1274(d), except that— “(A) paragraphs (2) and (3) thereof shall not apply, and “(B) such rate shall be properly adjusted for differences between rates on long-term taxable and tax-exempt obligations. “(g) Ownership Change.— For purposes of this section— “(1) In general.— There is an ownership change if, immediately after any owner shift involving a 5-percent shareholder or any equity structure shift— “(A) the percentage of the stock of the new loss corporation owned by 1 or more 5-percent shareholders has increased by more than 50 percentage points, over “(B) the lowest percentage of stock of the old loss corporation (or any predecessor corporation) owned by such share-holders at any time during the testing period. “(2) Owner shift involving 5-percent shareholder.— There is an owner shift involving a 5-percent shareholder if— “(A) there is any change in the respective ownership of stock of a corporation, and “(B) such change affects the percentage of stock of such corporation owned by any person who is a 5-percent shareholder before or after such change. “(3) Equity structure shift defined.— “(A) In general.— The term ‘equity structure shift’ means any reorganization (within the meaning of section 368). Such term shall not include— “(i) any reorganization described in subparagraph (D) or (G) of section 368(a)(1) unless the requirements of section 354(b)(1) are met, and “(ii) any reorganization described in subparagraph (F) of section 368(a)(1). “(B) Taxable reorganization-type transactions, etc.— To the extent provided in regulations, the term ‘equity structure shift’ includes taxable reorganization-type transactions, public offerings, and similar transactions. “(4) Special rules for application of subsection.— “(A) Treatment of less than 5-percent shareholders.— Except as provided in subparagraphs (B)(i) and (C), in determining whether an ownership change has occurred, all stock owned by shareholders of a corporation who are not 5-percent shareholders of such corporation shall be treated as stock owned by 1 5-percent shareholder of such corporation. “(B) Coordination with equity structure shifts.— For purposes of determining whether an equity structure shift (or subsequent transaction) is an ownership change— “(i) Less than 5-percent shareholders.— Subparagraph (A) shall be applied separately with respect to each group of shareholders (immediately before such equity structure shift) of each corporation which was a party to the reorganization involved in such equity structure shift. “(ii) Acquisitions of stock.— Unless a different proportion is established, acquisitions of stock after such equity structure shift shall be treated as being made proportionately from all shareholders immediately before such acquisition. “(C) Coordination with other owner shifts.— Except as provided in regulations, the rules of subparagraph (B) shall apply in determining whether there has been an owner shift involving a 5-percent shareholder and whether such shift (or subsequent transaction) results in an ownership change. “(h) Special Rules for Built-In Gains and Losses and Section 338 Gains.— For purposes of this section— “(1) In general.— “(A) Net unrealized built-in gain.— “(i) In general.— If the old loss corporation has a net unrealized built-in gain, the section 382 limitation for any recognition period taxable year shall be increased by the recognized built-in gains for such taxable year. “(ii) Limitation.— The increase under clause (i) for any recognition period taxable year shall not exceed— “(I) the net unrealized built-in gain, reduced by “(II) recognized built-in gains for prior years ending in the recognition period. “(B) Net unrealized built-in loss.— “(i) In general.— If the old loss corporation has a net unrealized built-in loss, the recognized built-in loss for any recognition period taxable year shall be subject to limitation under this section in the same manner as if such loss were a prechange loss. “(ii) Limitation.— Clause (i) shall apply to recognized built-in losses for any recognition period taxable year only to the extent such losses do not exceed— “(I) the net unrealized built-in loss, reduced by “(II) recognized built-in losses for prior taxable years ending in the recognition period. “(C) Section 338 gain.— The section 382 limitation for any taxable year in which gain is recognized by reason of an election under section 338 shall be increased by the excess of— “(i) the amount of such gain, over “(ii) the portion of such gain taken into account in computing recognized built-in gains for such taxable year. “(2) Recognized built-in gain and loss.— “(A) Recognized built-in gain.— The term ‘recognized built-in gain’ means any gain recognized during the rec-ognition period on the disposition of any asset to the extent the new loss corporation establishes that— “(i) such asset was held by the old loss corporation immediately before the change date, and “(ii) such gain does not exceed the excess of— “(I) the fair market value of such asset on the change date, over “(II) the adjusted basis of such asset on such date. “(B) Recognized built-in loss.— The term ‘recognized built-in loss’ means any loss recognized during the recognition period on the disposition of any asset except to the extent the new loss corporation establishes that— “(i) such asset was not held by the old loss corporation immediately before the change date, or “(ii) such loss exceeds the excess of— “(I) the adjusted basis of such asset on the change date, over “(II) the fair market value of such asset on such date. “(3) Net unrealized built-in gain and loss defined.— “(A) Net unrealized built-in gain and loss.— “(i) In general.— The terms ‘net unrealized built-in gain’ and ‘net unrealized built-in loss’ mean, with respect to any old loss corporation, the amount by which— “(I) the fair market value of the assets of such corporation immediately before an ownership change is more or less, respectively, than “(II) the aggregate adjusted basis of such assets at such time. “(ii) Special rule for redemptions.— If a redemption occurs in connection with an ownership change, determinations under clause (i) shall be made after taking such redemption into account. “(B) Threshold requirement.— “(i) If the amount of the net unrealized built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old loss corporation is not greater than 25 percent of the amount determined for purposes of subparagraph (A)(i)(I), the net unrealized built-in gain or net unrealized built-in loss shall be zero. “(ii) Cash and cash items not taken into account.— In computing any net unrealized built-in gain or net unrealized built-in loss under clause (i), there shall not be taken into account— “(I) any cash or cash item, or “(II) any marketable security which has a value which does not substantially differ from adjusted basis. “(4) Disallowed loss treated as a net operating loss.— If a deduction for any portion of a recognized built-in loss is disallowed for any post-change year, such portion— “(A) shall be carried forward to subsequent taxable years under rules similar to the rules for the carrying forward of net operating losses, but “(B) shall be subject to limitation under this section in the same manner as a prechange loss. “(5) Special rules for post-change year which includes change date.— For purposes of subsection (b)(3)— “(A) in applying subparagraph (A) thereof, taxable income shall be computed without regard to recognized built-in gains and losses, and gain described in paragraph (1)(C), for the year, and “(B) in applying subparagraph (B) thereof, the section 382 limitation snail be computed without regard to recognized built-in gains, and gain described in paragraph (1)(C), for the year. “(6) Secretary may treat certain deductions as built-in losses.— The Secretary may by regulation treat amounts which accrue on or before the change date but which are allowable as a deduction after such date as recognized built-in losses. “(7) Recognition period, etc.— “(A) Recognition period.— The term ‘recognition period’ means, with respect to any ownership change, the 5-year period beginning on the change date. “(B) Recognition period taxable year.— The term ‘recognition period taxable year’ means any taxable year any portion of which is in the recognition period. “(8) Determination of fair market value in certain cases.— If 80 percent or more in value of the stock of a corporation is acquired in 1 transaction (or in a series of related transactions during any 12-month period), for purposes of determining the net unrealized built-in loss, the fair market value of the assets of such corporation shall not exceed the grossed up amount paid for such stock properly adjusted for indebtedness of the corporation and other relevant items. “(9) Tax-free exchanges or transfers.— The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection where property held on the change date is transferred in a transaction where gain or loss is not recognized (in whole or in part). “(i) Testing Period.— For purposes of this section— “(1) 3-year period.— Except as otherwise provided in this section, the testing period is the 3-year period ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift. “(2) Shorter period where there has been recent ownership change.— If there has been an ownership change under this section, the testing period for determining whether a 2nd ownership change has occurred shall not begin before the 1st day following the change date for such earlier ownership change. “(3) Shorter period where all losses arise after 3-year period begins.— The testing period shall not begin before the 1st day of the 1st taxable year from which there is a carryforward of a loss or of an excess credit to the 1st post-change year. Except as provided in regulations, this paragraph shall not apply to any loss corporation which has a net unrealized built-in loss (determined after application of subsection (h)(3)(B)). “(j) Change Date.— For purposes of this section, the change date is— “(1) in the case where the last component of an ownership change is an owner shift involving a 5-percent shareholder, the date on which such shift occurs, and “(2) in the case where the last component of an ownership change is an equity structure shift, the date of the reorganization. “(k) Definitions and Special Rules.— For purposes of this section— “(1) Loss corporation.— The term ‘loss corporation’ means a corporation entitled to use a net operating loss carryover. Except to the extent provided in regulations, such term includes any corporation with a net unrealized built-in loss. “(2) Old loss corporation.— The term ‘old loss corporation’ means any corporation with respect to which there is an ownership change— “(A) which (before the ownership change) was a loss corporation, or “(B) with respect to which there is a prechange loss described in subsection (d)(1)(B). “(3) New loss corporation.— The term ‘new loss corporation’ means a corporation which (after an ownership change) is a loss corporation. Nothing in this section shall be treated as implying that the same corporation may not be both the old loss corporation and the new loss corporation. “(4) Taxable income.— Taxable income shall be computed with the modifications set forth in section 172(d). “(5) Value.— The term ‘value’ means fair market value. “(6) Rules relating to stock.— “(A) Preferred stock.— Except as provided in regulations and subsection (e), the term ‘stock’ means stock other than stock described in section 1504(a)(4). “(B) Treatment of certain rights, etc.— The Secretary shall prescribe such regulations as may be necessary— “(i) to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and “(ii) to treat stock as not stock. “(C) Determinations on basis of value.— Determinations of the percentage of stock of any corporation held by any person shall be made on the basis of value. “(7) 5-percent shareholder.— The term ‘5-percent share-holder’ means any person holding 5 percent or more of the stock of the corporation at any time during the testing period. “(l) Certain Additional Operating Rules.— For purposes of this section— “(1) Certain capital contributions not taken into ac-count.— “(A) In general.— Any capital contribution received by an old loss corporation as part of a plan a principal purpose of which is to avoid or increase any limitation under this section shall not be taken into account for purposes of this section. “(B) Certain contributions treated as part of plan.— For purposes of subparagraph (A), any capital contribution made during the 2-year period ending on the change date shall, except as provided in regulations, be treated as part of a plan described in subparagraph (A). “(2) Ordering rules for application of section — “(A) Coordination with section 172(b) carryover rules.— In the case of any prechange loss for any taxable year (hereinafter in this subparagraph referred to as the ‘loss year’) subject to limitation under this section, for purposes of determining under the 2nd sentence of section 172(b)(2) the amount of such loss which may be carried to any taxable year, taxable income for any taxable year shall be treated as not greater than— “(i) the section 382 limitation for such taxable year, reduced by “(ii) the unused prechange losses for taxable years preceding the loss year. Similar rules shall apply in the case of any credit or loss subject to limitation under section 383. “(B) Ordering rule for losses carried from same tax-able year.— In any case in which— “(i) a prechange loss of a loss corporation for any taxable year is subject to a section 382 limitation, and “(ii) a net operating loss of such corporation from such taxable year is not subject to such limitation, taxable income shall be treated as having been offset first by the loss subject to such limitation. “(3) Operating rules relating to ownership of stock.— “(A) Constructive ownership.— Section 318 (relating to constructive ownership of stock) shall apply in determining ownership of stock, except that— “(i) paragraphs (1) and (5)(B) of section 318(a) shall not apply and an individual and all members of his family described in paragraph (1) of section 318(a) shall be treated as 1 individual for purposes of applying this section, “(ii) paragraph (2) of section 318(a) shall be applied— “(I) without regard to the 50-percent limitation contained in subparagraph (C) thereof, and “(II) except as provided in regulations, by treating stock attributed thereunder as no longer being held by the entity from which attributed, “(iii) paragraph (3) of section 318(a) shall be applied only to the extent provided in regulations, and “(iv) except to the extent provided in regulations, paragraph (4) of section 318(a) shall apply to an option if such application results in an ownership change. A rule similar to the rule of clause (iv) shall apply in the case of any contingent purchase, warrant, convertible debt, put, stock subject to a risk of forfeiture, contract to acquire stock, or similar interests. “(B) Stock acquired by reason of death, gift, divorce, separation, etc —If— “(i) the basis of any stock in the hands of any person is determined— “(I) under section 1014 (relating to property acquired from a decedent), “(II) section 1015 (relating to property acquired by a gift or transfer in trust), or “(III) section 1041(b)(2) (relating to transfers of property between spouses or incident to divorce, “(ii) stock is received by any person in satisfaction of a right to receive a pecuniary bequest, or “(iii) stock is acquired by a person pursuant to any divorce or separation instrument (within the meaning of section 71(b)(2)), such person shall be treated as owning such stock during the period such stock was owned by the person from whom it was acquired. “(C) Special rule for employee stock ownership plans.— “(i) In general.— Except as provided in clause (ii), the acquisition of employer securities (within the meaning of section 409(1)) by— “(I) a tax credit employee stock ownership plan or an employee stock ownership plan (within the meaning of section 4975(e)(7)), or “(II) a participant of any such plan pursuant to the requirements of section 409(h), shall not be taken into account in determining whether an ownership change has occurred. “(ii) Ownership and allocation requirements.— Subclause (I) of clause (i) shall not apply to any acquisition unless— “(I) immediately after such acquisition the plan holds stock meeting the requirements of section 1042(b)(2), except that such section shall be applied by substituting ‘50 percent’ for ‘30 percent’, and “(II) the plan meets requirements similar to the requirements of section 409(n). “(D) Certain changes in percentage ownership which are attributable to fluctuations in value not taken into account.— Except as provided in regulations, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of different classes of stock shall not be taken into account. “(4) Reduction in value where substantial nonbusiness assets.— “(A) In general.— If, immediately after an ownership change, the new loss corporation has substantial nonbusiness assets, the value of the old loss corporation shall be reduced by the excess (if any) of— “(i) the fair market value of the nonbusiness assets of the old loss corporation, over “(ii) the nonbusiness asset share of indebtedness for which such corporation is liable. “(B) Corporation having substantial nonbusiness assets.— For purposes of subparagraph (A)— “(i) In general.— The old loss corporation shall be treated as having substantial nonbusiness assets if at least ‘/a of the value of the total assets of such corporation consists of nonbusiness assets. “(ii) Exception for certain investment entities.— A regulated investment company to which part I of subchapter M applies, a real estate investment trust to which part II of subchapter M applies, or a real estate mortgage pool to which part IV of subchapter M ap-plies, shall not be treated as a new loss corporation aving substantial nonbusiness assets. “(C) Nonbusiness assets.— For purposes of this paragraph, the term ‘nonbusiness assets’ means assets held for investment. “(D) Nonbusiness asset share.— For purposes of this paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same ratio to such indebtedness as— “(i) the fair market value of the nonbusiness assets of the corporation, bears to “(ii) the fair market value of all assets of such corporation. “(E) Treatment of subsidiaries.— For purposes of this paragraph, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets. For purposes of the preceding sentence, a corporation shall be treated as a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of stock entitled to vote, and 50 percent or more of the total value of shares of all classes of stock. “(5) Title 11 or similar case.— “(A) In general.— Subsection (a) shall not apply to any ownership change if— “(i) the old loss corporation is (immediately before such ownership change) under the jurisdiction of the court in a title 11 or similar case, and “(ii) the shareholders and creditors of the old loss corporation (determined immediately before such ownership change) own (immediately after such ownership change) stock of the new loss corporation (or stock of controlling corporation if also in bankruptcy) which meets the requirements of section 1504(a)(2) (determined by substituting ‘50 percent’ for ‘80 percent’ each place it appears). “(B) Reduction for interest payments to creditors becoming shareholders.— In any case to which subparagraph (A) applies, the net operating loss deduction under section 172(a) for any post-change year shall be determined as if no deduction was allowable under this chapter for the interest paid or accrued by the old loss corporation on indebtedness which was converted into stock pursuant to title 11 or similar case during— “(i) any taxable year ending during the 3-year period preceding the taxable year in which the ownership change occurs, and “(ii) the period of the taxable year in which the ownership change occurs on or before the change date. “(C) Reduction of carryforwards where discharge of indebtedness.— In any case to which subparagraph (A) applies, the prechange losses and excess credits (within the meaning of section 383(a)(2)) which may be carried to a post-change year shall be computed as if 50 percent of the amount which, but for the application of section 108(e)(10)(B), would have been includible in gross income for any taxable year had been so included. “(D) Section 382 limitation zero if another change within 2 years.— If, during the 2-year period immediately following an ownership change to which this paragraph applies, an ownership change of the new loss corporation occurs, this paragraph shall not apply and the section 382 limitation with respect to the 2nd ownership change for any post-change year ending after the change date of the 2nd ownership change shall be zero. “(E) Only certain stock of creditors taken into ac-count.— For purposes of subparagraph (A)(ii), stock transferred to a creditor in satisfaction of indebtedness shall be taken into account only if such indebtedness— “(i) was held by the creditor at least 18 months before the date of the filing of the title 11 or similar case, or “(ii) arose in the ordinary course of the trade or business of the old loss corporation and is held by the person who at all times held the beneficial interest in such indebtedness. “(F) Special rule for certain financial institutions.— “(i) In general.— In the case of any ownership change to which this subparagraph applies, this paragraph shall be applied— “(I) by substituting ’20 percent’ for ‘50 percent’ in subparagraph (A)(ii), and “(II) “(II) without regard to subparagraphs (B) and (C). “(ii) Special rule for depositors.— For purposes of applying this paragraph to an ownership change to which this subparagraph applies— “(I) a depositor in the old loss corporation shall be treated as a stockholder in such loss corporation immediately before the change, “(II) deposits which, after the change, become deposits of the new loss corporation shall be treated as stock of the new loss corporation, and “(III) the fair market value of the outstanding stock of the new loss corporation shall include deposits described in subclause (II). “(iii) Changes to which subparagraph applies.— This subparagraph shall apply to— “(I) an equity structure shift which is a reorganization described in section 368(a)(3)(D)(ii), or “(II) any other equity structure shift (or transaction to which section 351 applies) which occurs as an integral part of a transaction involving a change to which subclause (I) applies. This subparagraph shall not apply to any equity structure shift or transaction occurring after December 31, 1988. “(G) Title ii or similar case.— For purposes of this paragraph, the term ‘title 11 or similar case’ has the meaning given such term by section 368(a)(3)(A). “(H) Election not to have paragraph apply.— A new loss corporation may elect, subject to such terms and conditions as the Secretary may prescribe, not to have the provisions of this paragraph apply. “(6) Special rule for insolvency transactions.— If paragraph (5) does not apply to any reorganization described in subparagraph (G) of section 368(a)(1) or any exchange of debt for stock in a title 11 or similar case (as defined in section 368(a)(3)(A)), the value under subsection (e) shall be the value of the new loss corporation immediately after the ownership change. (a) Coordination with alternative minimum tax.— The Secretary shall by regulation provide for the application of this section to the alternative tax net operating loss deduction under section 56(d). “(m) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and section 383, including (but not limited to) regulations— “(1) providing for the application of this section and section 383 where an ownership change with respect to the old loss corporation is followed by an ownership change with respect to the new loss corporation, and “(2) providing for the application of this section and section 383 in the case of a short taxable year, “(3) providing for such adjustments to the application of this section and section 383 as is necessary to prevent the avoidance of the purposes of this section and section 383, including the avoidance of such purposes through the use of related persons, pass-thru entities, or other intermediaries, “(4) providing for the treatment of corporate contractions as redemptions for purposes of subsections (e)(2) and (h)(3)(A), and “(5) providing for the application of subsection (g)(4) where there is only 1 corporation involved.” (b) Amendment of Section 383.— Section 383 (relating to special limitations on unused investment credits, etc.) is amended to read as follows: “SEC. 383. SPECIAL LIMITATIONS ON CERTAIN EXCESS CREDITS. ETC. “(a) Excess Credits.— “(1) In general.— Under regulations, if an ownership change occurs with respect to a corporation, the amount of any excess credit for any taxable year which may be used in any post-change year shall be limited to an amount determined on the basis of the tax liability which is attributable to so much of the taxable income as does not exceed the section 382 limitation for such post-change year to the extent available after the application of section 382 and subsections (b) and (c) of this section. “(2) Excess credit.— For purposes of paragraph (1), the term ‘excess credit’ means— “(A) any unused general business credit of the corporation under section 39, and “(B) any unused minimum tax credit of the corporation under section 53. “(b) Limitation on Net Capital Loss.— If an ownership change occurs with respect to a corporation, the amount of any net capital loss under section 1212 for any taxable year before the 1st post-change year which may be used in any post-change year shall be limited under regulations which shall be based on the principles applicable under section 382. Such regulations shall provide that any such net capital loss used in a post-change year shall reduce the section 382 limitation which is applied to prechange losses under section 382 for such year. “(c) Foreign Tax Credits.— If an ownership change occurs with respect to a corporation, the amount of any excess foreign taxes under section 904(c) for any taxable year before the 1st post-change taxable year shall be limited under regulations which shall be consistent with purposes of this section and section 382. “(d) Pro Ration Rules for Year Which Includes Change.— For purposes of this section, rules similar to the rules of subsections (b)(3) and (d)(1)(B) of section 382 shall apply. “(e) Definitions.— Terms used in this section shall have the same respective meanings as when used in section 382, except that appropriate adjustments shall be made to take into account that the limitations of this section apply to credits and net capital losses.” (c) Conforming Amendments.— (1) Paragraph (5) of section 318(b) is amended by striking out “section 382(a)(3)” and inserting in lieu thereof “section 382(1)(3)”. (2) The table of sections for part V of subchapter C of chapter 1 is amended— (A) by striking out the item relating to section 382 and inserting in lieu thereof the following new item: “Sec. 382. Limitation on net operating loss carryforwards and certain built-in losses following ownership change.”, and (B) by striking out the item relating to section 383 and inserting in lieu thereof the following new item: “Sec. 383. Special limitations on certain excess credits, etc.”. (d) Report on Depreciation and Built-In Deductions; Report on Bankruptcy Workouts.— The Secretary of the Treasury or his delegate— (1) shall, not later than January 1, 1989, conduct a study and report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate with respect to the treatment of depreciation, amortization, depletion, and other built-in deductions for purposes of sections 382 and 383 of the Internal Revenue Code of 1986 (as amended by this section), and (2) shall, not later than January 1, 1988, conduct a study and report to the committees referred to in paragraph (1) with respect to the treatment of informal bankruptcy workouts for purposes of sections 108 and 382 of such Code. (e) Repeal of Changes Made by Tax Reform Act of 1976.— (1) Subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 (including the amendment treated as part of such subsections under section 59(b) of the Tax Reform Act of 1984) are hereby repealed. (2) Subsection (g) of such section 806 is amended by striking out paragraphs (2) and (3). (f) Effective Dates.— (1) In general.— The amendments made by subsections (a), (b), and (c) shall apply to any ownership change following— (A) an owner shift involving a 5-percent shareholder occurring after December 31, 1986, or (B) an equity structure shift occurring pursuant to a plan of reorganization adopted after December 31, 1986. (2) For amendments to tax reform act of 1976.— (A) In general.— The repeals made by subsection (e)(i) and the amendment made by subsection (e)(2) shall take effect on January 1, 1986. (B) Election to have amendments apply.— (i) If a taxpayer described in clause (ii) elects to have the provisions of this subparagraph apply, the amendments made by subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 shall apply to the reorganization described in clause (ii). (ii) A taxpayer is described in this clause if the taxpayer filed a title 11 or similar case on December 8, 1981, filed a plan of reorganization on February 5, 1986, filed an amended plan on March 14, 1986, and received court approval for the amended plan and disclosure statement on April 16, 1986. (C) Application of old rules to certain debt— In the case of debt of a corporation incorporated in Colorado on November 8, 1924, with headquarters in Denver, Colorado— (i) the amendments made by subsections (a), (b), and (c) shall not apply to any debt restructuring of such debt which was approved by the debtor’s Board of Directors and the lenders in 1986, and (ii) the amendments made by subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 (including the amendment treated as part of such subsections under section 59(b) of the Tax Reform Act of 1984) shall apply to such debt restructuring. (D) Special rule for oil and gas well drilling business.— In the case of a Texas corporation incorporated on July 23, 1935, in applying section 382 of the Internal Revenue Code of 1986 (as in effect before and after the amendments made by subsections (a), (b), and (c)) to a loan restructuring agreement during 1985, section 382(a)(5)(C) of the Internal Revenue Code of 1954 (as added by the amendments made by subsections (e) and (D of section 806 of the Tax Reform Act of 1976) shall be applied as if it were in effect with respect to such restructuring or reorganization. (3) Testing period.— For purposes of determining whether there is an ownership change after December 31, 1986, the testing period shall not begin before the later of— (A) May 6, 1986, or (B) in the case of an ownership change which occurs after May 5, 1986, and to which the amendments made by subsections (a), (b), and (c) do not apply, the first day following the date on which such ownership change occurs. (4) Special transition rules.— The amendments made by subsections (a), (b), and (c) shall not apply to any— (A) stock-for-debt exchanges and stock sales made pursuant to a plan of reorganization with respect to a petition for reorganization filed by a corporation under chapter 11 of title 11, United States Code, on August 26, 1982, and which filed with a United States district court a first amended and related plan of reorganization before March 1, 1986, or (B) ownership change of a Delaware corporation incorporated in August 1983, which may result from the exercise of put or call option under an agreement entered into on September 14, 1983, but only with respect to taxable years beginning after 1991 regardless of when such ownership change takes place. Any regulations prescribed under section 382(g)(3)(B) of the Internal Revenue Code of 1986 (as amended by subsection (a)) shall not apply with respect to domestic building and loan trasactions for any period before January 1, 1989. (5) Bankruptcy proceedings.— In the case of a reorganization described in subparagraph (G) of section 368(a)(1) of the Internal Revenue Code of 1986 or an exchange of debt for stock in a title 11 or similar case, as defined in section 368(a)(3) of such Code, the amendments made by subsections (a), (b), and (c) shall not apply to any ownership change resulting from such a reorganization or proceeding if a petition in such case was filed with the court before August 14, 1986. (6) Certain plans.— The amendments made by subsections (a), (b), and (c) shall not apply to any ownership change with respect to— ) (A) the acquisition of a corporation the stock of which is acquired pursuant to a plan of divestiture which identified such corporation and its assets, and was agreed to by the board of directors of such corporation’s parent corporation on May 17, 1985, (B) a merger which occurs pursuant to a merger agreement (entered into before September 24, 1985) and an application for approval by the Federal Home Loan Bank Board was filed on October 4, 1985, (C) a reorganization involving a party to a reorganization of a group of corporations engaged in enhanced oil recovery operations in California, merged in furtherance of a plan of reorganization adopted by a board of directors vote on September 24, 1985, and a Delaware corporation whose principal oil and gas producing fields are located in California, or (D) the conversion of a mutual savings and loan association holding a Federal charter dated March 22, 1985, to a stock savings and loan association pursuant to the rules and regulations of the Federal Home Loan Bank Board. (7) Ownership change of regulated air carrier.— The amendments made by subsections (a), (b), and (c) shall not apply to an ownership change of a regulated air carrier if— (A) on July 16, 1986, at least 40 percent of the outstanding common stock (excluding all preferred stock, whether or not convertible) of such carrier had been acquired by the parent corporation referred to in section 203(d)(13)(B), and (B) the acquisition (by or for such parent corporation) or retirement of the remaining common stock of such carrier is completed before the later of March 31, 1987, or 90 days after the requisite governmental approvals are finally granted, but only if the ownership change occurs on or before the later of March 31, 1987, or such 90th day. The aggregate reduction in tax for any taxable year by reason of this paragraph shall not exceed $10,000,000. The testing period for determining whether a subsequent ownership change has occurred shall not begin before the 1st day following an ownership change to which this paragraph applies. (8) The amendments made by subsections (a), (b), and (c) shall not apply to any ownership change resulting from the conversion of a Minnesota mutual savings bank holding a Federal charter dated December 31, 1985, to a stock savings bank pursuant to the rules and regulations of the Federal Home Loan Bank Board, and from the issuance of stock pursuant to that conversion to a holding company incorporated in Delaware on February 21, 1984. For purposes of determining whether any ownership change occurs with respect to the holding company or any subsidiary thereof (whether resulting from the transaction described in the preceding sentence or otherwise), any issuance of stock made by such holding company in connection with the transaction described in the preceding sentence shall not be taken into account. (9) Definitions.— Except as otherwise provided, terms used in this subsection shall have the same meaning as when used in section 382 of the Internal Revenue Code of 1986 (as amended by this section). Subtitle D— Recognition of Gain and Loss on Distributions of Property in Liquidation SEC. 631. RECOGNITION OF GAIN AND LOSS ON DISTRIBUTIONS OF PROPERTY IN LIQUIDATION. (a) General Rule.— Subpart B of part II of subchapter C (relating to effects on corporation) is amended by striking out sections 336 and 337 and inserting in lieu thereof the following: “SEC. 336. GAIN OR LOSS RECOGNIZED ON PROPERTY DISTRIBUTED INCOMPLETE LIQUIDATION. “(a) General Rule.— Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee at its fair market value. “(b) Treatment of Liabilities in Excess of Basis.— If any property distributed in the liquidation is subject to a liability or the shareholder assumes a liability of the liquidating corporation in connection with the distribution, for purposes of subsection (a) and section 337, the fair market value of such property shall be treated as not less than the amount of such liability. “(c) Exception for Certain Liquidations to Which Part III Applies.— This section shall not apply with respect to any distribution of property to the extent there is nonrecognition of gain or loss with respect to such property to the recipient under part III. “(d) Limitations on Recognition of Loss.— “(1) No loss recognized in certain distributions to related persons.— “(A) In general.— No loss shall be recognized to a liquidating corporation on the distribution of any property to a related person (within the meaning of section 267) if— “(i) such distribution is not pro rata, or “(ii) such property is disqualified property. “(B) Disqualified property.— For purposes of subparagraph (A), the term ‘disqualified property’ means any prop-erty which is acquired by the liquidating corporation in a transaction to which section 351 applied, or as a contribution to capital, during the 5-year period ending on the date of the distribution. Such term includes any property if the adjusted basis of such property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence. “(2) Special rule for certain property acquired in certain carryover basis transactions.— “(A) In general.— For purposes of determining the amount of loss recognized by any liquidating corporation on any sale, exchange, or distribution of property described in subparagraph (B), the adjusted basis of such property shall be reduced (but not below zero) by the excess (if any) of— “(i) the adjusted basis of such property immediately after its acquisition by such corporation, over “(ii) the fair market value of such property as of such time. “(B) Description of property.— “(i) In general.— For purposes of subparagraph (A), property is described in this subparagraph if— “(I) such property is acquired by the liquidating corporation in a transaction to which section 351 applied or as a contribution to capital, and “(II) the acquisition of such property by the liquidating corporation was part of a plan a principal purpose of which was to recognize loss by the liquidating corporation with respect to such property in connection with the liquidation. Other property shall be treated as so described if the adjusted basis of such other property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence. “(ii) Certain acquisitions treated as part of plan.— For purposes of clause (i), any property described in clause (i)(I) acquired by the liquidating corporation during the 2-year period ending on the date of the adoption of the plan of complete liquidation shall, except as provided in regulations, be treated as part of a plan described in clause (i)(II). “(C) Recapture in lieu of disallowance.— The Secretary may prescribe regulations under which, in lieu of disallowing a loss under subparagraph (A) for a prior taxable year, the gross income of the liquidating corporation for the taxable year in which the plan of complete liquidation is adopted shall be increased by the amount of the disallowed loss. “(3) Special rule in case of liquidation to which section 332 applies.— In the case of any liquidation to which section 332 applies, no loss shall be recognized to the liquidating corporation on any distribution in such liquidation. “(e) Certain Stock Sales and Distributions May Be Treated As Asset Transfers.— Under regulations prescribed by the Secretary, if— “(1) a corporation owns stock in another corporation meeting the requirements of section 1504(a)(2), and “(2) such corporation sells, exchanges, or distributes all of such stock, such corporation may elect to treat such sale, exchange, or distribution as a disposition of all of the assets of such other corporation, and no gain or loss shall be recognized on the sale, exchange, or distribution of such stock. “SEC. 337. NONRECOGNITION FOR PROPERTY DISTRIBUTED TO PARENT IN COMPLETE LIQUIDATION OF SUBSIDIARY. “(a) In General.— No gain or loss shall be recognized to the liquidating corporation on the distribution to the 80-percent distributee of any property in a complete liquidation to which section 332 applies. “(b) Treatment of Indebtedness of Subsidiary, Etc.— “(1) Indebtedness of subsidiary to parent.— If— “(A) a corporation is liquidated in a liquidation to which section 332 applies, and “(B) on the date of the adoption of the plan of liquidation, such corporation was indebted to the 80-percent distributee, for purposes of this section and section 336, any transfer of property to the 80-percent distributee in satisfaction of such indebtedness shall be treated as a distribution to such distributee in such liquidation. “(2) Treatment of tax-exempt distributee.— “(A) In general.— Except as provided in subparagraph (B), paragraph (1) and subsection (a) shall not apply where the 80-percent distributee is an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter. “(B) Exception where property will be used in unrelated business.— “(i) In general.— Subparagraph (A) shall not apply to any distribution of property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such distribution, such organization uses such property in an unrelated trade or business (as defined in section 513). “(ii) Later disposition or change in use.— If any property to which clause (i) applied is disposed of by the organization acquiring such property, notwithstanding any other provision of law, any gain (not in excess of the amount not recognized by reason of clause (i)) shall be included in such organization’s unrelated business taxable income. For purposes of the preceding sentence, if such property ceases to be used in an unrelated trade or business of such organization, such organization shall be treated as having disposed of such property on the date of such cessation. “(c) 80-Percent Distributee.— For purposes of this section, the term ‘80-percent distributee’ means only the corporation which meets the 80-percent stock ownership requirements specified in section 332(b). “(d) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the amendments made to this subpart by the Tax Reform Act of 1986, including— “(1) regulations to ensure that such purposes may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations and part III of this subchapter), and “(2) regulations providing for appropriate coordination of the provisions of this section with the provisions of this title relating to taxation of foreign corporations and their shareholders.” (b) Amendments to Section 338.— (1) Subsection (a) of section 338 (relating to certain stock purchases treated as asset acquisitions) is amended by striking out “to which section 337 applies”. (2) Subsection (c) of section 338 is hereby repealed. (3) Subparagraph (B) of section 338(h)(10) is amended by adding at the end thereof the following new sentence: “To the extent provided in regulations, such term also includes any affiliated group of corporations which includes the target corporation (whether or not such group files a consolidated return).” (c) Treatment of Distributions of Appreciated Property.— Section 311 is amended to read as follows: “SEC. 311. TAXABILITY OF CORPORATION ON DISTRIBUTION. “(a) General Rule.— Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution, with respect to its stock, of— “(1) its stock (or rights to acquire its stock), or “(2) property. “(b) Distributions of Appreciated Property.— “(1) In general.— If— “(A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and “(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value. “(2) Treatment of liabilities in excess of basis.— Rules similar to the rules of section 336(b) shall apply for purposes of this subsection.” (d) Treatment of Foreign Distributees.— (1) Amendments to section 367.— Subsection (e) of section 367 is amended to read as follows: “(e) Treatment of Distributions Described in Section 355 or Liquidations Under Section 332.— “(1) Distributions described in section 355.— In the case of any distribution described in section 355 (or so much of section 356 as relates to section 355) by a domestic corporation to a person who is not a United States person, to the extent provided in regulations, gain shall be recognized under principles similar to the principles of this section. “(2) Liquidations under section 332.— In the case of any liquidation to which section 332 applies, except as provided in regulations, subsections (a) and (b)(1) of section 337 shall not apply where the 80-percent distributee (as defined in section 337(c)) is a foreign corporation.” (2) Amendments to section 1248.— (A) Subsection (e) of section 1248 is amended by striking out “Under regulations” and inserting in lieu thereof “Except as provided in regulations”. (B) Subsection (f) of section 1248 is amended by inserting “Except as provided in regulations prescribed by the Secretary—” after the subsection heading. (e) Technical and Conforming Amendments.— (1) Paragraph (4) of section 312(n) (as redesignated by title XVIII) is amended to read as follows: “(4) LIFO inventory adjustments.— “(A) In general.— Earnings and profits shall be in-creased or decreased by the amount of any increase or decrease in the LIFO recapture amount as of the close of each taxable year; except that any decrease below the LIFO recapture amount as of the close of the taxable year preceding the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary. “(B) LIFO recapture amount.— For purposes of this paragraph, the term ‘LIFO recapture amount’ means the amount (if any) by which— “(i) the inventory amount of the inventory assets under the first-in, first-out method authorized by section 471, exceeds “(ii) the inventory amount of such assets under the LIFO method. “(C) Definitions.— For purposes of this paragraph— “(i) LIFO method.— The term ‘LIFO method’ means the method authorized by section 472 (relating to last-in, first-out inventories). “(ii) Inventory assets.— The term ‘inventory assets’ means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year. “(iii) Inventory amount.— The inventory amount of assets under the first-in, first-out method authorized by section 471 shall be determined— “(I) if the corporation uses the retail method of valuing inventories under section 472, by using such method, or “(II) if subclause (I) does not apply, by using cost or market, whichever is lower.” (2) Subsection (c) of section 332 is hereby repealed. (3) Section 333 is hereby repealed. (4) (A) Subsection (a) of section 334 is amended by striking out “(other than a distribution to which section 333 applies)”. (B) Subsection (c) of section 334 is hereby repealed. (5) Paragraph (12) of section 338(h) is hereby repealed. (6) (A) Subsection (e) of section 341 is amended by striking out paragraphs (2), (3), and (4). (B) Paragraph (5) of section 341(e) is amended— (i) by striking out “paragraphs (1), (2), and (4)” and inserting in lieu thereof “paragraph (1)”, and (ii) by striking out subparagraph (B). (7) Subsection (b) of section 346 is amended by striking out “337,”. (8) (A) Subparagraphs (A) and (B) of section 453(h)(1) (relating to use of installment sales in section 337 liquidations) are amended to read as follows: “(A) In general.— If, in a liquidation to which section 331 applies, the shareholder receives (in exchange for the share-holder’s stock) an installment obligation acquired in respect of a sale or exchange by the corporation during the 12-month period beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period, then, for purposes of this section, the receipt of payments under such obligation (but not the receipt of such obligation) by the shareholder shall be treated as the receipt of payment for the stock. “(B) Obligations attributable to sale of inventory must result from bulk sale.— Subparagraph (A) shall not apply to an installment obligation acquired in respect of a sale or exchange of— “(i) stock in trade of the corporation, “(ii) other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and “(iii) property held by the corporation primarily for sale to customers in the ordinary course of its trade or business, unless such sale or exchange is to one person and involves substantially all of such property attributable to a trade or business of the corporation.” (B) Subparagraph (E) of section 453(h)(1) is amended to read as follows: “(E) Sales by liquidating subsidiaries.— For purposes of subparagraph (A), in the case of a controlling corporate shareholder (within the meaning of section 368(c)(1)) of a selling corporation, an obligation acquired in respect of a sale or exchange by the selling corporation shall be treated as so acquired by such controlling corporate shareholder. The preceding sentence shall be applied successively to each controlling corporate shareholder above such controlling corporate shareholder.” (C) The heading for section 453(h) is amended by striking out “Section 337” and inserting in lieu thereof “Certain”. (9) Subsection (d) of section 453B is amended to read as follows: “(d) Effect of Distribution in Liquidations to Which Section 332 Applies.— If— “(1) an installment obligation is distributed in a liquidation to which section 332 (relating to complete liquidations of subsidiaries) applies, and “(2) the basis of such obligation in the hands of the distributee is determined under section 334(b)(1), then no gain or loss with respect to the distribution of such obligation shall be recognized by the distributing corporation.” (10) Paragraph (5) of section 467(c) is amended by striking out “453B(d)(2)Z’. (11) Subsection (b) of section 852 is amended by adding at the end thereof the following new paragraph: “(6) Section 311 (b) not to apply to certain distributions.— Section 311(b) shall not apply to any distribution by a regulated investment company to which this part applies, if such distribution is in redemption of its stock upon the demand of the shareholder.” (12) Subsection (d) of section 897 is amended— (A) by striking out paragraph (2), (B) by striking out the heading for paragraph (1), (C) by appropriately redesignating each subparagraph, clause, and subclause of paragraph (1) as a paragraph, subparagraph, or clause, as the case may be, (D) by striking out “subparagraph (A)” in paragraph (2) (as so redesignated) and inserting in lieu thereof “paragraph (1)”, and (E) by striking out “, Etc.,” in the subsection heading. (13) Subsection (a) of section 1056 is amended by striking out the last sentence thereof. (14) Paragraph (2) of section 1255(b) is amended by striking out “453B(d)(2)”. (15) Paragraph (3) of section 1276(c) is amended by striking out “334(c),”. (16) The table of sections for subpart A of part II of sub-chapter C of chapter 1 is amended by striking out the item relating to section 333. (17) The table of sections for subpart B of part II of subchapter C of chapter 1 is amended by striking out the items relating to sections 336 and 337 and inserting in lieu thereof the following: “Sec. 336. Gain or loss recognized on property distributed in complete liquidation. “Sec. 337. Nonrecognition for property distributed to parent in complete liquidation of subsidiary.” SEC. 632. TREATMENT OF C CORPORATIONS ELECTING SUBCHAPTER S STATUS. (a) General Rule.— Section 1374 (relating to tax imposed on certain capital gains) is amended to read as follows: “SEC. 1374. TAX IMPOSED ON CERTAIN BUILT-IN GAINS. “(a) General Rule.— If for any taxable year beginning in the recognition period an S corporation has a recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year. “(b) Amount of Tax.— “(1) In general.— The tax imposed by subsection (a) shall be a tax computed by applying the highest rate of tax specified in section 11(b) to the lesser of— “(A) the recognized built-in gains of the S corporation for the taxable year, or “(B) the amount which would be the taxable income of the corporation for such taxable year if such corporation were not an S corporation. “(2) Net operating loss carryforwards from c years allowed.— Notwithstanding section 1371(b)(1), any net operating loss carryforward arising in a taxable year for which the corporation was a C corporation shall be allowed as a deduction against the lesser of the amounts referred to in subparagraph (A) or (B) of paragraph (1). For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the lesser of the amounts referred to in subpara-graph (A) or (B) of paragraph (1) shall be treated as taxable income. “(3) Credits.— “(A) In general.— Except as provided in subparagraph (B), no credit shall be allowable under part IV of subchapter A of this chapter (other than under section 34) against the tax imposed by subsection (a). “(B) Business credit carryforwards from c years allowed.— Notwithstanding section 1371(b)(1), any business credit carryforward under section 39 arising in a taxable year for which the corporation was a C corporation shall be allowed as a credit against the tax imposed by subsection (a) in the same manner as if it were imposed by section 11. “(4) Coordination with section 1201(a).— For purposes of section 1201(a)— “(A) the tax imposed by subsection (a) shall be treated as if it were imposed by section 11, and “(B) the lower of the amounts specified in subparagraphs (A) and (B) of paragraph (1) shall be treated as the taxable income. “(c) Limitations.— “(1) Corporations which were always s corporations.— Subsection (a) shall not apply to any corporation if an election under section 1362(a) has been in effect with respect to such corporation for each of its taxable years. Except as provided in regulations, an S corporation and any predecessor corporation shall be treated as 1 corporation for purposes of the preceding sentence. “(2) Limitation on amount of recognized built-in gains.— The amount of the recognized built-in gains taken into account under this section for any taxable year shall not exceed the excess (if any) of— “(A) the net unrealized built-in gain, over “(B) the recognized built-in gains for prior taxable years beginning in the recognition period. “(d) Definitions and Special Rules.— For purposes of this section— “(1) Net unrealized built-in gain.— The term ’net unrealized built-in gain’ means the amount (if any) by which— “(A) the fair market value of the assets of the S corporation as of the beginning of its 1st taxable year for which an election under section 1362(a) is in effect, exceeds “(B) the aggregate adjusted bases of such assets at such time. “(2) Recognized built-in gain.— The term ‘recognized built-in gain’ means any gain recognized during the recognition period on the disposition of any asset except to the extent that the S corporation establishes that— “(A) such asset was not held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (1), or “(B) such gain exceeds the excess (if any) of— “(i) the fair market value of such asset as of the beginning of such 1st taxable year, over “(ii) the adjusted basis of the asset as of such time. “(3) Recognition period.— The term ‘recognition period’ means the 10-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. “(4) Taxable income.— Taxable income of the corporation shall be determined under section 63(a)— “(A) without regard to the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures), and “(B) without regard to the deduction under section 172.” (b) Treatment of Distributions.— Subsection (e) of section 1363 is amended to read as follows: “(e) Subsection (d) Not To Apply to Reorganizations, Etc.— Subsection (d) shall not apply to any distribution to the extent it consists of property permitted by section 354, 355, or 356 to be received without the recognition of gain.” (c) Conforming Amendments.— (1) Subparagraph (G) of section 26(b)(2) is amended by striking out “certain capital gains” and inserting in lieu thereof “certain built-in gains”. (2) Paragraph (2) of section 1366(f) is amended to read as follows: “(2) Reduction in pass-thru for tax imposed on built-in gains.— If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a), the amount of each recognized built-in gain (as defined in section 1374(d)(2)) for such taxable year shall be reduced by its proportionate share of such tax.” (3) Subparagraph (B) of section 1375(b)(1) is amended by striking out “section 1374(d)” and inserting in lieu thereof “section 1374(d)(4)”. (d) Clerical Amendment.— The table of sections for part III of subchapter S of chapter 1 is amended by striking out the item relating to section 1374 and inserting in lieu thereof the following: “Sec. 1374. Tax imposed on certain built-in gains.” SEC. 633. EFFECTIVE DATES. (a) General Rule.— Except as otherwise provided in this section, the amendments made by this subtitle shall apply to— (1) any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liquidated before January 1, 1987 (2) any transaction described in section 338 of the Internal Revenue Code of 1986 for which the acquisition date occurs after December 31, 1986, and (3) any distribution (not in complete liquidation) made after December 31, 1986. (b) Built-In Gains of S Corporations.— The amendments made by section 632 (other than subsection (b) thereof) shall apply to taxable years beginning after December 31, 1986, but only in cases where the 1st taxable year for which the corporation is an S corporation is pursuant to an election made after December 31, 1986. (c) Exception for Certain Plans of Liquidation and Binding Contracts.— (1) In general.— The amendments made by this subtitle shall not apply to— (A) any distribution or sale or exchange made pursuant to a plan of liquidation adopted before August 1, 1986, if the liquidating corporation is completely liquidated before January 1, 1988, (B) any distribution or sale or exchange made by any corporation if 50 percent or more of the voting stock (by value) of such corporation is acquired on or after August 1, 1986, pursuant to a written binding contract in effect before such date and if such corporation is completely liquidated before January 1, 1988, (C) any distribution or sale or exchange made by any corporation if substantially all of the assets of such corporation are sold on or after August 1, 1986, pursuant to 1 or more written binding contracts in effect before such date and if such corporation is completely liquidated before January 1, 1988, or (D) any transaction described in section 338 of the Internal Revenue Code of 1986 with respect to any target corporation if a qualified stock purchase of such target corporation is made on or after August 1, 1986, pursuant to a written binding contract in effect before such date and the acquisition date (within the meaning of such section 338) is before January 1, 1988. (2) Special rule for certain actions taken before November 20, 1985.— For purposes of paragraph (1), transactions shall be treated as pursuant to a plan of liquidation adopted before August 1, 1986, if— (A) before November 20, 1985— (i) the board of directors of the liquidating corporation adopted a resolution to solicit shareholder approval for a transaction of a kind described in section 336 or 337, or (ii) the shareholders or board of directors have approved such a transaction, (B) before November 20, 1985— (i) there has been an offer to purchase a majority of the voting stock of the liquidating corporation, or (ii) the board of directors of the liquidating corporation has adopted a resolution approving an acquisition or recommending the approval of an acquisition to the shareholders, or (C) before November 20, 1985, a ruling request was submitted to the Secretary of the Treasury or his delegate with respect to a transaction of a kind described in section 336 or 337 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this subtitle). For purposes of the preceding sentence, any action taken by the board of directors or shareholders of a corporation with respect to any subsidiary of such corporation shall be treated as taken by the board of directors or shareholders of such subsidiary. (d) Transitional Rule for Certain Small Corporations.— (1) In general.— In the case of the complete liquidation before January 1, 1989, of a qualified corporation, the amendments made by this section shall not apply to the applicable percentage of each gain or loss which (but for this paragraph) would be recognized by reason of the amendments made by this subtitle. (2) Paragraph (1) not to apply to certain items.— Paragraph (1) shall not apply to— (A) any gain or loss which is an ordinary gain or loss (determined without regard to section 1239 of the Internal Revenue Code of 1986), (B) any gain or loss on a capital asset held for not more than 6 months, and (C) any gain to the extent section 453B of such Code applies. (3) Applicable percentage.— For purposes of this subsection, the term ‘applicable percentage’ means— (A) 100 percent if the applicable value of the qualified corporation is less than $5,000,000, or (B) 100 percent reduced by an amount which bears the same ratio to 100 percent as— (i) the excess of the applicable value of the corporation over $5,000,000, bears to (ii) $5,000,000. (4) Applicable value.— For purposes of this subsection, the applicable value is the fair market value of all of the stock of the corporation on the date of the adoption of the plan of complete liquidation (or if greater, on August 1, 1986). (5) Qualified corporation.— For purposes of this subsection, the term “qualified corporation” means any corporation if— (A) on August 1, 1986, and at all times thereafter before the corporation is completely liquidated, more than 50 percent (by value) of the stock in such corporation is held by 10 or fewer qualified persons, and (B) the applicable value of such corporation does not exceed $10,000,000. (6) Definitions and special rules.— For purposes of this subsection— (A) Qualified person.— The term “qualified person” means— (i) an individual, (ii) an estate, or (iii) any trust described in clause (ii) or (iii) of section 1361(c)(2)(A) of the Internal Revenue Code of 1986. (B) Attribution rules.— (i) Entities.— Any stock held by a corporation, trust, or partnership shall be treated as owned proportionally by its shareholders, beneficiaries, or partners. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person. (ii) Family members.— Stock owned (or treated as owned under clause (i)) by members of the same family (within the meaning of section 318(a)(1) of the Internal Revenue Code of 1986) shall be treated as owned by 1 person. (C) Controlled group of corporations.— All members of the same controlled group (as defined in section 267(f)(1) of such Code) shall be treated as 1 corporation for purposes of this subsection. (7) Section 338 transactions.— The provisions of this subsection shall also apply in the case of a transaction described in section 338 of the Internal Revenue Code of 1986 where the acquisition date (within the meaning of such section 338) is before January 1, 1989. (8) Application of section 1374.— Rules similar to the rules of this subsection shall apply for purposes of applying section 1374 of the Internal Revenue Cede of 1986 (as amended by section 632) in the case of a qualified corporation which becomes an S corporation for a taxable year beginning before January 1, 1989. (d) Complete Liquidation Defined.— For purposes of this section, a corporation shall be treated as completely liquidated if all of the assets of such corporation are distributed in complete liquidation, less assets retained to meet claims. (e) Other Transitional Rules.— (1) The amendments made by this subtitle shall not apply to any liquidation of a corporation incorporated under the laws of Pennsylvania on August 3, 1970, if— (A) the board of directors of such corporation approved a plan of liquidation before January 1, 1986, (B) an agreement for the sale of a material portion of the assets of such corporation was signed on May 9, 1986 (whether or not the assets are sold in accordance with such agreement), and (C) the corporation is completely liquidated on or before December 31, 1988. (2) The amendments made by this subtitle shall not apply to any liquidation (or deemed liquidation under section 338 of the Internal Revenue Code of 1986) of a diversified financial services corporation incorporated under the laws of Delaware on May 9, 1929, pursuant to a binding written contract entered into on or before December 31, 1986; but only if the liquidation is completed (or in the case of a section 338 election, the acquisition date occurs) before January 1, 1988. (3) The amendments made by this subtitle shall not apply to any distribution, or sale, or exchange— (A) of the assets owned (directly or indirectly) by a testamentary trust established under the will of a decedent dying on June 15, 1956, or its beneficiaries, (B) made pursuant to a court order in an action filed on January 18, 1984, if such order— (i) is issued after July 31, 1986, and (ii) directs the disposition of the assets of such trust and the division of the trust corpus into 3 separate sub-trusts. For purposes of the preceding sentence, an election under section 338(g) of the Internal Revenue Code of 1986 (or an election under section 338(h)(10) of such Code) qualifying as a section 337 liquidation pursuant to regulations prescribed by the Secretary under section 1.338(h)(10)-lT(j)) made in connection with a sale or exchange pursuant to a court order described in subparagraph (B) shall be treated as a sale of exchange. (4) (A) The amendments made by this subtitle shall not apply to any distribution, or sale, or exchange— (i) if— (I) an option agreement binding on the selling corporation to sell substantially all its assets is executed before August 1, 1986, the corporation adopts (by approval of its shareholders) a conditional plan of liquidation before August 1, 1986 to become effective upon the exercise of such option agreement (or modification thereto), and the assets are sold pursuant to the exercise of the option (as originally executed or subsequently modified provided that the purchase price is not thereby increased), or (II) in the event that the optionee does not acquire substantially all the assets of the corporation, the optionor corporation sells substantially all its assets to another purchaser at a purchase price not greater than that contemplated by such option agreement pursuant to an effective plan of liquidation, and (ii) the complete liquidation of the corporation occurs within 12 months of the time the plan of liquidation becomes effective, but in no event later than December 31, 1989. (B) For purposes of subparagraph (A), a distribution, or sale, or exchange, of a distributee corporation (within the meaning of section 337(c)(3) of the Internal Revenue Code of 1986) shall be treated as satisfying the requirements of subparagraph (A) if its subsidiary satisfies the requirements of subparagraph (A). (C) For purposes of section 56 of the Internal Revenue Code of 1986 (as amended by this Act), any gain or loss not recognized by reason of this paragraph shall not be taken into account in determining the adjusted net book income of the corporation. (5) In the case of a corporation incorporated under the laws of Wisconsin on April 3, 1948— (A) a voting trust established not later than December 31, 1987, for purposes of holding employees’ shares of stock in such corporation, shall qualify as a trust permitted as a shareholder of an S corporation, and (B) the amendment made by section 632 (other than subsection (b) thereof) shall not apply to such corporation if it elects to be an S corporation before January 1, 1989. (6) The amendments made by this subtitle shall not apply to the liquidation of a corporation incorporated on January 26, 1982, under the laws of the State of Alabama with a principal place of business in Colbert County, Alabama, but only if such corporation is completely liquidated on or before December 31, 1987. (7) The amendments made by this subtitle shall not apply to the acquisition by a Delaware bank holding company of all of the assets of an Iowa bank holding company pursuant to a written contract dated December 9, 1981. (8) The amendments made by this subtitle shall not apply to the liquidation of a corporation incorporated under the laws of Delaware on January 20, 1984, if more than 40 percent of the stock of such corporation was acquired by purchase on June 11, 1986, and there was a tender offer with respect to all additional outstanding shares of such corporation on July 29, 1986, but only if the corporation is completely liquidated on or before December 31, 1987. (f) Treatment of Certain Distributions in Response To Hostile Tender Offer.— (1) In general.— No gain or loss shall be recognized under the Internal Revenue Code of 1986 to a corporation (hereinafter in this subsection referred to as “parent”) on a qualified distribution. (2) Qualified Distribution Defined.— For purposes of paragraph (1)— (A) In general.— The term “qualified distribution” means a distribution— (i) by parent of all of the stock of a qualified subsidiary in exchange for stock of parent which was acquired for purposes of such exchange pursuant to a tender offer dated February 16, 1982, and (ii) pursuant to a contract dated February 13, 1982, and (iii) which was made not more than 60 days after the board of directors of parent recommended rejection of an unsolicited tender offer to obtain control of parent. (B) Qualified subsidiary.—The term “qualified subsidiary” means a corporation created or organized under the laws of Delaware on September 7, 1976, all of the stock of which was owned by parent immediately before the qualified distribution. SEC. 634. STUDY OF CORPORATE PROVISIONS. The Secretary of the Treasury or his delegate shall conduct a study of proposals to reform the provisions of subchapter C of chapter 1 of the Internal Revenue Code of 1986. Not later than January 1, 1988, the Secretary shall submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a report on the study conducted under this section (together with such recommendations as he may deem advisable). Subtitle E— Other Corporate Provisions SEC. 641. SPECIAL ALLOCATION RULES FOR CERTAIN ASSET ACQUISITIONS. (a) In General.— Part IV of subchapter O of chapter 1 (relating to special rules for determining basis) is amended by redesignating section 1060 as section 1061 and by inserting after section 1059 the following new section: “SEC. 1060. SPECIAL ALLOCATION RULES FOR CERTAIN ASSET ACQUISITIONS. “(a) General Rule.— In the case of any applicable asset acquisition, for purposes of determining both— “(2) the transferee’s basis in such assets, and “(2) the gain or loss of the transferor with respect to such acquisition, the consideration received for such assets shall be allocated among such assets acquired in such acquisition in the same manner as amounts are allocated to assets under section 338(b)(5). “(b) Information Required To Be Furnished to Secretary.— Under regulations, the transferor and transferee in an applicable asset acquisition shall, at such times and in such manner as may be provided in such regulations, furnish to the Secretary the following information: “(1) The amount of the consideration received for the assets which is allocated to goodwill or going concern value. “(2) Any modification of the amount described in paragraph (1). “(3) Any other information with respect to other assets transferred in such acquisition as the Secretary may find necessary to carry out the provisions of this section. “(c) Applicable Asset Acquisition.— For purposes of this section, the term ‘applicable asset acquisition’ means any transfer (whether directly or indirectly)— “(1) of assets which constitute a trade or business, and “(2) with respect to which the transferee’s basis in such assets is determined wholly by reference to the consideration paid for such assets. A transfer shall not be treated as failing to be an applicable asset acquisition merely because section 1031 applies to a portion of the assets transferred.” (b) Conforming Amendment.— The table of sections for part IV of subchapter O of chapter 1 is amended by striking out the item relating to section 1060 and inserting in lieu thereof the following new items: Sec. 1060. Special allocation rules for certain asset acquisitions. Sec. 1061. Cross references.” (c) Effective Date.— The amendments made by this section shall apply to any acquisition of assets after May 6, 1986, unless such acquisition is pursuant to a binding contract which was in effect on May 6, 1986, and at all times thereafter. SEC. 642. MODIFICATION OF DEFINITION OF RELATED PARTY. (a) Definitions of Related Party for Purposes of Certain Sales.— (1) Sale of depreciable property between certain related taxpayers.— (A) In general.— Paragraph (1) of section 1239(b) (defining related persons) is amended by striking out “80-percent owned entities” and inserting in lieu thereof “controlled entities”. (B) Controlled entity defined.— (i) In general.— Section 1239(c)(1) (defining 80-percent owned entity) is amended— (I) by striking out “80-percent owned entity” and inserting in lieu thereof “controlled entity”, (II) by striking out “80 percent or more in value” in subparagraph (A) and inserting in lieu thereof “more than 50 percent of the value”, (III) by striking out “80 percent or more” in subparagraph (B) and inserting in lieu thereof “more than 50 percent”, and (IV) by striking out “and” at the end of subparagraph (A), by striking out the period at the end of subparagraph (B) and inserting “, and”, and by adding at the end thereof the following new paragraph: “(C) any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b).” (ii) Conforming amendment.— Section 1239(c) is amended by striking out “80-Percent Owned Entity” in the heading thereof and inserting in lieu thereof “Controlled Entity”, (C) Constructive ownership.— Paragraph (2) of section 1239(c) is amended to read as follows: “(2) Constructive ownership.— For purposes of this section, ownership shall be determined in accordance with rules similar to the rules under section 267(c) (other than paragraph (3) thereof).” (D) Conforming amendment.— Section 453(g) is amended by striking out “80-Percent Owned“ in the heading thereof and inserting in lieu thereof “Controlled”. (2) Partnerships.— Paragraph (2) of section 707(b) (relating to gains treated as ordinary income) is amended by striking out “80 percent” each place it appears and inserting in lieu thereof “50 percent”. (3) Installment sales.— Paragraph (1) of section 453(0 (defining related person) is amended to read as follows: “(1) Related person.— Except for purposes of subsection (g) and (h), the term ‘related person’ means— “(A) a person whose stock would be attributed under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property, or “(B) a person who bears a relationship described in section 267(b) to the person first disposing of the property.” (b) Rules Relating to Contingent Payments.— (1) Payments to be received defined.— Section 453(f) (relating to definitions and special rules) is amended by adding at the end thereof the following new paragraph: “(8) Payments to be received defined.— The term ‘payment to be received’ includes— “(A) the aggregate amount of all payments which are not contingent as to amount, and “(B) the fair market value of any payments which are contingent as to amount.” (2) Sale of depreciable property between related parties.— Paragraph (1) of section 453(g) (relating to sale of depreciable property to controlled entities) is amended to read as follows: “(1) In general.— In the case of an installment sale of depreciable property between related persons (within the meaning of section 1239(b))— “(A) subsection (a) shall not apply, and “(B) for purposes of this title— “(i) except as provided in clause (ii), all payments to be received shall be treated as received in the year of the disposition, and “(ii) in the case of any payments which are contingent as to amount but with respect to which the fair market value may not be reasonably ascertained— “(I) the basis shall be recovered ratably, and “(II) the purchaser may not increase the basis of any property acquired in such sale by any amount before such time as the seller includes such amount in income.” (c) Effective Date.— (1) In general.— Except as provided in paragraph (2), the amendments made by this section shall apply to sales after the date of the enactment of this Act, in taxable years ending after such date. (2) Traditional rule for binding contracts.— The amendments made by this section shall not apply to sales made after August 14, 1986, which are made pursuant to a binding contract in effect on August 14, 1986, and at all times thereafter. SEC. 643. TREATMENT OF AMORTIZABLE BOND PREMIUM AS INTEREST. (a) In General.— Section 171 (relating to amortizable bond premium) is amended by redesignating subsection (e) as (f) and by inserting after subsection (d) the following new subsection: “(e) Treatment as Interest.— Except as provided in regulations, the amount of any amortizable bond premium with respect to which a deduction is allowed under subsection (a)(1) for any taxable year shall be treated as interest for purposes of this title.” (b) Effective Date.— (1) In general.— The amendment made by subsection (a) shall apply to obligations acquired after the date of the enactment of this Act, in taxable years ending after such date. (2) Revocation of election.— In the case of a taxpayer with respect to whom an election is in effect on the date of enactment of this Act under section 171(c) of the Internal Revenue Code of 1986, such election shall apply to obligations issued after the date of the enactment of this Act only if the taxpayer chooses (at such time and in such manner as may be prescribed by the Secretary of the Treasury or his delegate) to have such election apply with respect to such obligations. SEC. 644. PROVISIONS RELATING TO COOPERATIVE HOUSING CORPORATIONS. (a) Tenant-Stockholder May Include Person Other Than Individual.— (1) In general.— Section 216(b)(2) (defining tenant-stock-holder) is amended— (A) by striking out “an individual” and inserting in lieu thereof “a person”, and (B) by striking out “such individual” and inserting in lieu thereof “such person”. (2) Prior approval of occupancy.— Paragraphs (5) and (6) of section 216(b) are amended to read as follows: (5) Prior approval of occupancy.— For purposes of this section, in the following cases there shall not be taken into account the fact that (by agreement with the cooperative housing corporation) the person or his nominee may not occupy the house or apartment without the prior approval of such corporation: “(A) In any case where a person acquires stock of a cooperative housing corporation by operation of law. “(B) In any case where a person other than an individual acquires stock of a cooperative housing corporation. “(C) In any case where the original seller acquires any stock of the cooperative housing corporation from the corporation not later than 1 year after the date on which the apartments or houses (or leaseholds therein) are transferred by the original seller to the corporation. “(6) Original seller defined.— For purposes of paragraph (5), the term ‘original seller’ means the person from whom the corporation has acquired the apartments or houses (or lease-holds therein).”. (b) Treatment of Depreciation.— Section 216(c) (relating to treatment as property subject to depreciation) is amended to read as follows: “(c) Treatment as Property Subject to Depreciation.— “(1) In general.— So much of the stock of a tenant-stock-holder in a cooperative housing corporation as is allocable, under regulations prescribed by the Secretary, to a proprietary lease or right of tenancy in property subject to the allowance for depreciation under section 167(a) shall, to the extent such proprietary lease or right of tenancy is used by such tenant-stockholder in a trade or business or for the production of income, be treated as property subject to the allowance for depreciation under section 167(a). The preceding sentence shall not be construed to limit or deny a deduction for depreciation under section 167(a) by a cooperative housing corporation with respect to property owned by such a corporation and leased to tenant-stockholders. “(2) Deduction limited to adjusted basis in stock.— “(A) In general.— The amount of any deduction for depreciation allowable under section 167(a) to a tenant-stockholder with respect to any stock for any taxable year by reason of paragraph (1) shall not exceed the adjusted basis of such stock as of the close of the taxable year of the tenant-stockholder in which such deduction was incurred. “(B) Carryforward of disallowed amount.— The amount of any deduction which is not allowed by reason of subparagraph (A) shall, subject to the provisions of subparagraph (A), be treated as a deduction allowable under section 167(a) in the succeeding taxable year.”. (c) Disallowance of Deductions for Payments to Corporation.— Section 216 is amended by adding at the end thereof the following new subsection: “(d) Disallowance of Deduction for Certain Payments to the Corporation.— No deduction shall be allowed to a stockholder in a cooperative housing corporation for any amount paid or accrued to such corporation during any taxable year (in excess of the stockholder’s proportionate share of the items described in subsections (a)(1) and (a)(2)) to the extent that, under regulations prescribed by the Secretary, such amount is properly allocable to amounts paid or incurred at any time by the corporation which are chargeable to the corporation’s capital account. The stockholder’s adjusted basis in the stock in the corporation shall be increased by the amount of such disallowance.” (d) Deduction of Taxes and Interest.— Paragraph (3) of section 216(b) (defining tenant-stockholder’s proportionate share) is amended to read as follows: “(3) Tenant-stockholder’s proportionate share.— “(A) In general.— Except as provided in subparagraph (B), the term ‘tenant-stockholder’s proportionate share’ means that proportion which the stock of the cooperative housing corporation owned by the tenant-stockholder is of the total outstanding stock of the corporation (including any stock held by the corporation). “(B) Special rule where allocation of taxes or interest reflect cost to corporation of stockholder’s unit.— “(i) In general.— If, for any taxable year— “(I) each dwelling unit owned or leased by a cooperative housing corporation is separately allocated a share of such corporation’s real estate taxes described in subsection (a)(1) or a share of such corporation’s interest described in subsection (a)(2), and “(II) such allocations reasonably reflect the cost to such corporation of such taxes, or of such interest, attributable to the tenant-stockholder’s dwelling unit (and such unit’s share of the common areas), then the term ‘tenant-stockholder’s proportionate share’ means the shares determined in accordance with the allocations described in subclause (II). “(ii) Election by corporation required.— Clause (i) shall apply with respect to any cooperative housing corporation only if such corporation elects its application. Such an election, once made, may be revoked only with the consent of the Secretary.” (e) Treatment of Amounts Received in Connection With the Refinancing of Indebtedness of Certain Cooperative Housing Corporations; Treatment of Amounts Paid From Qualified Re-financing-Related Reserve.— (1) Payment of closing costs and creation of reserve excluded from gross income.— For purposes of the Internal Revenue Code of 1954, no amount shall be included in the gross income of a qualified cooperative housing corporation by reason of the payment or reimbursement by a city housing development agency or corporation of amounts for— (A) closing costs, or (B) the creation of reserves for the qualified cooperative housing corporation, in connection with a qualified refinancing. (2) Income from reserve fund treated as member income.— (A) In general.— Income from a qualified refinancing-related reserve shall be treated as derived from its members for purposes of— (i) section 216 of the Internal Revenue Code of 1954 (relating to deduction of taxes, interest, and business depreciation by cooperative housing corporation tenant-stockholder), and (ii) section 277 of such Code (relating to deductions incurred by certain membership organizations in transactions with members). (B) No inference.— Nothing in the provisions of this paragraph shall be construed to infer that a change in law is intended with respect to the treatment of deductions under section 277 of the Internal Revenue Code of 1954 with respect to cooperative housing corporations, and any determination of such issue shall be made as if such provisions had not been enacted. (3) Treatment of certain interest claimed as deduction.— Any amount— (A) claimed (on a return of tax imposed by chapter 1 of the Internal Revenue Code of 1954) as a deduction by a qualified cooperative housing corporation for interest for any taxable year beginning before January 1, 1986, on a second mortgage loan made by a city housing development agency or corporation in connection with a qualified refinancing, and (B) reported (before April 16, 1986) by the qualified cooperative housing corporation to its tenant-stockholders as interest described in section 216(a)(2) of such Code, shall be treated for purposes of such Code as if such amount were paid by such qualified cooperative housing corporation during such taxable year. (4) Qualified cooperative housing corporation.— (A) In general.— For purposes of this subsection, the term “qualified cooperative housing corporation” means any corporation if— (i) such corporation is, after the application of paragraphs (1) and (2), a cooperative housing corporation (as defined in section 216(b) of the Internal Revenue Code of 1954), (ii) such corporation is subject to a qualified limited-profit housing companies law, and (iii) such corporation either— (I) filed for incorporation on July 22, 1965, or (II) filed for incorporation on March 5, 1964. (B) Qualified limited-profit housing companies law.— For purposes of subparagraph (A), the term “qualified limited-profit housing companies law” means any limited-profit housing companies law which limits the resale price for a tenant-stockholder’s stock in a cooperative housing corporation to the sum of his basis for such stock plus his proportionate share of part or all of the amortization of any mortgage on the building owned by such corporation. (5) Qualified refinancing.— For purposes of this subsection, the term “qualified refinancing” means any refinancing— (A) which occurred— (i) with respect to a qualified cooperative housing corporation described in paragraph (4)(A)(iii)(I) on September 20, 1978, or (ii) with respect to a qualified cooperative housing corporation described in paragraph (4)(A)(iii)(II) on November 21, 1978, and (B) in which a qualified cooperative housing corporation refinanced a first mortgage loan made to such corporation by a city housing development agency with a first mortgage loan made by a city housing development corporation and insured by an agency of the Federal Government and a second mortgage loan made by such city housing development agency, in the process of which a reserve was created (as required by such Federal agency) and closing costs were paid or reimbursed by such city housing development agency or corporation. (6) Qualified refinancing-related reserve.— For purposes of this subsection, the term “qualified refinancing-related re-serve” means any reserve of a qualified cooperative housing corporation with respect to the creation of which no amount was included in the gross income of such corporation by reason of paragraph (a). (7) Treatment of amounts paid from qualified refinancing-related reserve.— (A) In general.— With respect to any payment from a qualified refinancing-related reserve out of amounts excluded from gross income by reason of paragraph (1)— (i) no deduction shall be allowed under chapter 1 of such Code, and (ii) the basis of any property acquired with such payment (determined without regard to this subparagraph) shall be reduced by the amount of such payment. (B) Ordering rules.— For purposes of subparagraph (A), payments from a reserve shall be treated as being made— (i) first from amounts excluded from gross income by reason of paragraph (1) to the extent thereof, and (ii) then from other amounts in the reserve. (f) Effective Date.— (1) In general.— The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) Subsection (e).— (A) Except as provided in subparagraph (B), subsection (e) shall apply to taxable years beginning before January 1, 1986. (B) Subsection (e)(T) shall apply to amounts paid or incurred, and property acquired, in taxable years beginning, after December 31, 1985. SEC. 645. SPECIAL RULES RELATING TO PERSONAL HOLDING COMPANY TAX. (a) Computer Software Royalties.— (1) In general.— Paragraph (1) of section 543(a) (defining personal holding company income) is amended— (A) by striking out “and” at the end of subparagraph (A), (B) by striking out the period at the end of subparagraph (B) and inserting in lieu thereof“, and”, and (C) by adding at the end thereof the following new subparagraph: “(C) active business computer software royalties (within the meaning of subsection (d)).” (2) Active business computer software royalties defined.— Section 543 is amended by adding at the end thereof the following new subsection: “(d) Active Business Computer Software Royalties.— “(1) ) In general.— For purposes of this section, the term ‘active business computer software royalties’ means any royalties— “(A) received by any corporation during the taxable year in connection with the licensing of computer software, and “(B) with respect to which the requirements of paragraphs (2), (3), (4), and (5) are met. “(2) Royalties must be received by corporation actively engaged in computer software business.— The requirements of this paragraph are met if the royalties described in paragraph (1)— “(A) are received by a corporation engaged in the active conduct of the trade or business of developing, manufacturing, or producing computer software, and “(B) are attributable to computer software which— “(i) is developed, manufactured, or produced by such corporation (or its predecessor) in connection with the trade or business described in subparagraph (A), or “(ii) is directly related to such trade or business. “(3) Royalties must constitute at least 50 percent of income.— The requirements of this paragraph are met if the royalties described in paragraph (1) constitute at least 50 percent of the ordinary gross income of the corporation for the t axable year. “(4) Deductions under sections 162 and 174 relating to royalties must equal or exceed 25 percent of ordinary gross income.— “(A) In general.— The requirements of this paragraph are met if— “(i) the sum of the deductions allowable to the corporation under sections 162, 174, and 195 for the taxable year which are properly allocable to the trade or business described in paragraph (2) equals or exceeds 25 percent of the ordinary gross income of such corporation for such taxable year, or “(ii) the average of such deductions for the 5-taxable year period ending with such taxable year equals or exceeds 25 percent of the average ordinary gross income of such corporation for such period. If a corporation has not been in existence during the 5-taxable year period described in clause (ii), then the period of existence of such corporation shall be substituted for such 5-taxable year period. “(B) Deductions allowable under section 162.— For purposes of subparagraph (A), a deduction shall not be treated as allowable under section 162 if it is specifically allowable under another section. “(C) Limitation on allowable deductions.— For purposes of subparagraph (A), no deduction shall be taken into account with respect to compensation for personal services rendered by the 5 individual shareholders holding the largest percentage (by value) of the outstanding stock of the corporation. For purposes of the preceding sentence— “(i) individuals holding less than 5 percent (by value) of the stock of such corporation shall not be taken into account, and “(ii) stock deemed to be owned by a shareholder solely by attribution from a partner under section 544(a)(2) shall be disregarded. “(5) Dividends must equal or exceed excess of personal holding company income over 10 percent of ordinary gross income.— “(A) In general.— The requirements of this paragraph are met if the sum of— “(i) the dividends paid during the taxable year (determined under section 562), “(ii) the dividends considered as paid on the last day of the taxable year under section 563(c) (as limited by the second sentence of section 563(b)), and “(iii) the consent dividends for the taxable year (determined under section 565), equals or exceeds the amount, if any, by which the personal holding company income for the taxable year exceeds 10 percent of the ordinary gross income of such corporation for such taxable year. “(B) Computation of personal holding company income.— For purposes of this paragraph, personal holding company income shall be computed— “(i) without regard to amounts described in subsection (a)(1)(C), “(ii) without regard to interest income during any taxable year— “(I) which is in the 5-taxable year period beginning with the later of the 1st taxable year of the corporation or the 1st taxable year in which the corporation conducted the trade or business described in paragraph (2)(A), and “(II) during which the corporation meets the requirements of paragraphs (2), (3), and (4), and “(iii) by including adjusted income from rents and adjusted income from mineral, oil, and gas royalties (within the meaning of paragraphs (2) and (3) of subsection (a)). “(6) Special rules for affiliated group members.— “(A) In general.— In any case in which— “(i) the taxpayer receives royalties in connection with the licensing of computer software, and “(ii) another corporation which is a member of the same affiliated group as the taxpayer meets the requirements of paragraphs (2), (3), (4), and (5) with respect to such computer software, the taxpayer shall be treated as having met such requirements. “(B) Affiliated group.— For purposes of this paragraph, the term ‘affiliated group’ has the meaning given such term by section 1504(a).” (3) Foreign personal holding company income.— Paragraph (1) of section 553(a) (defining foreign personal holding company income) is amended by adding at the end thereof the following new sentence: “This paragraph shall not apply to active business computer software royalties (as defined in section 543(d)).” (4) Conforming amendments.— (A) Section 543(a)(4) (relating to copyright royalties) is amended by adding at the end thereof the following new sentence: “This paragraph shall not apply to active business computer software royalties.”. (B) Section 543(b)(3) (relating to adjusted income from rents) is amended— (i) by striking out “or” at the end of subparagraph (C), (ii) by striking out the period at the end of subparagraph (D) and inserting in lieu thereof “, or”, and (iii) by adding at the end thereof the following new subparagraph: “(E) active business computer software royalties (as defined in subsection (d)).” (b) Special Rules for Broker-Dealers.— In the case of a broker-dealer which is part of an affiliated group which files a consolidated Federal income tax return, the common parent of which was incorporated in Nevada on January 27, 1972, the personal holding company income (within the meaning of section 543 of the Internal Revenue Code of 1986) of such broker-dealer, shall not include any interest received after the date of the enactment of this Act with respect to— (1) any securities or money market instruments held as inventory, (2) margin accounts, or (3) any financing for a customer secured by securities or money market instruments. (c) Special Rule for Royalties Received by Qualified Tax-payer.— (1) In general.— Any qualified royalty received or accrued in taxable years beginning after December 31, 1981, by a qualified taxpayer shall be treated in the same manner as a royalty with respect to software is treated under the amendments made by this section. (2) Qualified taxpayer.— For purposes of this subsection, a qualified taxpayer is any taxpayer incorporated on September 7, 1978, which is engaged in the trade or business of manufacturing dolls and accessories. (3) Qualified royalty.— For purposes of this subsection, the term “qualified royalty” means any royalty arising from an agreement entered into in 1982 which permits the licensee to manufacture and sell dolls and accessories. (d) Special Rule for Treatment of Active Business Computer Royalties for Corporation Purposes.— In the case of a taxpayer which was incorporated on May 3, 1977, in California and which elected to be taxed as an S corporation for its taxable year ending on December 31, 1985, any active business computer royalties (within the meaning of section 543(d) of the Internal Revenue Code of 1986 as added by this Act) which are received by the taxpayer in taxable years beginning after December 31, 1984, shall not be treated as passive investment income (within the meaning of section 1362(d)(3)(D)) for purposes of subchapter S of chapter 1 of such Code. (e) Effective Date.— The amendments made by subsection (a) shall apply to royalties received before, on, and after December 31, 1986. SEC. 646. CERTAIN ENTITIES NOT TREATED AS CORPORATIONS. (a) General Rule.— For purposes of the Internal Revenue Code of 1986, if the entity described in subsection (b) makes an election under subsection (c), such entity shall be treated as a trust to which subpart E of part 1 of subchapter J of chapter 1 of such Code applies. (b) Entity.— An entity is described in this subsection if— (1) such entity was created in 1906 as a common law trust and is governed by the trust laws of the State of Minnesota, (2) such entity receives royalties from iron ore leases, and (.3) income interests in such entity are publicly traded on a national stock exchange. (c) Election.— (1) In general.— An election under this subsection to have the provisions of this section apply— (A) shall be made by the board of trustees of the entity, and (B) shall not be valid unless accompanied by an agreement described in paragraph (2). (2) Agreement.— The agreement described in this paragraph is a written agreement signed by the board of trustees of the entity which provides that the entity will not— (A) sell any trust property, (B) purchase any additional trust properties, or (C) receive any income other than— (i) income from long-term mineral leases, or (ii) interest or other income attributable to ordinary and necessary reserves of the entity. (3) Period for which election is in effect.— An election under this subsection shall be in effect during the period— (A) beginning on the first day of the first taxable year beginning after the date of the enactment of this Act and following the taxable year in which the election is made, and (8) ending as of the close of the taxable year preceding the taxable year in which the entity ceases to be described in subsection (b) or violates any term of the agreement under paragraph (2). (4) Manner of election.— Any election under this subsection shall be made in such manner as the Secretary of the Treasury or his delegate may prescribe. (d) Special Rules for Taxation of Trust.— (1) Election treated as a liquidation.— If an election is made under subsection (c) with respect to any entity— (A) such entity shall be treated as having been liquidated into a trust immediately before the period described in subsection (c)(3) in a liquidation to which section 333 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this Act) applies, and (B) any person holding an interest in the property held by such entity as of such time shall be treated as a qualified electing shareholder for purposes of section 333 of such Code (as so in effect). (2) Termination of election.— If an entity ceases to be described in subsection (b) or violates any term of the agreement described in subsection (c)(2), then the tax imposed on such entity for the taxable year in which such cessation or violation occurs shall be increased by the sum of— (A) the amount of taxes which would have been imposed on such entity during any taxable year with respect to which an election under subsection (c) was in effect if such election had not been in effect, plus (B) interest determined for the period— (i) beginning on the due date for any such taxable year, and (ii) ending on the due date for the taxable year in which such cessation or violation occurs, by using the rates and method applicable under section 6621 for underpayments of tax for such period. (3) Trust ceasing to exist.— Paragraph (2) shall not apply if the trust ceases to be described in subsection (b) or violates the agreement in subsection (c)(2) because the trust ceases to exist or by reason of subsection (e). (e) Termination of Election.— Any election under subsection (c) shall not apply to any taxable year beginning more than 5 years after the date of the enactment of this Act unless the trust petitions a court of competent jurisdiction and the court acts to remove from the trust instrument any powers deemed by the court to be inconsistent with the operation of the entity as a trust for tax purposes (as described in an Internal Revenue Service ruling dated November 1, 1983). SEC. 647. SPECIAL RULE FOR DISPOSITION OF STOCK OF SUBSIDIARY. If for a taxable year of an affiliated group filing a consolidated return ending on or before December 31, 1987, there is a disposition of stock of a subsidiary (within the meaning of Treasury Regulation section 1.1502–19), the amount required to be included in income with respect to such disposition under Treasury Regulation section 1.1502–19(a) shall, notwithstanding such section, be included in income ratably over the 15-year period beginning with the taxable year in which the disposition occurs. The preceding sentence shall apply only if such subsidiary was incorporated on December 24, 1969, and is a participant in a mineral joint venture with a corporation organized under the laws of the foreign country in which the joint venture mineral project is located. Subtitle F— Regulated Investment Companies SEC. 651. EXCISE TAX ON UNDISTRIBUTED INCOME OF REGULATED INVESTMENT COMPANIES. (a) General Rule.— Chapter 44 (relating to real estate investment trusts) is amended by adding at the end thereof the following new section: “SEC. 4982. EXCISE TAX ON UNDISTRIBUTED INCOME OF REGULATED INVESTMENT COMPANIES. “(a) Imposition of Tax.— There is hereby imposed a tax on every regulated investment company for each calendar year equal to 4 percent of the excess (if any) of— “(1) the required distribution for such calendar year, over “(2) the distributed amount for such calendar year. “(b) Required Distribution.— For purposes of this section— “(1) In general.— The term ‘required distribution’ means, with respect to any calendar year, the sum of— “(A) 97 percent of the regulated investment company’s ordinary income for such calendar year, plus “(B) 90 percent of the regulated investment company’s capital gain net income for the 1-year period ending on October 31 of such calendar year. “(2) Increase by prior year shortfall.— The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— “(A) the grossed up required distribution for the preceding calendar year, over “(B) the distributed amount for such preceding calendar year. “(3) Grossed up required distribution.— The grossed up required distribution for any calendar year is the required distribution for such year determined— “(A) with the application of paragraph (2) to such taxable year, and “(B) by substituting ‘100 percent’ for each percentage set forth in paragraph (1). “(c) Distributed Amount.— For purposes of this section— “(1) In general.— The term ‘distributed amount’ means, with respect to any calendar year, the sum of— “(A) the deduction for dividends paid (as defined in section 561) during such calendar year, and “(B) any amount on which tax is imposed under subsection (b)(1) or (b)(3)(A) of section 852 for any taxable year ending in such calendar year. “(2) Increase by prior year overdistribution.— The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— “(A) the distributed amount for the preceding calendar year (determined with the application of this paragraph to such preceding calendar year), over “(B) the grossed up required distribution for such preceding calendar year. “(3) Determination of dividends paid.— The amount of the dividends paid during any calendar year shall be determined without regard to— “(A) the provisions of section 855, and “(B) any exempt-interest dividend as defined in section 852(b)(5). “(d) Time for Payment of Tax.— The tax imposed by this section for any calendar year shall be paid on or before March 15 of the following calendar year. “(e) Definitions and Special Rules.— For purposes of this section— “(1) Ordinary income.— The term ‘ordinary income’ means the investment company taxable income (as defined in section 852(b)(2)) determined— “(A) without regard to subparagraphs (A) and (D) of section 852(b)(2), “(B) by not taking into account any gain or loss from the sale or exchange of a capital asset, and “(C) by treating the calendar year as the company’s taxable year. “(2) Capital gain net income.— The term ‘capital gain net income’ has the meaning given to such term by section 1222(9) (determined by treating the 1-year period ending on October 31 of any calendar year as the company’s taxable year). “(3) Treatment of deficiency distributions.— In the case of any deficiency dividend (as defined in section 860(f))— “(A) such dividend shall be taken into account when paid without regard to section 860, and “(B) any income giving rise to the adjustment shall be treated as arising when the dividend is paid. “(4) Election to use taxable year in certain cases.— “(A) In general.— If— “(i) the taxable year of the regulated investment company ends with the month of November or December, and “(ii) such company makes an election under this paragraph, subsection (b)(1)(B) and paragraph (2) of this subsection shall be applied by taking into account the company’s taxable year in lieu of the 1-year period ending on October 31 of the calendar year. “(B) Election revocable only with consent.— An election under this paragraph, once made, may be revoked only with the consent of the Secretary.” (b) Related Amendments.— (1) Time certain dividends taken into account.— (A) Subsection (b) of section 852 (relating to method of taxation of regulated investment companies and their shareholders) is amended by adding at the end thereof the following new paragraph: “(6) Time certain dividends taken into account.— For purposes of this title, any dividend declared by a regulated investment company in December of any calendar year and payable to shareholders of record on a specified date in such month shall be deemed— “(A) to have been received by each shareholder on such date, and “(B) to have been paid by such company on such date (or, if earlier, as provided in section 855). The preceding sentence shall apply only if such dividend is actually paid by the company before February 1 of the following calendar year.” (B) Subsection (b) of section 855 is amended by striking out “Amounts” and inserting in lieu thereof “Except as provided in section 852(b)(6), amounts”. (2) Treatment of earnings and profits.— Subsection (c) of section 852 is amended to read as follows: “(c) Earnings and Profits.— “(1) In general.— The earnings and profits of a regulated investment company for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income for such taxable year. For purposes of this subsection, the term ‘regulated investment company’ includes a domestic corporation which is a regulated investment company determined without regard to the requirements of subsection (a). “(2) Coordination with tax on undistributed income.— A regulated investment company shall be treated as having sufficient earnings and profits to treat as a dividend any distribution (other than in a redemption to which section 302(a) applies) which is treated as a dividend by such company. The preceding sentence shall not apply to the extent that the amount distributed during any calendar year by the company exceeds the required distribution for such calendar year (as determined under section 4982).” (3) Treatment of net capital loss after October 31 of any year.— Subparagraph (C) of section 852(b)(3) (defining capital gain dividend) is amended by adding at the end thereof the following new sentences: “For purposes of this subparagraph, the amount of the net capital gain for a taxable year (to which an election under section 4982(e)(4) does not apply) shall be determined without regard to any net capital loss attributable to transactions after October 31 of such year, and any such net capital loss shall be treated as arising on the 1st day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing regulated investment company taxable income.” (c) Clerical Amendment.— Chapter 44 is amended by striking out the chapter heading and the table of sections and inserting in lieu thereof the following: “CHAPTER 44— QUALIFIED INVESTMENT ENTITIES “Sec. 4981. Excise tax on undistributed income of real estate investment trusts. “Sec. 4982. Excise tax on undistributed income of regulated investment companies.” (d) Effective Date.— The amendments made by this section shall apply to calendar years beginning after December 31, 1986. SEC. 652. TREATMENT OF BUSINESS DEVELOPMENT COMPANIES. (a) General Rule.— Paragraph (1) of section 851(a) is amended by striking out “either as a management company or as a unit investment trust” and inserting in lieu thereof “as a management company, business development company, or unit investment trust”. (b) Technical Amendment.— Paragraph (1) of section 851(e) (relating to investment companies furnishing capital to development corporations) is amended by striking out “registered management company” and inserting in lieu thereof “registered management company or registered business development company”. (c) Effective Date.— The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 653. AMENDMENTS TO QUALIFICATION RULES. (a) Treatment of Certain Hedging Transactions.— Section 851 (defining regulated investment company) is amended by adding at the end thereof the following new subsection: “(g) Treatment of Certain Hedging Transactions.— “(1) In general.— In the case of any designated hedge, for purposes of subsection (b)(3), increases (and decreases) during the period of the hedge in the value of positions which are part of such hedge shall be netted. “(2) Designated hedge.— For purposes of this subsection, there is a designated hedge where— “(A) the taxpayer’s risk of loss with respect to any position in property is reduced by reason of— “(i) the taxpayer having an option to sell, being under a contractual option to sell, or having made (and not closed) a short sale of substantially identical property, “(ii) the taxpayer being the grantor of an option to buy substantially identical property, or “(iii) under regulations prescribed by the Secretary, the taxpayer holding 1 or more other positions, and “(B) the positions which are part of the hedge are clearly identified by the texpayer in the manner prescribed by regulations.” (b) Definition of Qualifying Income.— Paragraph (2) of subsection 851(b) is amended by striking out the semicolon at the end thereof and inserting in lieu thereof: “(as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended) or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies;”. (c) Foreign Currency Gains.— Subsection (b) of section 851 is amended by inserting before the last sentence thereof the following new sentence: “For purposes of paragraph (2), the Secretary may by regulation exclude from qualifying income foreign currency gains which are not ancillary to the company’s principal business of investing in stock or securities (or options and futures with respect to stock or securities).” (d) Effective Date.— The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act. SEC. 654. TREATMENT OF SERIES FUNDS AS SEPARATE CORPORATIONS. (a) General Rule.— Section 851 is amended by adding at the end thereof the following new subsection: “(q) Special Rule for Series Funds.— “(1) In general.— In the case of a regulated investment company (within the meaning of subsection (a)) having more than one fund, each fund of such regulated investment company shall be treated as a separate corporation for purposes of this title (except with respect to the definitional requirement of subsection (a)). “(2) Fund defined.— For purposes of paragraph (1) the term ‘fund’ means a segregated portfolio of assets, the beneficial interests in which are owned by the holders of a class or series of stock of the regulated investment company that is preferred over all other classes or series in respect of such portfolio of assets.” (b) Effective Date.— (1) In general.— The amendment made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act. (2) Treatment of certain existing series funds.— In the case of a regulated investment company which has more than one fund on the date of the enactment of this act, and has before such date been treated for Federal income tax purposes as a single corporation— (A) the amendment made by subsection (a), and the resulting treatment of each fund as a separate corporation, shall not give rise to the realization or recognition of income or loss by such regulated investment company, its funds, or its shareholders, and (B) the tax attributes of such regulated investment company shall be appropriately allocated among its funds. SEC. 655. EXTENSION OF PERIOD FOR MAILING NOTICES TO SHAREHOLDERS. (a) General Rule.— The following provisions are each amended by striking out “45 days” each place it appears and inserting in lieu thereof “60 days”: (1) Paragraph (3) of subsection 852(b). (2) Subparagraph (A) of paragraph 852(b)(5). (3) Subsection (c) of section 853. (4) Paragraph (2) of subsection 854(b). (5) Subsection (c) of section 855. (b) Effective Date.— The amendments made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act. SEC. 656. PROTECTION OF MUTUAL FUNDS RECEIVING THIRD-PARTY SUMMONSES. (a) General Rule.— Paragraph (3) of subsection 7609(a) is amended— (1) by striking out “and” at the end of subparagraph (F); (2) by striking out the period at the end of subparagraph (G) and inserting in lieu thereof“; and”; and (3) by adding the following new subparagraph: “(H) any regulated investment company (as defined in section 851) and any agent of such regulated investment company when acting as an agent thereof.” (b) Effective Date.— The amendment made by subsection (a) shall apply to summonses served after the date of the enactment of this Act. SEC. 657. CERTAIN DISTRIBUTIONS NOT TREATED AS PREFERENTIAL DIVIDENDS. (a) General Rule.— Subsection (c) of section 562 (relating to preferential dividends) is amended by adding at the end thereof the following new sentence: “In the case of a distribution by a regulated investment company to a shareholder who made an initial investment of at least $10,000,000 in such company, such distribution shall not be treated as not being pro rata or as being preferential solely by reason of an increase in the distribution by reason of reductions in administrative expenses of the company.” (b) Effective Date.— The amendment made by subsection (a) shall apply to distributions after the date of the enactment of this Act. Subtitle G— Real Estate Investment Trusts SEC. 661. GENERAL QUALIFICATION REQUIREMENTS. (a) Modification of Closely-Held Requirements.— (1) Paragraph (6) of section 856(a) is amended to read as follows: “(6) which is not closely held (as determined under subsection (h)); and”. (2) Section 856 is amended by adding at the end thereof the following new subsection: “(h) Closely Held Determinations.— “(1) Section 542(a)(2) applied.— “(A) In general.— For purposes of subsection (a)(6), a corporation, trust, or association is closely held if the stock ownership requirement of section 542(a)(2) is met. “(B) Waiver of partnership attribution, etc.— For purposes of subparagraph (A)— “(i) paragraph (2) of section 544(a) shall be applied as if such paragraph did not contain the phrase ‘or by or for his partner’, and “(ii) sections 544(a)(4)(A) and 544(b)(1) shall be applied by substituting ‘the entity meet the stock ownership requirement of section 542(a)(2)’ for ‘the corporation a personal holding company’. “(2) Subsections (a) (5) and (6) not to apply to 1st year.— Paragraphs (5) and (6) of subsection (a) shall not apply to the 1st taxable year for which an election is made under subsection (c)(1) by any corporation, trust, or association.” (b) Requirement of No Earnings and Profits Accumulated in Non-REIT Years.— Subsection (a) of section 857 is amended by striking out “and” at the end of paragraph (1), by striking out the period at the end of paragraph (2) and inserting in lieu thereof “, and”, and by adding at the end thereof the following: “(3) either— “(A) the provisions of this part apply to the real estate investment trust for all taxable years beginning after February 28, 1986, or “(B) as of the close of the taxable year, the real estate investment trust has no earnings and profits accumulated in any non-REIT year. For purposes of the preceding sentence, the term ‘non-REIT year’ means any taxable year to which the provisions of this part did not apply with respect to the entity.” (c) Initial Change in Annual Accounting Period Permitted.— (1) Section 859 is amended by adding at the end thereof the following new subsection: “(b) Change of Accounting Period Without Approval.— Notwithstanding section 442, an entity which has not engaged in any active trade or business may change its accounting period to a calendar year without the approval of the Secretary if such change is in connection with an election under section 856(c).” (2) Section 859 is amended by striking out “For purposes of” and inserting in lieu thereof “(a) General Rule.—for purposes of”. SEC. 662. ASSET AND INCOME REQUIREMENTS. (a) Treatment of Certain Wholly Owned Subsidiaries.— Section 856 (defining real estate investment trust) is amended by adding at the end thereof the following new subsection: “(i) Treatment of Certain Wholly Owned Subsidiaries.— “(1) In general.— For purposes of this title— “(A) a corporation which is a qualified REIT subsidiary shall not be treated as a separate corporation, and “(B) all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the real estate investment trust. “(2) Qualified reit subsidiary.— For purposes of this subsection, the term ‘qualified REIT subsidiary’ means any corporation if 100 percent of the stock of such corporation is held by the real estate investment trust at all times during the period such corporation was in existence. “(3) Treatment of termination of qualified subsidiary status.— For purposes of this subtitle, if any corporation which was a qualified REIT subsidiary ceases to meet the requirements of paragraph (2), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the real estate investment trust in exchange for its stock.” (b) Temporary Investment of New Equity Capital.— (1) Paragraph (3) of section 856(c) is amended by striking out “and” at the end of subparagraph (G), by adding “and” at the end of subparagraph (H), and by inserting after subparagraph (H) the following new subparagraph: “(I) qualified temporary investment income;”. (2) Subparagraph (B) of section 856(c)(6) is amended by adding at the end thereof the following new sentence: “Such term also includes any property (not otherwise a real estate asset) attributable to the temporary investment of new capital, but only if such property is stock or a debt instrument, and only for the 1-year period beginning on the date the real estate trust receives such capital.” (3) Paragraph (6) of section 856(c) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph: “(D) Qualified temporary investment income.— “(i) In general.— The term ‘qualified temporary investment income’ means any income which— “(I) is attributable to stock or a debt instrument, “(II) is attributable to the temporary investment of new capital, and “(III) is received or accrued during the 1-year period beginning on the date on which the real estate investment trust receives such capital. “(ii) New capital.— The term ’new capital’ means any amount received by the real estate investment trust— “(I) in exchange for stock in such trust (other than amounts received pursuant to a dividend reinvestment plan), or “(II) in a public offering of debt obligations of such trust which have maturities of at least 5 years. (c) Treatment of Shared Appreciation Mortgages.— Section 856 is amended by adding at the end thereof the following new subsection: “(j) Treatment of Shared Appreciation Mortgages.— “(1) In general.— Solely for purposes of subsection (c) of this section and section 857(b)(6), any income derived from a shared appreciation provision shall be treated as gain recognized on the sale of the secured property. “(2) Treatment of income.— For purposes of applying subsection (c) of this section and section 857(b)(6) to any income described in paragraph (1)— “(A) the real estate investment trust shall be treated as holding the secured property for the period during which it held the shared appreciation provision (or, if shorter, for the period during which the secured property was held by the person holding such property), and “(B) the secured property shall be treated as property described in section 1221(1) if it is so described in the hands of the person holding the secured property (or it would be so described if held by the real estate investment trust). “(3) Coordination with prohibited transactions safe harbor.— For purposes of section 857(b)(6)(C)— “(A) the real estate investment trust shall be treated as having sold the secured property when it recognizes any income described in paragraph (1), and “(B) any expenditures made by any holder of the secured property shall be treated as made by the real estate investment trust. “(4) Definitions.— For purposes of this subsection— “(A) Shared appreciation provision.— The term ‘shared appreciation provision’ means any provision— “(i) which is in connection with an obligation which is held by the real estate investment trust and is secured by an interest in real property, and “(ii) which entitles the real estate investment trust to receive a specified portion of any gain realized on the sale or exchange of such real property (or of any gain which would be realized if the property were sold on a specified date). “(B) Secured property.— The term ‘secured property’ means the real property referred to in subparagraph (A).” SEC. 663. DEFINITION OF RENTS. (a) Modification of Independent Contractor Requirements.— Paragraph (2) of section 856(d) (relating to certain amounts excluded from rents from real property) is amended by adding at the end thereof the following: “Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unrelated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2).” (b) Certain Rents or Interest Based on Net Income or Profits Permitted.— (1) Rents.— Subsection (d) of section 856 is amended by adding at the end thereof the following new paragraph: “(6) Special rule for certain property subleased by tenant of real estate investment trusts.— “(A) In general.— If— “(i) a real estate investment trust receives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and “(ii) such tenant receives or accrues, directly or indirectly, from subtenants only amounts which are qualified rents, then the amounts that the trust receives or accrues from the tenant shall not be excluded from the term ‘rents from real property’ solely by reason of being based on the income or profits of such tenant. “(B) Qualified rents.— For purposes of subparagraph (A), the term ‘qualified rents’ means any amount which would be treated as rents from real property if received by the real estate investment trust.” (2) Interest.— Subsection (f) of section 856 (relating to qualifying interest income) is amended to read as follows: “(f) Interest.— “(1) In general.— For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term ’interest’ does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends (in whole or in part) on the income or profits of any person, except that— “(A) any amount so received or accrued shall not be excluded from the term ‘interest’ solely by reason of being based on a fixed percentage or percentages of receipts or sales, and “(B) any amount so received or accrued with respect to an obligation secured by a mortgage on real property or an interest in real property shall not be excluded from the term ‘interest’ solely by reason of being based on the income or profits of the debtor from such property, if— “(i) the debtor derives substantially all of its gross income with respect to such property from the leasing of substantially all of its interests in such property to tenants, and “(ii) the amounts received or accrued directly or indirectly by the debtor from such tenants are only qualified rents (as defined in subsection (d)(6)(B)). “(2) Special rule.— Where a real estate investment trust receives or accrues any amount which would be excluded from the term ‘interest’ solely because the debtor of the real estate investment trust receives or accrues any amount the determination of which depends (in whole or in part) on the income or profits of any person, only a proportionate part (determined under regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust shall be excluded from the term ‘interest’.” (3) Conforming amendment.— Subparagraph (A) of section 856(d)(2) is amended by striking out “paragraph (4)” and inserting in lieu thereof “paragraphs (4) and (6)”. SEC. 664. DISTRIBUTION REQUIREMENTS. (a) Exclusion of Certain Noncash Income From Distribution Requirement.— Subparagraph (B) of section 857(a)(1) (relating to distribution requirements) is amended to read as follows: “(B) any excess noncash income (as determined under subsection (e)); and” (b) Excess Noncash Income Defined.— Section 857 is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: “(e) Excess Noncash Income.— “(1) In general.— For purposes of subsection (a)(1)(B), the term ‘excess noncash income’ means the excess (if any) of— “(A) the amount determined under paragraph (2) for the taxable year, over “(B) 5 percent of the real estate investment trust taxable income for the taxable year determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain. “(2) Determination of amount.— The amount determined under this paragraph for the taxable year is the sum of— “(A) the amount (if any) by which— “(i) the amounts includible in gross income under section 467 (relating to certain payments for the use of property or services), exceed “(ii) the amounts which would have been includible in gross income without regard to such section, “(B) in the case of a real estate investment trust using the cash receipts and disbursements method of accounting, the amount (if any) by which— “(i) the amounts includible in gross income as original issue discount on instruments to which section 1274 (relating to certain debt instruments issued for property) applies, exceed “(ii) the amount of money and the fair market value of other property received during the taxable year under such instruments; plus “(C) any income on the disposition of a real estate asset if— “(i) there is a determination (as defined in section 860(e)) that such income is not eligible for nonrecognition under section 1031, and “(ii) failure to meet the requirements of section 1031 was due to reasonable cause and not to willful neglect.” SEC. 665. TREATMENT OF CAPITAL GAINS. (a) Coordination of Net Operating Loss Deduction With Payment of Capital Gain Dividends.— (1) In general.— Paragraph (3) of section 857(b) (relating to capital gains) is amended by adding at the end thereof the following new subparagraph: “(D) Coordination with net operating loss provisions.— For purposes of section 172, if a real estate investment trust pays capital gain dividends during any taxable year, the amount of the net capital gain for such taxable year (to the extent such gain does not exceed the amount of such capital gain dividends) shall be excluded in determining— “(i) the net operating loss for the taxable year, and “(ii) the amount of the net operating loss of any prior taxable year which may be carried through such taxable year under section 172(b)(2) to a succeeding taxable year.” (2) Repeal of limitation of net capital gain to real estate investment trust taxable income.— Subparagraph (C) of section 857(b)(3) (defining capital gain dividend) is amended by striking out the last sentence. (b) Notice of Capital Gains Dividends May Be Mailed With Annual Report.— (1) Subparagraph (C) of section 857(b)(3) (defining capital gain dividend) is amended by striking out “the close of its taxable year” and inserting in lieu thereof “the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year)”. (2) Subsection (c) of section 858 (relating to notice to share-holders) is amended by striking out “distribution is made” and inserting in lieu thereof “distribution is made (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year)”. SEC. 666. MODIFICATIONS OF PROHIBITED TRANSACTION RULES. (a) Exemptions From Prohibited Transactions Rules.— (1) Clause (iii) of section 857(b)(6)(C) (relating to certain sales not to constitute prohibited transactions) is amended to read as follows: “(iii) (I) during the taxable year the trust does not make more than 7 sales of property (other than foreclosure property), or (II) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than foreclosure property) sold during the taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable year; and”. (2) Clause (ii) of section 857(b)(6)(C) is amended by striking out “20 percent” and inserting in lieu thereof “30 percent”. (3) Subparagraph (C) of section 857(b)(6) is amended by striking out “and” at the end of clause (iii), by striking out the period at the end of clause (iv) and inserting in lieu thereof “; and”, and by inserting after clause (iv) the following new clause: “(v) if the requirement of clause (iii)(I) is not satisfied, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor (as defined in section 856(d)(3)) from whom the trust itself does not derive or receive any income.” (b) Net Loss From Prohibited Transactions.— (1) Loss from prohibited transactions not allowed to offset gain from such transactions.— Clause (ii) of section 857(b)(6)(B) (relating to income from prohibited transactions) is amended to read as follows: “(ii) in determining the amount of the net income derived from prohibited transactions, there shall not be taken into account any item attributable to any prohibited transaction for which there was a loss; and”. (2) Net loss may reduce taxable income.— Subparagraph (F) of section 857(b)(2) (defining real estate investment trust taxable income) is amended by striking out “and there shall be included an amount equal to any net loss derived from prohibited transactions”. SEC. 667. DEFICIENCY DIVIDENDS OF REAL ESTATE INVESTMENT TRUSTS NOT SUBJECT TO PENALTY UNDER SECTION 6697. “(a) General Rule.— The section heading and subsection (a) of section 6697 (relating to assessable penalties with respect to liability for tax of qualified investment entities) are amended to read as follows: “SEC. 6697. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR TAX OF REGULATED INVESTMENT COMPANIES. “(a) Civil Penalty.— In addition to any other penalty provided by law, any regulated investment company whose tax liability for any taxable year is deemed to be increased pursuant to section 860(c)(1)(A) shall pay a penalty in an amount equal to the amount of the interest (for which such company is liable) which is attributable solely to such increase.” (b) Conforming Amendment.— (1) Subsection (j) of section 860 is amended by striking out “qualified investment entity” and inserting in lieu thereof “regulated investment company”. (2) The table of sections for subchapter B of chapter 68 is amended by striking out the item relating to section 6697 and inserting in lieu thereof the following: “Sec. 6697. Assessable penalties with respect to liability for tax of regulated investment companies.” SEC. 668. EXCISE TAX ON UNDISTRIBUTED INCOME OF REAL ESTATE INVESTMENT TRUSTS. (a) General Rule.— Section 4981 is amended to read as follows: SEC. 4981. EXCISE TAX ON UNDISTRIBUTED INCOME OF REAL ESTATE INVESTMENT TRUSTS. “(a) Imposition of Tax.— There is hereby imposed a tax on every real estate investment trust for each calendar year equal to 4 percent of the excess (if any) of— “(1) the required distribution for such calendar year, over “(2) the distributed amount for such calendar year. “(b) Required Distribution.— For purposes of this section— “(1) In general.— The term ‘required distribution’ means, with respect to any calendar year, the sum of— “(A) 85 percent of the real estate investment trust’s ordinary income for such calendar year, plus “(B) 95 percent of the real estate investment trust’s capital gain net income for such calendar year. “(2) Increase by prior year shortfall.— The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— “(A) the grossed up required distribution for the preceding calendar year, over “(B) the distributed amount for such preceding calendar year. “(3) Grossed up required distribution.— The grossed up required distribution for any calendar year is the required distribution for such year determined— “(A) with the application of paragraph (2) to such taxable year, and “(B) by substituting ‘100 percent’ for each percentage set forth in paragraph (1). “(c) Distributed Amount.— For purposes of this section— “(1) In general.— The term ‘distributed amount’ means, with respect to any calendar year, the sum of— “(A) the deduction for dividends paid (as defined in section 561) during such calendar year, and “(B) any amount on which tax is imposed under subsection (b)(1) or (b)(3)(A) of section 857 for any taxable year ending in such calendar year. “(2) Increase by prior year overdistribution.— The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— “(A) the distributed amount for the preceding calendar year (determined with the application of this paragraph to such preceding calendar year), over “(B) the grossed up required distribution for such preceding calendar year. “(3) Determination of dividends paid.— The amount of the dividends paid during any calendar year shall be determined without regard to the provisions of section 858. “(d) Time for Payment of Tax.— The tax imposed by this section for any calendar year shall be paid on or before March 15 of the following calendar year. “(e) Definitions and Special Rules.— For purposes of this section— “(1) Ordinary income.— The term ‘ordinary income’ means the real estate investment trust taxable income (as defined in section 857(b)(2)) determined— “(A) without regard to subparagraph (B) of section 857(b)(2), “(B) by not taking into account any gain or loss from the sale or exchange of a capital asset, and “(C) by treating the calendar year as the trust’s taxable year. “(2) Capital gain net income.— The term ‘capital gain net income’ has the meaning given to such term by section 1222(9) (determined by treating the calendar year as the trust’s taxable year). “(3) Treatment of deficiency distributions.— In the case of any deficiency dividend (as defined in section 860(f)— “(A) such dividend shall be taken into account when paid without regard to section 860, and “(B) any income giving rise to the adjustment shall be treated as arising when the dividend is paid.” (b) Related Amendments.— (1) Time certain dividends taken into account.— (A) Subsection (b) of section 857 (relating to method of taxation of real estate investment trusts and holders of interests therein) is amended by adding at the end thereof the following new paragraph: “(8) Time certain dividends taken into account.— For purposes of this title, any dividend declared by a real estate investment trust in December of any calendar year and payable to shareholders of record on a specified date in such month shall be deemed— “(A) to have been received by each shareholder on such date, and “(B) to have been paid by such trust on such date (or, if earlier, as provided in section 858). The preceding sentence shall apply only if such dividend is actually paid by the company before February 1 of the following calendar year.” (B) Subsection (b) of section 856 is amended by striking out “Amounts” and inserting in lieu thereof “Except as provided in section 857(b)(8), amounts”. (2) Treatment of earnings and profits.— Subsection (d) of section 857 is amended to read as follows: “(d) Earnings and Profits.— “(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 is not allowable in computing its taxable income for such taxable year. 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). “(2) Coordination with tax on undistributed income.— A real estate investment trust shall be treated as having sufficient earnings and profits to treat as a dividend any distribution (other than in a redemption to which section 302(a) applies) which is treated as a dividend by such trust. The preceding sentence shall not apply to the extent that the amount distributed during any calendar year by the trust exceeds the required distribution for such calendar year (as determined under section 4981).” (3) Treatment of net capital gain after October 31 of any year.— Subparagraph (C) of section 857(b)(3) (defining capital gain dividend) is amended by adding at the end thereof the following new sentences: “For purposes of this subparagraph, the amount of the net capital gain for any taxable year which is not a calendar year shall be determined without regard to any net capital loss attributable to transactions after December 31 of such year, and any such net capital loss such be treated as arising on the 1st day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing real estate investment trust taxable income.” SEC. 669. EFFECTIVE DATES. (a) General Rule.— Except as otherwise provided in this section, the amendments made by this part shall apply to taxable years beginning after December 31, 1986. (b) Section 668.— The amendments made by section 668 shall apply to calendar years beginning after December 31, 1986. (c) Retention of Existing Transitional Rule.— The amendment made by section 663(b)(2) shall not apply with respect to amounts received or accrued pursuant to loans made before May 28, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28, 1976, if such loan is made pursuant to a binding commitment entered into before May 28, 1976. Subtitle H— Taxation of Interests in Entities Holding Real Estate Mortgages SEC. 671. TAXATION OF REAL ESTATE MORTGAGE INVESTMENT CONDUITS. (a) General Rule.— Subchapter M of chapter 1 (relating to regulated investment companies and real estate investment trusts) is amended by adding at the end thereof the following new part: “PART IV— REAL ESTATE MORTGAGE INVESTMENT CONDUITS “Sec. 860A. Taxation of REMIC’s. “Sec. 860B. Taxation of holders of regular interests “Sec. 860C. Taxation of residual interests “Sec. 860D. REMIC defined. “Sec. 860E. Treatment of income in excess of daily accruals on residual interests. “Sec. 860F. Other rules. “Sec. 860G. Other definitions and special rules “SEC 860A. TAXATION OF REMIC’s. “(a) General Rule.— Except as otherwise provided in this part, a REMIC shall not be subject to taxation under this chapter (and shall not be treated as a corporation, partnership, or trust for purposes of this chapter). “(b) Income Taxable to Holders.— The income of any REMIC shall be taxable to the holders of interests in such REMIC as provided in this part. “SEC. 860B. TAXATION OF HOLDERS OF REGULAR INTERESTS “(a) General Rule.— In determining the tax under this chapter of any holder of a regular interest in a REMIC, such interest (if not otherwise a debt instrument) shall be treated as a debt instrument. “(b) Holders Must Use Accrual Method.— The amounts includible in gross income with respect to any regular interest in a REMIC shall be determined under the accrual method of accounting. “(c) Portion of Gain Treated as Ordinary Income.— Gain on the disposition of a regular interest shall be treated as ordinary income to the extent such gain does not exceed the excess (if any) of— “(1) the amount which would have been includible in the gross income of the taxpayer with respect to such interest if the yield on such interest were 110 percent of the applicable Federal rate (as defined in section 1274(d) without regard to paragraph (2) thereof) as of the beginning of the taxpayer’s holding period, over “(2) the amount actually includible in gross income with respect to such interest by the taxpayer. “(d) Cross Reference.— “For special rules in determining inclusion of original issue discount on regular interests, see section )272(a)(6). “SEC. 860C. TAXATION OF RESIDUAL INTERESTS. “(a) Pass-Thru of Income or Loss.— “(1) In general.— In determining the tax under this chapter of any holder of a residual interest in a REMIC, such holder shall take into account his daily portion of the taxable income or net loss of such REMIC for each day during the taxable year on which such holder held such interest. “(2) Daily portion.— The daily portion referred to in paragraph (1) shall be determined— “(A) by allocating to each day in any calendar quarter its ratable portion of the taxable income (or net loss) for such quarter, and “(B) by allocating the amount so allocated to any day among the holders (on such day) of residual interests in proportion to their respective holdings on such day. “(b) Determination of Taxable Income or Net Loss —For purposes of this section.— “(1) Taxable income.— The taxable income of a REMIC shall be determined under an accrual method of accounting and in the same manner as in the case of an individual, except that— “(A) regular interests in such REMIC (if not otherwise debt instruments) shall be treated as indebtedness of such REMIC, “(B) market discount on any market discount bond shall be included in gross income for the taxable years to which it is attributable as determined under the rules of section 1276(b)(2) (and sections 1276(a) and 1277 shall not apply), “(C) there shall not be taken into account any item of income, gain, loss, or deduction allocable to a prohibited transaction, and “(D) the deductions referred to in section 703(a)(2) (other than any deduction under section 212) shall not be allowed. “(2) Net loss.— The net loss of any REMIC is the excess of— “(A) the deductions allowable in computing the taxable income of such REMIC, over “(B) its gross income. Such amount shall be determined with the modifications set forth in paragraph (1). “(c) Distributions.— Any distribution by a REMIC— “(1) shall not be included in gross income to the extent it does not exceed the adjusted basis of the interest, and “(2) to the extent it exceeds the adjusted basis of the interest, shall be treated as gain from the sale or exchange of such interest. “(d) Basis Rules.— “(1) Increase in basis.— The basis of any person’s residual interest in a REMIC shall be increased by the amount of the taxable income of such REMIC taken into account under subsection (a) by such person with respect to such interest. “(2) Decreases in basis.— The basis of any person’s residual interest in a REMIC shall be decreased (but not below zero) by the sum of the following amounts: “(A) any distributions to such person with respect to such interest, and “(B) any net loss of such REMIC taken into account under subsection (a) by such person with respect to such interest. “(e) Special Rules.— “(1) Amounts treated as ordinary income.— Any amount included in the gross income of any holder of a residual interest in a REMIC by reason of subsection (a) shall be treated as ordinary income. “(2) Limitation on losses.— “(A) In general.— The amount of the net loss of any REMIC taken into account by a holder under subsection (a) with respect to any calendar quarter shall not exceed the adjusted basis of such holders residual interest in such REMIC as of the close of such calendar quarter (determined without regard to the adjustment under subsection (d)(2)(B) for such calendar quarter). “(B) Indefinite carryforward.— Any loss disallowed by reason of subparagraph (A) shall be treated as incurred by the REMIC in the succeeding calendar quarter with respect to such holder “(3) Cross reference.— “For special treatment of income in excess of daily accruals, see section 860E. “SEC. 860D. REMIC DEFINED. “(a) General Rule.— For purposes of this title, the terms ‘real estate mortgage investment conduit’ and ‘REMIC’ mean any entity— “(1) to which an election to be treated as a REMIC applies for the taxable year and all prior taxable years, “(2) all of the interests in which are regular interests or residual interests, “(3) which has 1 (and only 1) class of residual interests (and all distributions, if any, with respect to such interests are pro ratal, “(4) as of the close of the 4th month ending after the startup day and each quarter ending thereafter, substantially all of the assets of which consist of qualified mortgages and permitted investments, and “(5) which has a taxable year which is a calendar year. “(b) Election.— “(1) In general.— An entity (otherwise meeting the requirements of subsection (a)) may elect to be treated as a REMIC for its 1st taxable year. Such an election shall be made on its return for such 1st taxable year. Except as provided in paragraph (2), such an election shall apply to the taxable year for which made and all subsequent taxable years. “(2) Termination.— “(A) In general.— If any entity ceases to be a REMIC at any time during the taxable year, such entity shall not be treated as a REMIC for such taxable year or any succeeding taxable year. “(B) Inadvertent terminations.—If— “(i) an entity ceases to be a REMIC, “(ii) the Secretary determines that such cessation was inadvertent, “(iii) no later than a reasonable time after the discovery of the event resulting in such cessation, steps are taken so that such entity is once more a REMIC, and “(iv) such entity, and each person holding an interest in such entity at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such entity as a REMIC or a C corporation) as may be required by the Secretary with respect to such period, then, notwithstanding such terminating event, such entity shall be treated as continuing to be a REMIC (or such cessation shall be disregarded for purposes of subparagraph (A)) whichever the Secretary determines to be appropriate. “SEC 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL INTERESTS. “(a) Excess Inclusions May Not Be Offset by Net Operating Losses — “(1) In general.— Except as provided in paragraph (2), the taxable income of any holder of a residual interest in a REMIC for any taxable year shall in no event be less than the excess inclusion for such taxable year. “(2) Exception for certain financial institutions.— Paragraph (1) shall not apply to any organization to which section 593 applies. The Secretary may by regulations provide rhat the preceding sentence shall not apply where necessary or appropriate to prevent avoidance of tax imposed by this chapter. “(b) Organizations Subject to Unrelated Business Tax.— If the holder of any residual interest in a REMIC is an organization subject to the tax imposed by section 511, the excess inclusion of such holder for any taxable year shall be treated as unrelated business taxable income of such holder for purposes of section 511. “(c) Excess Inclusion.— For purposes of this section— “(1) In general.— The term ‘excess inclusion’ means, with respect to any residual interest in a REMIC for any calendar quarter, the excess (if any) of— “(A) the amount taken into account with respect to such interest by the holder under section 8600a), over “(B) the sum of the daily accruals with respect to such interest for days during such calendar quarter while held by such holder. To the extent provided in regulations, if residual interests in a REMIC do not have significant value, the excess inclusions with respect to such interests shall be the amount determined under subparagraph (A) without regard to subparagraph (B). “(2) Determination of daily accruals.— “(A) In general.— For purposes of this subsection, the daily accrual with respect to any residual interest for any day in any calendar quarter shall be determined by allocating to each day in such quarter its ratable portion of the product of— “(i) the adjusted issue price of such interest at the beginning of such quarter, and “(ii) 120 percent of the long-term Federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). “(B) Adjusted issue price.— For purposes of this paragraph, the adjusted issue price of any residual interest at the beginning of any calendar quarter is the issue price of residual interest— “(i) increased by the amount of daily accruals for prior quarters, and “(ii) decreased by any distribution made with respect to such interest before the beginning of such quarter. “(C) Federal long-term rate.— For purposes of this paragraph, the term ’Federal long-term rate’ means the Federal long-term rate which would have applied to the residual interest under section 1274(d) (determined without regard to paragraph (2) thereoD if it were a debt instrument. “(d) Treatment of Residual Interests Held by Real Estate Investment Trusts.— If a residual interest in a REMIC is held by a real estate investment trust, under regulations prescribed by the Secretary— “(1) any excess of— “(A) the aggregate excess inclusions determined with respect to such interests, over “(B) the real estate investment trust taxable income (within the meaning of section 857(b)(2), excluding any net capital gain), shall be allocated among the shareholders of such trust in proportion to the dividends received by such shareholders from such trust, and “(2) any amount allocated to a shareholder under paragraph (1) shall be treated as an excess inclusion with respect to a residual interest held by such shareholder. “SEC. 860F. OTHER RULES. “(a) 100 Percent Tax on Prohibited Transactions “(1) Tax imposed.— There is hereby imposed for each taxable year of a REMIC a tax equal to 100 percent of the net income derived from prohibited transactions. “(2) Prohibited transaction.— For purposes of this part, the term ‘prohibited transaction’ means— “(A) Disposition of qualified mortgage.— The disposition of any qualified mortgage transferred to the REMIC other than a disposition pursuant to— “(i) the substitution of a qualified replacement mortgage for a qualified mortgage, “(ii) a disposition incident to the foreclosure, default, or imminent default of the mortgage, “(iii) the bankruptcy or insolvency of the real estate mortgage pool, or “(iv) a qualified liquidation. Notwithstanding the preceding sentence, the term ‘prohibited transaction shall not include any disposition required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages. “(B) Income from nonpermitted assets.— The receipt of any income attributable to any asset which is neither a qualified mortgage nor a permitted investment. “(C) Compensation for services.— The receipt by the real estate mortgage pool of any amount representing a fee or other compensation for services. “(D) Gain from disposition of cash flow investments.— Gain from the disposition of any cash flow investment other than pursuant to any qualified liquidation described in subsection (b). “(3) Determination of net income.— For purposes of paragraph (1), the term ‘net income derived from prohibited transactions’ means the excess of the gross income from prohibited transactions over the deductions allowed by this chapter which are directly connected with such transactions; except that there shall not be taken into account any item attributable to any prohibited transaction for which there was a loss. “(4) Qualified liquidation.— For purposes of this part— “(A) In general.— The term ‘qualified liquidation’ means a transaction in which— “(i) the REMIC adopts a plan of complete liquidation, “(ii) such REMIC sells all its assets (other than cash) within the liquidation period, and “(iii) all proceeds of the liquidation (plus the cash), less assets retained to meet claims, are credited or distributed to holders of regular or residual interests on or before the last day of the liquidation period. “(B) Liquidation period.— The term ‘liquidation period’ means the period— “(i) beginning on the date of the adoption of the plan of liquidation, and “(ii) ending at the close of the 90th day after such date. “(b) Treatment of Transfers to the REMIC.— “(1) Treatment of transferor.— “(A) Nonrecognition gain or loss.— No gain or loss shall be recognized to the transferor on the transfer of any property to a REMIC. “(B) Adjusted bases of interests.— The adjusted bases of the regular and residual interests received in a transfer described in subparagraph (A) shall be equal to the aggregate adjusted bases of the property transferred in such transfer. Such amount shall be allocated among such interests in proportion to their respective fair market values. “(C) Treatment of nonrecognized gain.— If the issue price of any regular or residual interest exceeds its adjusted basis as determined under subparagraph (B), for periods during which such interest is held by the transferor (or by any other person whose basis is determined in whole or in part by reference to the basis of such interest in the hand of the transferor)— “(i) in the case of a regular interest, such excess shall be included in gross income (as determined under rules similar to rules of section 1276(b)), and “(ii) in the case of a residual interest, such excess shall be included in gross income ratably over the anticipated period during which the real estate mortgage pool will be in existence. “(D) Treatment of nonrecognized loss.— If the adjusted basis of any regular or residual interest received in a transfer described in subparagraph (A) exceeds its issue price, for periods during which such interest is held by the transferor (or by any other person whose basis is determined in whole or in part by reference to the basis of such interest in the hand of the transferor)— “(i) in the case of a regular interest, such excess shall be allowable as a deduction under rules similar to the rules of section 171, and “(ii) in the case of a residual interest, such excess shall be allowable as a deduction ratably over the anticipated period during which the real estate mortgage pool will be in existence. “(2) Basis to remic.— The basis of any property received by a REMIC in a transfer described in paragraph (1)(A) shall be its fair market value immediately after such transfer. “(c) Distributions of Property.— If a REMIC makes a distribution of property with respect to any regular or residual interest— “(1) notwithstanding any other provision of this subtitle, gain shall be recognized to such REMIC on the distribution in the same manner as if it had sold such property to the distributee at its fair market value, and “(2) the basis of the distributee in such property shall be its fair market value. “(d) Coordination With Wash Sale Rules.— For purposes of section 1091— “(1) any residual interest in a REMIC shall be treated as a security, and “(2) in applying such section to any loss claimed to have been sustained on the sale or other disposition of a residual interest in a REMIC— “(A) except as provided in regulations, any residual interest in any REMIC and any interest in a taxable mortgage pool (as defined in section 7701(i)) comparable to a residual interest in a REMIC shall be treated as substantially identical stock or securities, and “(B) subsections (a) and (e) of such section shall be applied by substituting ‘6 months’ for ‘30 days’ each place it appears. “(e) Treatment Under Subtitle F.— For purposes of subtitle F, a REMIC shall be treated as a partnership (and holders of residual interests in such REMIC shall be treated as partners). Any return required by reason of the preceding sentence shall include the amount of the daily accruals determined under section 860E(c). “SEC. 860G. OTHER DEFINITIONS AND SPECIAL RULES. “(a) Definitions.— For purposes of this part— “(1) Regular interest.— The term ‘regular interest’ means an interest in a REMIC the terms of which are fixed on the startup day, and which— “(A) unconditionally entitles the holder to receive a specified principal amount (or other similar amount), and “(B) provides that interest payments (or other similar amounts), if any, at or before maturity are payable based on a fixed rate (or to the extent provided in regulations, at a variable rate). An interest shall not fail to meet the requirements of subparagraph (Al merely because the timing (but not the amount) of the principal payments (or other similar amounts) may be contingent on the extent of prepayments on qualified mortgages and the amount of income from permitted investments. “(2) Residual interest.— The term ‘residual interest’ means an interest in a REMIC which is not a regular interest and is designated as a residual interest. “(3) Qualified mortgage.— The term ‘qualified mortgage’ means— “(A) any obligation (including any participation or certificate of beneficial ownership therein) which is principally secured, directly or indirectly, by an interest in real property and which— “(i) is transferred to the REMIC on or before the startup day, or “(ii) is purchased by the REMIC within the 3-month period beginning on the startup day, “(B) any qualified replacement mortgage, and “(C) any regular interest in another REMIC transferred to the REMIC on or before the startup day. “(4) Qualified replacement mortgage.— The term ‘qualified replacement mortgage’ means any obligation— “(A) which would be described in paragraph (3)(A) if it were transferred to the REMIC on or before the startup day, and “(B) which is received for— “(i) another obligation within the 3-month period beginning on the startup day, or “(ii) a defective obligation within the 2-year period beginning on the startup day. “(5) Permitted investments.— The term ‘permitted investments’ means any— “(A) cash flow investment, “(B) qualified reserve asset, or “(C) foreclosure property. “(6) Cash flow investment.— The term ‘cash flow investment’ means any investment of amounts received under qualified mortgages for a temporary period before distribution to holders of interests in the REMIC. “(7) Qualified reserve asset.— “(A) In general.— The term ‘qualified reserve asset’ means any intangible property which is held for investment and as part of a qualified reserve fund. “(B) Qualified reserve fund.— For purposes of subparagraph (A), the term ‘qualified reserve fund’ means any reasonably required reserve to provide for full payment of expenses of the REMIC or amounts due on regular interests in the event of defaults on qualified mortgages. The amount of any such reserve shall be promptly and appropriately reduced as payments of qualified mortgages are received. “(C) Special rule.— A reserve shall not be treated as a qualified reserve for any taxable year (and all subsequent taxable years) if more than 30 percent of the gross income from the assets in such fund for the taxable year is derived from the sale or other disposition of property held for less than 3 months. For purposes of the preceding sentence, gain on the disposition of a qualified reserve asset shall not be taken into account if the disposition giving rise to such gain is required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages. “(8) Foreclosure property.— The term ‘foreclosure property’ means property— “(A) which would be foreclosure property under section 856(e) if acquired by a real estate investment trust, and “(B) which is acquired in connection with the default or imminent default of a qualified mortgage held by the REMIC. Property shall cease to be foreclosure property with respect to the REMIC on the date which is 1 year after the date such real estate mortgage pool acquired such property. “(9) Startup day.— The term ‘startup day’ means any day selected by a REMIC which is on or before the 1st day on which interests in such REMIC are issued. “(10) Issue price.— The issue price of any regular or residual interest in a REMIC shall be determined under section 1273(b) in the same manner as if such interest were a debt instrument; except that if the interest is issued for property, paragraph (3) of section 1273(b) shall apply whether or not the requirements of such paragraph are met. “(b) Treatment of Nonresident Aliens and Foreign Corporations.— If the holder of a residual interest in a REMIC is a non-resident alien individual or a foreign corporation, for purposes of sections 871(a), 881,1441, and 1442— “(1) amounts includible in the gross income of such holder under this part shall be taken into account when paid or distributed (or when the interest is disposed of), and “(2) no exemption from the taxes imposed by such sections (and no reduction in the rates of such taxes) shall apply to any excess inclusion. The Secretary may by regulations provide that such amounts shall be taken into account earlier than as provided in paragraph (1) where necessary or appropriate to prevent the avoidance of tax imposed by this chapter. “(c) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations— “(1) to prevent unreasonable accumulations of assets in a REMIC, “(2) permitting determinations of the fair market value of property transferred to a REMIC and issue price of interests in a REMIC to be made earlier than otherwise provided, and “(3) requiring reporting to holders of residual interests of such information as frequently as is necessary or appropriate to permit such holders to compute their taxable income accurately.” (b) Technical Amendments — (1) Treatment for reit purposes.— Paragraph (6) of section 856(c) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph: “(D) A regular or residual interest in a REMIC shall be treated as an interest in real property, and any amount includible in gross income with respect to such an interest shall be treated as interest; except that, if less than 95 percent of the assets of such REMIC are interests in real property (determined as if the taxpayer held such assets), such interest shall be so treated only in the proportion which the assets of the REMIC consist of such interests.” (2) Treatment for purposes of section 593.— Subsect ion (d) of section 593 (defining loans) is amended by adding at the end thereof the following new paragraph: “(4) Treatment of interests in remic’s.— A regular or residual interest in a REMIC shall be treated as a qualifying real property loan; except that, if less than 95 percent of the assets of such REMIC are qualifying real property loans (determined as if the taxpayer held the assets of the REMIC), such interest shall be so treated only in the proportion which the assets of such REMIC consist of such loans.” (3) Treatment for purposes of section 7701 (a) (19).— Subparagraph (C) of section 7701(a)(19) (defining domestic building and loan associations) is amended by striking out “and” at the end of clause (ix), by striking out the period at the end of clause (x) and inserting in lieu thereof “, and”, and by inserting after clause (x) the following new clause: “(xi) any regular or residual interest in a REMIC, but only in the proportion which the assets of such REMIC consist of property described in any of the preceding clauses of this subparagraph; except that if 95 percent or more of the assets of such REMIC are loans described in clauses (i) through (x), the entire interest in the REMIC shall qualify.” (4) Treatment for purposes of section 582(c).— Paragraph (1) of section 582(c) is amended by adding at the end thereof the following new sentence: “For purposes of the preceding sentence, any regular or residual interest in a REMIC shall be treated as an evidence of indebtedness.” SEC. 672. RULES FOR ACCRUING ORIGINAL ISSUE DISCOUNT ON REGULAR INTERESTS AND SIMILAR DEBT INSTRUMENTS. Subsection (a) of section 1272 (relating to current inclusion in income of original issue discount) is amended by redesignating paragraph (6) as paragraph (7) and by inserting after paragraph (5) the following new paragraph: “(6) Determination of daily portions where principal subject to acceleration.— “(A) In general.— In the case of any debt instrument to which this paragraph applies, the daily portion of the original issue discount shall be determined by allocating to each day in any accrual period its ratable portion of the excess (if any)of— “(i) the sum of (I) the present value determined under subparagraph (B) of all remaining payments under the debt instrument as of the close of such period, and (II) the payments during the accrual period of amounts included in the stated redemption price of the debt instrument, over “(ii) the adjusted issue price of such debt instrument at the beginning of such period. “(B) Determination of present value.—For purposes of subparagraph (A), the present value shall be determined on the basis of— “(i) the original yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), “(ii) events which have occurred before the close of the accrual period, and “(iii) a prepayment assumption determined in the manner prescribed by regulations. “(C) Debt instruments to which paragraph applies.— This paragraph applies to— “(i) any regular interest in a REMIC or qualified mortgage held by a REMIC, or “(ii) any other debt instrument if payments under such debt instrument may be accelerated by reason of prepayments of other obligations securing such debt instrument (or, to the extent provided in regulations, by reason of other events).” SEC. 673. TREATMENT OF TAXABLE MORTGAGE POOLS. Section 7701, as amended by section 201(c), is amended by redesignating subsection (i) as subsection (j) and by inserting after subsection (h) the following new subsection: “(i) Taxable Mortgage Pools.— “(1) Treated as separate corporations.— A taxable mortgage pool shall be treated as a separate corporation which may not be treated as an includible corporation with any other corporation for purposes of section 1501. “(2) Taxable mortgage pool defined.— For purposes of this title— “(A) In general.— Except as otherwise provided in this paragraph, a taxable mortgage pool is any entity (other than a REMIC) if— “(i) substantially all of the assets of such entity consists of debt obligations (or interests therein) and more than 50 percent of such debt obligations (or interests) consists of real estate mortgages (or interests therein), “(ii) such entity is the obligor under debt obligations with 2 or more maturities, and “(iii) under the terms of the debt obligations referred to in clause (ii) (or underlying arrangement), payments on such debt obligations bear a relationship to payments on the debt obligations (or interests) referred to in clause (i). “(B) Portion of entities treated as pools.—Any portion of an entity which meets the definition of subparagraph (A) shall be treated as a taxable mortgage pool. “(C) Exception for domestic building and loan.— Nothing in this subsection shall be construed to treat any domes-tic building and loan association (or portion thereof) as a taxable mortgage pool. “(D) Treatment of certain equity interests.—To the extent provided in regulations, equity interest of varying classes which correspond to maturity classes of debt shall be treated as debt for purposes of this subsection. “(3) Treatment of certain reit’s.— If— “(A) a real estate investment trust is a taxable mortgage pool, or “(B) a qualified REIT subsidiary (as defined in section 856(i)(2)) of a real estate investment trust is a taxable mortgage pool, under regulations prescribed by the Secretary, adjustments similar to the adjustments provided in section 860E(d) shall apply to the shareholders of such real estate investment trust.” SEC. 674. COMPLIANCE PROVISIONS. Subsection (d) of section 6049 (relating to returns regarding payments of interest) is amended by adding at the end thereof the following new paragraph: “(7) Interests in remic’s and certain other debt instruments.— “(A) In general.— For purposes of subsection (a), the term ‘interest’ includes amounts includible in gross income with respect to regular interests in REMIC’s. “(B) Reporting to corporations, etc.— Except as otherwise provided in regulations, in the case of any interest described in subparagraph (A) of this paragraph and any other debt instrument to which section 1272(a)(6) applies, subsection (b)(4) of this section shall be applied without regard to subparagraphs (A), (H), (I), (J), (K), and (L)(i). “(C) Additional information.— Except as otherwise provided in regulations, any return or statement required to be filed or furnished under this section with respect to interest income described in subparagraph (A) and interest on any other debt instrument to which section 1272(a)(6) applies shall also provide information setting forth the issue price of the interest to which the return or statement relates at the beginning of each accrual period with respect to which interest income is required to be reported on such return or statement and information necessary to compute accrual of market discount. “(D) Regulatory authority.— The Secretary may prescribe such regulations as are necessary or appropriate to carry out the purposes of this paragraph, including regulations which require more frequent or more detailed reporting.” SEC. 675. EFFECTIVE DATES. (a) General Rule.— Except as otherwise provided in this section, the amendments made by this part shall apply to taxable years beginning after December 31, 1986. (b) Rules for Accruing Original Issue Discount.— The amendment made by section 672 shall apply to debt instruments issued after December 31, 1986, in taxable years ending after such date. (c) Treatment of Taxable Mortgage Pools.— (1) In general.— The amendment made by section 673 shall take effect on January 1, 1992. (2) Treatment of existing entities.— The amendment made by section 673 shall not apply to any entity in existence on December 31, 1991. The preceding sentence shall cease to apply with respect to any entity as of the 1st day after December 31, 1991, on which there is a substantial transfer of cash or other property to such entity. (3) Special rule for coordination with wash-sale rules.— Notwithstanding paragraphs (1) and (2), for purposes of applying section 860F(d) of the Internal Revenue Code of 1986 (as added by this part), the amendment made by section 673 shall apply to taxable years beginning after December 31, 1986.

35. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 663(a) · 100 Stat. 2085

    1. Inserted · 26 U.S.C. § 856(d)(2)

       Pub. L. 99–514, § 663(a), (b)(3), inserted reference to par. (6) in subpar. (A)

    2. Inserted · 26 U.S.C. § 856(d)(2)

       Pub. L. 99–514, § 663(a), (b)(3), inserted at end “Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unrelated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2).”

    Source evidence

    Code amendment note
    Subsec. (d)(2). Pub. L. 99–514, § 663(a), (b)(3), inserted reference to par. (6) in subpar. (A) and inserted at end “Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unrelated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2).”

    Enacted provision · exact public law section
    (a) Modification of Independent Contractor Requirements.— Paragraph (2) of section 856(d) (relating to certain amounts excluded from rents from real property) is amended by adding at the end thereof the following: “Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unrelated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2).”

36. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 663(b)(1) · 100 Stat. 2085

    Added · 26 U.S.C. § 856(d)(6)

    Pub. L. 99–514, § 663(b)(1), added par. (6)

    Source evidence

    Code amendment note
    Subsec. (d)(6). Pub. L. 99–514, § 663(b)(1), added par. (6).

    Enacted provision · exact public law section
    (1) Rents.— Subsection (d) of section 856 is amended by adding at the end thereof the following new paragraph: “(6) Special rule for certain property subleased by tenant of real estate investment trusts.— “(A) In general.— If— “(i) a real estate investment trust receives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and “(ii) such tenant receives or accrues, directly or indirectly, from subtenants only amounts which are qualified rents, then the amounts that the trust receives or accrues from the tenant shall not be excluded from the term ‘rents from real property’ solely by reason of being based on the income or profits of such tenant. “(B) Qualified rents.— For purposes of subparagraph (A), the term ‘qualified rents’ means any amount which would be treated as rents from real property if received by the real estate investment trust.”

37. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 663(b)(2) · 100 Stat. 2085

    1. Amended · 26 U.S.C. § 856(f)

       Pub. L. 99–514, § 663(b)(2), amended subsec. (f) generally, restating former introductory provisions and par. (1) as introductory provisions of par. (1) and as subpar. (A), restating provisions of par. (2)

    2. Added · 26 U.S.C. § 856(f)

       Pub. L. 99–514, § 663(b)(2), adding subpar. (1)(B)

    3. Struck · 26 U.S.C. § 856(f)

       Pub. L. 99–514, § 663(b)(2), striking out former concluding provisions which read as follows: “The provisions of this subsection shall apply only with respect to amounts received or accrued pursuant to loans made after May 27, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28, 1976, if such loan is made pursuant to a binding commitment entered into before May 28, 1976.”

    Source evidence

    Code amendment note
    Subsec. (f). Pub. L. 99–514, § 663(b)(2), amended subsec. (f) generally, restating former introductory provisions and par. (1) as introductory provisions of par. (1) and as subpar. (A), restating provisions of par. (2), adding subpar. (1)(B), and striking out former concluding provisions which read as follows: “The provisions of this subsection shall apply only with respect to amounts received or accrued pursuant to loans made after May 27, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28, 1976, if such loan is made pursuant to a binding commitment entered into before May 28, 1976.”

    Enacted provision · exact public law section
    (2) Interest.— Subsection (f) of section 856 (relating to qualifying interest income) is amended to read as follows: “(f) Interest.— “(1) In general.— For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term ’interest’ does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends (in whole or in part) on the income or profits of any person, except that— “(A) any amount so received or accrued shall not be excluded from the term ‘interest’ solely by reason of being based on a fixed percentage or percentages of receipts or sales, and “(B) any amount so received or accrued with respect to an obligation secured by a mortgage on real property or an interest in real property shall not be excluded from the term ‘interest’ solely by reason of being based on the income or profits of the debtor from such property, if— “(i) the debtor derives substantially all of its gross income with respect to such property from the leasing of substantially all of its interests in such property to tenants, and “(ii) the amounts received or accrued directly or indirectly by the debtor from such tenants are only qualified rents (as defined in subsection (d)(6)(B)). “(2) Special rule.— Where a real estate investment trust receives or accrues any amount which would be excluded from the term ‘interest’ solely because the debtor of the real estate investment trust receives or accrues any amount the determination of which depends (in whole or in part) on the income or profits of any person, only a proportionate part (determined under regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust shall be excluded from the term ‘interest’.”

38. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 661(a)(2) · 100 Stat. 2085

    Added · 26 U.S.C. § 856(h)

    Pub. L. 99–514, § 661(a)(2), added subsec. (h)

    Source evidence

    Code amendment note
    Subsec. (h). Pub. L. 99–514, § 661(a)(2), added subsec. (h).

    Enacted provision · exact public law section
    (2) Section 856 is amended by adding at the end thereof the following new subsection: “(h) Closely Held Determinations.— “(1) Section 542(a)(2) applied.— “(A) In general.— For purposes of subsection (a)(6), a corporation, trust, or association is closely held if the stock ownership requirement of section 542(a)(2) is met. “(B) Waiver of partnership attribution, etc.— For purposes of subparagraph (A)— “(i) paragraph (2) of section 544(a) shall be applied as if such paragraph did not contain the phrase ‘or by or for his partner’, and “(ii) sections 544(a)(4)(A) and 544(b)(1) shall be applied by substituting ‘the entity meet the stock ownership requirement of section 542(a)(2)’ for ‘the corporation a personal holding company’. “(2) Subsections (a) (5) and (6) not to apply to 1st year.— Paragraphs (5) and (6) of subsection (a) shall not apply to the 1st taxable year for which an election is made under subsection (c)(1) by any corporation, trust, or association.”

39. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 662(a) · 100 Stat. 2085

    Added · 26 U.S.C. § 856(i)

    Pub. L. 99–514, § 662(a), added subsec. (i)

    Source evidence

    Code amendment note
    Subsec. (i). Pub. L. 99–514, § 662(a), added subsec. (i).

    Enacted provision · exact public law section
    (a) Treatment of Certain Wholly Owned Subsidiaries.— Section 856 (defining real estate investment trust) is amended by adding at the end thereof the following new subsection: “(i) Treatment of Certain Wholly Owned Subsidiaries.— “(1) In general.— For purposes of this title— “(A) a corporation which is a qualified REIT subsidiary shall not be treated as a separate corporation, and “(B) all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the real estate investment trust. “(2) Qualified reit subsidiary.— For purposes of this subsection, the term ‘qualified REIT subsidiary’ means any corporation if 100 percent of the stock of such corporation is held by the real estate investment trust at all times during the period such corporation was in existence. “(3) Treatment of termination of qualified subsidiary status.— For purposes of this subtitle, if any corporation which was a qualified REIT subsidiary ceases to meet the requirements of paragraph (2), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the real estate investment trust in exchange for its stock.”

40. 1986

    Tax Reform Act of 1986

    Pub. L. 99–514 § 662(c) · 100 Stat. 2085

    Added · 26 U.S.C. § 856(j)

    Pub. L. 99–514, § 662(c), added subsec. (j)

    Source evidence

    Code amendment note
    Subsec. (j). Pub. L. 99–514, § 662(c), added subsec. (j).

    Enacted provision · exact public law section
    (c) Treatment of Shared Appreciation Mortgages.— Section 856 is amended by adding at the end thereof the following new subsection: “(j) Treatment of Shared Appreciation Mortgages.— “(1) In general.— Solely for purposes of subsection (c) of this section and section 857(b)(6), any income derived from a shared appreciation provision shall be treated as gain recognized on the sale of the secured property. “(2) Treatment of income.— For purposes of applying subsection (c) of this section and section 857(b)(6) to any income described in paragraph (1)— “(A) the real estate investment trust shall be treated as holding the secured property for the period during which it held the shared appreciation provision (or, if shorter, for the period during which the secured property was held by the person holding such property), and “(B) the secured property shall be treated as property described in section 1221(1) if it is so described in the hands of the person holding the secured property (or it would be so described if held by the real estate investment trust). “(3) Coordination with prohibited transactions safe harbor.— For purposes of section 857(b)(6)(C)— “(A) the real estate investment trust shall be treated as having sold the secured property when it recognizes any income described in paragraph (1), and “(B) any expenditures made by any holder of the secured property shall be treated as made by the real estate investment trust. “(4) Definitions.— For purposes of this subsection— “(A) Shared appreciation provision.— The term ‘shared appreciation provision’ means any provision— “(i) which is in connection with an obligation which is held by the real estate investment trust and is secured by an interest in real property, and “(ii) which entitles the real estate investment trust to receive a specified portion of any gain realized on the sale or exchange of such real property (or of any gain which would be realized if the property were sold on a specified date). “(B) Secured property.— The term ‘secured property’ means the real property referred to in subparagraph (A).”

41. 1988

    Technical and Miscellaneous Revenue Act of 1988

    Pub. L. 100–647 § 1006(t)(11) · 102 Stat. 3342

    Struck · 26 U.S.C. § 856(c)(6)(D)

    Pub. L. 100–647, § 1006(t)(11), struck out subpar. (D), as added by Pub. L. 99–514, § 671(b)(1), which read as follows: “A regular or residual interest in a REMIC shall be treated as an interest in real property, and any amount includible in gross income with respect to such an interest shall be treated as interest; except that, if less than 95 percent of the assets of such REMIC are interests in real property (determined as if the taxpayer held such assets), such interest shall be so treated only in the proportion which the assets of the REMIC consist of such interests.”

    Source evidence

    Code amendment note
    Subsec. (c)(6)(D). Pub. L. 100–647, § 1006(t)(11), struck out subpar. (D), as added by Pub. L. 99–514, § 671(b)(1), which read as follows: “A regular or residual interest in a REMIC shall be treated as an interest in real property, and any amount includible in gross income with respect to such an interest shall be treated as interest; except that, if less than 95 percent of the assets of such REMIC are interests in real property (determined as if the taxpayer held such assets), such interest shall be so treated only in the proportion which the assets of the REMIC consist of such interests.”

    Enacted provision · exact public law section
    (11) Paragraph (6) of section 856(c) of the 1986 Code is amended by redesignating the last subparagraph as subparagraph (F) and by striking out the subparagraph (D) added by section 671(b)(1) of the Reform Act and inserting in lieu thereof the following: “(E) A regular or residual interest in a REMIC shall be treated as a real estate asset, and any amount includible in gross income with respect to such an interest shall be treated as interest on an obligation secured by a mortgage on real property; except that, if less than 95 percent of the assets of such REMIC are real estate assets (determined as if the real estate investment trust held such assets), such real estate investment trust shall be treated as holding directly (and as receiving directly) its proportionate share of the assets and income of the REMIC. For purposes of determining whether any interest in a REMIC qualifies under the preceding sentence, any interest held by such REMIC in another REMIC shall be treated as a real estate asset under principles similar to the principles of the preceding sentence, except that, if such REMIC’s are part of a tiered structure, they shall be treated as one REMIC for purposes of this subparagraph.”

42. 1988

    Technical and Miscellaneous Revenue Act of 1988

    Pub. L. 100–647 § 1006(p)(1) · 102 Stat. 3342

    Substituted · 26 U.S.C. § 856(c)(6)(D)(i)(I)

    Pub. L. 100–647, § 1006(p)(1), substituted “debt instrument (within the meaning of section 1275(a)(1))” for “debt instrument”

    Source evidence

    Code amendment note
    Subsec. (c)(6)(D)(i)(I). Pub. L. 100–647, § 1006(p)(1), substituted “debt instrument (within the meaning of section 1275(a)(1))” for “debt instrument”.

    Enacted provision · exact public law section
    (1) Subclause (I) of section 856(c)(6)(D)(i) of the 1986 Code (as added by section 662 of the Reform Act) is amended by striking out “debt instrument” and inserting in lieu thereof “debt instrument (within the meaning of section 1275(a)(1))”.

43. 1988

    Technical and Miscellaneous Revenue Act of 1988

    Pub. L. 100–647 § 1006(p)(5) · 102 Stat. 3342

    Substituted · 26 U.S.C. § 856(c)(6)(D)(ii)(I)

    Pub. L. 100–647, § 1006(p)(5), substituted “stock (or certificates of beneficial interests) in such trust” for “stock in such trust”

    Source evidence

    Code amendment note
    Subsec. (c)(6)(D)(ii)(I). Pub. L. 100–647, § 1006(p)(5), substituted “stock (or certificates of beneficial interests) in such trust” for “stock in such trust”.

    Enacted provision · exact public law section
    (5) Subclause (I) of section 856(c)(6)(DXii) of the 1986 Code (as added by section 662 of the Reform Act) is amended by striking out “stock in” and inserting in lieu thereof “stock (or certificates of beneficial interests) in”.

44. 1988

    Technical and Miscellaneous Revenue Act of 1988

    Pub. L. 100–647 § 1006(t)(11) · 102 Stat. 3342

    1. Added · 26 U.S.C. § 856(c)(6)(E); 26 U.S.C. § 856(c)(6)(F)

       Pub. L. 100–647, § 1006(t)(11), added subpar. (E)

    2. Redesignated · 26 U.S.C. § 856(c)(6)(E); 26 U.S.C. § 856(c)(6)(F)

       Pub. L. 100–647, § 1006(t)(11), redesignated former subpar. (E) as (F)

    Source evidence

    Code amendment note
    Subsec. (c)(6)(E), (F). Pub. L. 100–647, § 1006(t)(11), added subpar. (E) and redesignated former subpar. (E) as (F).

    Enacted provision · exact public law section
    (11) Paragraph (6) of section 856(c) of the 1986 Code is amended by redesignating the last subparagraph as subparagraph (F) and by striking out the subparagraph (D) added by section 671(b)(1) of the Reform Act and inserting in lieu thereof the following: “(E) A regular or residual interest in a REMIC shall be treated as a real estate asset, and any amount includible in gross income with respect to such an interest shall be treated as interest on an obligation secured by a mortgage on real property; except that, if less than 95 percent of the assets of such REMIC are real estate assets (determined as if the real estate investment trust held such assets), such real estate investment trust shall be treated as holding directly (and as receiving directly) its proportionate share of the assets and income of the REMIC. For purposes of determining whether any interest in a REMIC qualifies under the preceding sentence, any interest held by such REMIC in another REMIC shall be treated as a real estate asset under principles similar to the principles of the preceding sentence, except that, if such REMIC’s are part of a tiered structure, they shall be treated as one REMIC for purposes of this subparagraph.”

45. 1988

    Technical and Miscellaneous Revenue Act of 1988

    Pub. L. 100–647 § 1006(p)(4)(A) · 102 Stat. 3342

    Added · 26 U.S.C. § 856(c)(6)(G)

    Pub. L. 100–647, § 1006(p)(4)(A), added subpar. (G)

    Source evidence

    Code amendment note
    Subsec. (c)(6)(G). Pub. L. 100–647, § 1006(p)(4)(A), added subpar. (G).

    Enacted provision · exact public law section
    (A) Paragraph (6) of section 856(c) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(G) Treatment of certain interest rate agreements.— Except to the extent provided by regulations, Real property. any— “(i) payment to a real estate investment trust under a bona fide interest rate swap or cap agreement entered into by the real estate investment trust to hedge any variable rate indebtedness of such trust incurred or to be incurred to acquire or carry real estate assets, and “(ii) any gain from the sale or other disposition of such agreement, shall be treated as income qualifying under paragraph (2) and such agreement shall be treated as a security for purposes of paragraph (4)(A).”

46. 1988

    Technical and Miscellaneous Revenue Act of 1988

    Pub. L. 100–647 § 1006(p)(3) · 102 Stat. 3342

    Added · 26 U.S.C. § 856(c)(8)

    Pub. L. 100–647, § 1006(p)(3), added par. (8)

    Source evidence

    Code amendment note
    Subsec. (c)(8). Pub. L. 100–647, § 1006(p)(3), added par. (8).

    Enacted provision · exact public law section
    (3) Subsection (c) of section 856 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(8) Treatment of liquidating gains.— In the case of the taxable year in which a real estate investment trust is completely liquidated, there shall not be taken into account under paragraph (4) any gain from the sale, exchange, or distribution of any property after the adoption of the plan of complete liquidation.

47. 1988

    Technical and Miscellaneous Revenue Act of 1988

    Pub. L. 100–647 § 1006(q)(1) · 102 Stat. 3342

    Amended · 26 U.S.C. § 856(d)(6)(A)

    Pub. L. 100–647, § 1006(q)(1), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “If—

    Source evidence

    Code amendment note
    Subsec. (d)(6)(A). Pub. L. 100–647, § 1006(q)(1), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “If—

    “(i) a real estate investment trust receives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and “(ii) such tenant receives or accrues, directly or indirectly, from subtenants only amounts which are qualified rents, then the amounts that the trust receives or accrues from the tenant shall not be excluded from the term ‘rents from real property’ solely by reason of being based on the income or profits of such tenant.”

    Enacted provision · exact public law section
    (1) Subparagraph (A) of section 856(d)(6) of the 1986 Code is amended to read as follows: “(A) In general.— If— “(i) a real estate investment trust receives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and “(ii) a portion of the amount such tenant receives or accrues, directly or indirectly, from subtenants consists of qualified rents, then the amounts which the trust receives or accrues from the tenant shall not be excluded from the term ‘rents from real property’ by reason of being based on the income or profits of such tenant to the extent the amounts so received or accrued are attributable to qualified rents received or accrued by such tenant.”

48. 1988

    Technical and Miscellaneous Revenue Act of 1988

    Pub. L. 100–647 § 1006(q)(2) · 102 Stat. 3342

    Amended · 26 U.S.C. § 856(f)

    Pub. L. 100–647, § 1006(q)(2), amended subsec. (f) generally, making changes in content and structure

    Source evidence

    Code amendment note
    Subsec. (f). Pub. L. 100–647, § 1006(q)(2), amended subsec. (f) generally, making changes in content and structure.

    Enacted provision · exact public law section
    (2) Subsection (f) of section 856 of the 1986 Code is amended to read as follows: “(f) Interest.— “(1) In general.— For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term ‘interest’ does not include any amount received or accrued, directly or indirectly, if the deter-mination of such amount depends in whole or in part on the income or profits of any person except that— “(A) any amount so received or accrued shall not be excluded from the term ‘interest’ solely by reason of being based on a fixed percentage or percentages of receipts or sales, and “(B) where a real estate investment trust receives any amount which would be excluded from the term ‘interest’ solely because the debtor of the real estate investment trust receives or accrues any amount the determination of which depends in whole or in part on the income or profits of any person, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from the debtor will be excluded from the term ‘interest’. “(2) Special rule.— If— “(A) a real estate investment trust receives or accrues with respect to an obligation secured by a mortgage on real property or an interest in real property amounts from a debtor which derives substantially all of its gross income with respect to such property (not taking into account any gain on any disposition) from the leasing of substantially all of its interests in such property to tenants, and “(B) a portion of the amount which such debtor receives or accrues, directly or indirectly, from tenants consists of qualified rents (as defined in subsection (d)(6)(B)), then the amounts which the trust receives or accrues from such debtor shall not be excluded from the term ‘interest’ by reason of being based on the income or profits of such debtor to the extent the amounts so received are attributable to qualified rents received or accrued by such debtor”

49. 1993

    Revenue Reconciliation Act of 1993

    Pub. L. 103–66 title XIII § 13149(a) · 107 Stat. 312

    Added · 26 U.S.C. § 856(h)(3)

    Pub. L. 103–66 added par. (3)

    Source evidence

    Code amendment note
    Subsec. (h)(3). Pub. L. 103–66 added par. (3).

    Enacted provision · exact public law section
    (a) General Rule.— Subsection (h) of section 856 (relating 26 USC 856. to closely held determinations) is amended by adding at the end thereof the following new paragraph: “(3) Treatment of trusts described in section 401(a).— “(A) Look-thru treatment.— “(i) In general.— Except as provided in clause (ii), in determining whether the stock ownership requirement of section 542(a)(2) is met for purposes of paragraph (1)(A), any stock held by a qualified trust shall be treated as held directly by its beneficiaries in proportion to their actuarial interests in such trust and shall not be treated as held by such trust. “(ii) Certain related trusts not eligible.— Clause (i) shall not apply to any qualified trust if one or more disqualified persons (as defined in section 4975(e)(2), without regard to subparagraphs (B) and (I) thereof) with respect to such qualified trust hold in the aggregate 5 percent or more in value of the interests in the real estate investment trust and such real estate investment trust has accumulated earnings and profits attributable to any period for which it did not qualify as a real estate investment trust. “(B) Coordination with personal holding company rules.— If any entity qualifies as a real estate investment trust for any taxable year by reason of subparagraph (A), such entity shall not be treated as a personal holding company for such taxable year for purposes of part II of subchapter G of this chapter. “(C) Treatment for purposes of unrelated business tax.— If any qualified trust holds more than 10 percent (by value) of the interests in any pension-held REIT at any time during a taxable year, the trust shall be treated as having for such taxable year gross income from an unrelated trade or business in an amount which bears the same ratio to the aggregate dividends paid (or treated as paid) by the REIT to the trust for the taxable year of the REIT with or within which the taxable year of the trust ends (the ‘REIT year’) as— “(i) the gross income (less direct expenses related thereto) of the REIT for the REIT year from unrelated trades or businesses (determined as if the REIT were a qualified trust), bears to “(ii) the gross income (less direct expenses related thereto) of the REIT for the REIT year. This subparagraph shall apply only if the ratio determined under the preceding sentence is at least 5 percent. “(D) Pension-held reit.— The purposes of subparagraph (C)— “(i) In general.— A real estate investment trust is a pension-held REIT if such trust would not have qualified as a real estate investment trust but for the provisions of this paragraph and if such trust is predominantly held by qualified trusts. “(ii) Predominantly held.— For purposes of clause (i), a real estate investment trust is predominantly held by qualified trusts if— “(I) at least 1 qualified trust holds more than 25 percent (by value) of the interests in such real estate investment trust, or “(II) 1 or more qualified trusts (each of whom own more than 10 percent by value of the interests in such real estate investment trust) hold in the aggregate more than 50 percent (by value) of the interests in such real estate investment trust. “(E) Qualified trust.— For purposes of this paragraph, the term ‘qualified trust’ means any trust described in section 401(a) and exempt from tax under section 501(a).”

50. 1996

    Small Business Job Protection Act of 1996

    Pub. L. 104–188 § 1704(t)(35) · 110 Stat. 1755

    Substituted · 26 U.S.C. § 856(a)(4)

    Pub. L. 104–188, § 1704(t)(35), substituted “section 582(c)(2)” for “section 582(c)(5)”

    Source evidence

    Code amendment note
    Subsec. (a)(4). Pub. L. 104–188, § 1704(t)(35), substituted “section 582(c)(2)” for “section 582(c)(5)”.

    Enacted provision · exact public law section
    (35) Paragraph (4) of section 856(a) is amended by striking “section 582(c)(5)” and inserting “section 582(c)(2)”.

51. 1996

    Small Business Job Protection Act of 1996

    Pub. L. 104–188 § 1621(b)(5) · 110 Stat. 1755

    Inserted · 26 U.S.C. § 856(c)(6)(E)

    Pub. L. 104–188, § 1621(b)(5), inserted at end “The principles of the preceding provisions of this subparagraph shall apply to regular interests in a FASIT.”

    Source evidence

    Code amendment note
    Subsec. (c)(6)(E). Pub. L. 104–188, § 1621(b)(5), inserted at end “The principles of the preceding provisions of this subparagraph shall apply to regular interests in a FASIT.”

    Enacted provision · exact public law section
    (5) Subparagraph (E) of section 856(c)(6) is amended by adding at the end the following new sentence: “The principles of the preceding provisions of this subparagraph shall apply to regular interests in a FASIT.”.

52. 1997

    Pub. L. 105–34 § 1251(b)(2) · 111 Stat. 788

    Inserted · 26 U.S.C. § 856(a)(6)

    Pub. L. 105–34, § 1251(b)(2), inserted “subject to the provisions of subsection (k),” before “which is not”

    Source evidence

    Code amendment note
    Subsec. (a)(6). Pub. L. 105–34, § 1251(b)(2), inserted “subject to the provisions of subsection (k),” before “which is not”.

53. 1997

    Pub. L. 105–34 § 1255(a)(1) · 111 Stat. 788

    Inserted · 26 U.S.C. § 856(c)(3)(I)

    Pub. L. 105–34, § 1255(a)(1), inserted “and” at end

    Source evidence

    Code amendment note
    Subsec. (c)(3)(I). Pub. L. 105–34, § 1255(a)(1), inserted “and” at end.

    Enacted provision · exact public law section
    (1) by adding “and” at the end of paragraph (3),

54. 1997

    Pub. L. 105–34 § 1255(a)(2) · 111 Stat. 788

    1. Redesignated · 26 U.S.C. § 856(c)(4)

       Pub. L. 105–34, § 1255(a)(2), (3), redesignated par. (5) as (4)

    2. Struck · 26 U.S.C. § 856(c)(4)

       Pub. L. 105–34, § 1255(a)(2), (3), struck out former par. (4) which read as follows: “less than 30 percent of its gross income is derived from the sale or other disposition of—

    Source evidence

    Code amendment note
    Subsec. (c)(4). Pub. L. 105–34, § 1255(a)(2), (3), redesignated par. (5) as (4) and struck out former par. (4) which read as follows: “less than 30 percent of its gross income is derived from the sale or other disposition of—

    “(A) stock or securities held for less than 1 year; “(B) property in a transaction which is a prohibited transaction; and “(C) real property (including interests in real property and interests in mortgages on real property) held for less than 4 years other than— “(i) property compulsorily or involuntarily converted within the meaning of section 1033, and “(ii) property which is foreclosure property within the definition of section 856(e); and”.

    Enacted provision · exact public law section
    (2) by striking paragraphs (4) and (8), and

55. 1997

    Pub. L. 105–34 § 1255(a)(3) · 111 Stat. 788

    Redesignated · 26 U.S.C. § 856(c)(5)

    Pub. L. 105–34, § 1255(a)(3), redesignated par. (6) as (5). Former par. (5) redesignated (4)

    Source evidence

    Code amendment note
    Subsec. (c)(5). Pub. L. 105–34, § 1255(a)(3), redesignated par. (6) as (5). Former par. (5) redesignated (4).

    Enacted provision · exact public law section
    (3) by redesignating paragraphs (5), (6), and (7) as paragraphs (4), (5), and (6), respectively.

56. 1997

    Pub. L. 105–34 § 1258 · 111 Stat. 788

    Amended · 26 U.S.C. § 856(c)(5)(G)

    Pub. L. 105–34, § 1258, amended heading and text of subpar. (G) generally. Prior to amendment, text read as follows: “Except to the extent provided by regulations, any—

    Source evidence

    Code amendment note
    Subsec. (c)(5)(G). Pub. L. 105–34, § 1258, amended heading and text of subpar. (G) generally. Prior to amendment, text read as follows: “Except to the extent provided by regulations, any—

    “(i) payment to a real estate investment trust under a bona fide interest rate swap or cap agreement entered into by the real estate investment trust to hedge any variable rate indebtedness of such trust incurred or to be incurred to acquire or carry real estate assets, and “(ii) any gain from the sale or other disposition of such agreement, shall be treated as income qualifying under paragraph (2).”

    Enacted provision · exact public law section
    SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS. Section 856(c)(5)(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).”.

57. 1997

    Pub. L. 105–34 § 1255(b)(1) · 111 Stat. 788

    Struck · 26 U.S.C. § 856(c)(5)(G)

    Pub. L. 105–34, § 1255(b)(1), struck out “and such agreement shall be treated as a security for purposes of paragraph (4)(A)” after “under paragraph (2)” in concluding provisions

    Target inherited from the preceding amendment note.

    Source evidence

    Code amendment note
    Pub. L. 105–34, § 1255(b)(1), struck out “and such agreement shall be treated as a security for purposes of paragraph (4)(A)” after “under paragraph (2)” in concluding provisions.

    Enacted provision · exact public law section
    (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)”.

58. 1997

    Pub. L. 105–34 § 1255(a)(3) · 111 Stat. 788

    Redesignated · 26 U.S.C. § 856(c)(6); 26 U.S.C. § 856(c)(7)

    Pub. L. 105–34, § 1255(a)(3), redesignated par. (7) as (6). Former par. (6) redesignated (5)

    Source evidence

    Code amendment note
    Subsec. (c)(6), (7). Pub. L. 105–34, § 1255(a)(3), redesignated par. (7) as (6). Former par. (6) redesignated (5).

    Enacted provision · exact public law section
    (3) by redesignating paragraphs (5), (6), and (7) as paragraphs (4), (5), and (6), respectively.

59. 1997

    Pub. L. 105–34 § 1255(a)(2) · 111 Stat. 788

    Struck · 26 U.S.C. § 856(c)(8)

    Pub. L. 105–34, § 1255(a)(2), struck out heading and text of par. (8). Text read as follows: “In the case of the taxable year in which a real estate investment trust is completely liquidated, there shall not be taken into account under paragraph (4) any gain from the sale, exchange, or distribution of any property after the adoption of the plan of complete liquidation.”

    Source evidence

    Code amendment note
    Subsec. (c)(8). Pub. L. 105–34, § 1255(a)(2), struck out heading and text of par. (8). Text read as follows: “In the case of the taxable year in which a real estate investment trust is completely liquidated, there shall not be taken into account under paragraph (4) any gain from the sale, exchange, or distribution of any property after the adoption of the plan of complete liquidation.”

    Enacted provision · exact public law section
    (2) by striking paragraphs (4) and (8), and

60. 1997

    Pub. L. 105–34 § 1252(a) · 111 Stat. 788

    1. Added · 26 U.S.C. § 856(d)(2)

       Pub. L. 105–34, § 1252(a), added subpar. (C)

    2. Struck · 26 U.S.C. § 856(d)(2)

       Pub. L. 105–34, § 1252(a), struck out former subpar. (C) and concluding provisions which read as follows:

    Source evidence

    Code amendment note
    Subsec. (d)(2). Pub. L. 105–34, § 1252(a), added subpar. (C) and struck out former subpar. (C) and concluding provisions which read as follows:

    “(C) any amount received or accrued, directly or indirectly, with respect to any real or personal property if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unrelated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2).”

    Enacted provision · exact public law section
    (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)).”.

61. 1997

    Pub. L. 105–34 § 1253 · 111 Stat. 788

    Substituted · 26 U.S.C. § 856(d)(5)

    Pub. L. 105–34, § 1253, substituted “except that—” and subpars. (A) and (B) for “except that ‘10 percent’ shall be substituted for ‘50 percent’ in subparagraph (C) of section 318(a)(2) and 318(a)(3).”

    Source evidence

    Code amendment note
    Subsec. (d)(5). Pub. L. 105–34, § 1253, substituted “except that—” and subpars. (A) and (B) for “except that ‘10 percent’ shall be substituted for ‘50 percent’ in subparagraph (C) of section 318(a)(2) and 318(a)(3).”

    Enacted provision · exact public law section
    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.”.

62. 1997

    Pub. L. 105–34 § 1252(b) · 111 Stat. 788

    Added · 26 U.S.C. § 856(d)(7)

    Pub. L. 105–34, § 1252(b), added par. (7)

    Source evidence

    Code amendment note
    Subsec. (d)(7). Pub. L. 105–34, § 1252(b), added par. (7).

    Enacted provision · exact public law section
    (b) 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 services.— 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) Coordination 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.”.

63. 1997

    Pub. L. 105–34 § 1257(a)(1) · 111 Stat. 788

    Substituted · 26 U.S.C. § 856(e)(2)

    Pub. L. 105–34, § 1257(a)(1), which directed amendment of par. (2) by substituting “as of the close of the 3d taxable year following the taxable year in which the trust acquired such property” for “on the date which is 2 years after the date the trust acquired such property”, was executed by making the substitution for “on the date which is 2 years after the date such trust acquired such property” to reflect the probable intent of Congress

    Source evidence

    Code amendment note
    Subsec. (e)(2). Pub. L. 105–34, § 1257(a)(1), which directed amendment of par. (2) by substituting “as of the close of the 3d taxable year following the taxable year in which the trust acquired such property” for “on the date which is 2 years after the date the trust acquired such property”, was executed by making the substitution for “on the date which is 2 years after the date such trust acquired such property” to reflect the probable intent of Congress.

    Enacted provision · exact public law section
    (1) 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”.

64. 1997

    Pub. L. 105–34 § 1257(a)(2) · 111 Stat. 788

    1. Substituted · 26 U.S.C. § 856(e)(3)

       Pub. L. 105–34, § 1257(a)(2), substituted “grant one extension” for “grant one or more extensions”

    2. Substituted · 26 U.S.C. § 856(e)(3)

       Pub. L. 105–34, § 1257(a)(2), substituted “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).” for “Any such extension shall not extend the grace period beyond the date which is 6 years after the date such trust acquired such property.”

    Source evidence

    Code amendment note
    Subsec. (e)(3). Pub. L. 105–34, § 1257(a)(2), substituted “grant one extension” for “grant one or more extensions” and “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).” for “Any such extension shall not extend the grace period beyond the date which is 6 years after the date such trust acquired such property.”

    Enacted provision · exact public law section
    (2) Extension.— Paragraph (3) of section 856(e) is amended— (A) 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).”.

65. 1997

    Pub. L. 105–34 § 1257(c) · 111 Stat. 788

    Inserted · 26 U.S.C. § 856(e)(4)

    Pub. L. 105–34, § 1257(c), inserted concluding provisions “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.”

    Source evidence

    Code amendment note
    Subsec. (e)(4). Pub. L. 105–34, § 1257(c), inserted concluding provisions “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.”

    Enacted provision · exact public law section
    (c) 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.”.

66. 1997

    Pub. L. 105–34 § 1257(b) · 111 Stat. 788

    Substituted · 26 U.S.C. § 856(e)(5)

    Pub. L. 105–34, § 1257(b), substituted “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.” for “Any such election shall be irrevocable.”

    Source evidence

    Code amendment note
    Subsec. (e)(5). Pub. L. 105–34, § 1257(b), substituted “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.” for “Any such election shall be irrevocable.”

    Enacted provision · exact public law section
    (b) 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.”.

67. 1997

    Pub. L. 105–34 § 1262 · 111 Stat. 788

    Struck · 26 U.S.C. § 856(i)(2)

    Pub. L. 105–34, § 1262, struck out “at all times during the period such corporation was in existence” after “real estate investment trust”

    Source evidence

    Code amendment note
    Subsec. (i)(2). Pub. L. 105–34, § 1262, struck out “at all times during the period such corporation was in existence” after “real estate investment trust”.

    Enacted provision · exact public law section
    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”.

68. 1997

    Pub. L. 105–34 § 1261(a) · 111 Stat. 788

    Redesignated · 26 U.S.C. § 856(j)(4)

    Pub. L. 105–34, § 1261(a), added par. (4). Former par. (4) redesignated (5)

    Source evidence

    Code amendment note
    Subsec. (j)(4). Pub. L. 105–34, § 1261(a), added par. (4). Former par. (4) redesignated (5).

    Enacted provision · exact public law section
    (a) 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; penalty.— 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.”.

69. 1997

    Pub. L. 105–34 § 1261(a) · 111 Stat. 788

    Redesignated · 26 U.S.C. § 856(j)(5)

    Pub. L. 105–34, § 1261(a), redesignated par. (4) as (5)

    Source evidence

    Code amendment note
    Subsec. (j)(5). Pub. L. 105–34, § 1261(a), redesignated par. (4) as (5).

    Enacted provision · exact public law section
    (a) 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; penalty.— 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.”.

70. 1997

    Pub. L. 105–34 § 1261(b) · 111 Stat. 788

    Inserted · 26 U.S.C. § 856(j)(5)(A)(ii)

    Pub. L. 105–34, § 1261(b), inserted before period at end “or appreciation in value as of any specified date”

    Source evidence

    Code amendment note
    Subsec. (j)(5)(A)(ii). Pub. L. 105–34, § 1261(b), inserted before period at end “or appreciation in value as of any specified date”.

    Enacted provision · exact public law section
    (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”.

71. 1997

    Pub. L. 105–34 § 1251(b)(1) · 111 Stat. 788

    Added · 26 U.S.C. § 856(k)

    Pub. L. 105–34, § 1251(b)(1), added subsec. (k)

    Source evidence

    Code amendment note
    Subsec. (k). Pub. L. 105–34, § 1251(b)(1), added subsec. (k).

72. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 532(c)(2)(H) · 113 Stat. 1860

    Substituted · 26 U.S.C. § 856(c)(2)(D); 26 U.S.C. § 856(c)(3)(C)

    Pub. L. 106–170, § 532(c)(2)(H), (I), substituted “section 1221(a)(1)” for “section 1221(1)”

    Source evidence

    Code amendment note
    Subsec. (c)(2)(D), (3)(C). Pub. L. 106–170, § 532(c)(2)(H), (I), substituted “section 1221(a)(1)” for “section 1221(1)”.

    Enacted provision · exact public law section
    (H) 26 USC 856. Section 856(c)(2)(D).

73. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 541(a) · 113 Stat. 1860

    Amended · 26 U.S.C. § 856(c)(4)(B)

    Pub. L. 106–170, § 541(a), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer.”

    Source evidence

    Code amendment note
    Subsec. (c)(4)(B). Pub. L. 106–170, § 541(a), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer.”

    Enacted provision · exact public law section
    (a) In General.— Subparagraph (B) of section 856(c)(4) of the 26 USC 856. Internal Revenue Code of 1986 is amended to read as follows: “(B) (i) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)), “(ii) not more than 20 percent of the value of its total assets is represented by securities of one or more taxable REIT subsidiaries, and “(iii) except with respect to a taxable REIT subsidiary and securities includible under subparagraph (A)— “(I) not more than 5 percent of the value of its total assets is represented by securities of any one issuer, “(II) the trust does not hold securities possessing more than 10 percent of the total voting power of the outstanding securities of any one issuer, and “(III) the trust does not hold securities having a value of more than 10 percent of the total value of the outstanding securities of any one issuer.” .

74. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 541(b) · 113 Stat. 1860

    Added · 26 U.S.C. § 856(c)(7)

    Pub. L. 106–170, § 541(b), added par. (7)

    Source evidence

    Code amendment note
    Subsec. (c)(7). Pub. L. 106–170, § 541(b), added par. (7).

    Enacted provision · exact public law section
    b) Exception for Straight Debt Securities.— Subsection (c) of section 856 of such Code is amended by adding at the end the following new paragraph: “(7) Straight debt safe harbor in applying paragraph (4).— Securities of an issuer which are straight debt (as defined in section 1361(c)(5) without regard to subparagraph (B)(iii) thereof) shall not be taken into account in applying paragraph (4)(B)(ii)(III) if— “(A) the issuer is an individual, or “(B) the only securities of such issuer which are held by the trust or a taxable REIT subsidiary of the trust are straight debt (as so defined), or “(C) the issuer is a partnership and the trust holds at least a 20 percent profits interest in the partnership.” .

75. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 542(b)(3)(A)(i) · 113 Stat. 1860

    Substituted · 26 U.S.C. § 856(d)(1)

    Pub. L. 106–170, § 542(b)(3)(A)(i), substituted “fair market values” for “adjusted bases” in two places in concluding provisions

    Source evidence

    Code amendment note
    Subsec. (d)(1). Pub. L. 106–170, § 542(b)(3)(A)(i), substituted “fair market values” for “adjusted bases” in two places in concluding provisions.

    Enacted provision · exact public law section
    (i) Paragraph (1) of section 856(d) of such Code Effective date. is amended by striking “adjusted bases” each place it occurs and inserting “fair market values”.

76. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 542(b)(2) · 113 Stat. 1860

    Inserted · 26 U.S.C. § 856(d)(2)(B)

    Pub. L. 106–170, § 542(b)(2), inserted “except as provided in paragraph (8),” after “(B)” in introductory provisions

    Source evidence

    Code amendment note
    Subsec. (d)(2)(B). Pub. L. 106–170, § 542(b)(2), inserted “except as provided in paragraph (8),” after “(B)” in introductory provisions.

    Enacted provision · exact public law section
    (2) Conforming amendment.— Subparagraph (B) of section 856(d)(2) of such Code is amended by inserting “except as provided in paragraph (8),” after “(B)”.

77. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 542(b)(3)(B)(i) · 113 Stat. 1860

    Substituted · 26 U.S.C. § 856(d)(2)(B)(i)

    Pub. L. 106–170, § 542(b)(3)(B)(i), substituted “value” for “number”

    Source evidence

    Code amendment note
    Subsec. (d)(2)(B)(i). Pub. L. 106–170, § 542(b)(3)(B)(i), substituted “value” for “number”.

    Enacted provision · exact public law section
    (i) Clause (i) of section 856(d)(2)(B) of such Code is amended by striking “number” and inserting “value”.

78. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 561(a) · 113 Stat. 1860

    Inserted · 26 U.S.C. § 856(d)(3)

    Pub. L. 106–170, § 561(a), inserted concluding provisions

    Source evidence

    Code amendment note
    Subsec. (d)(3). Pub. L. 106–170, § 561(a), inserted concluding provisions.

    Enacted provision · exact public law section
    (a) In General.— Paragraph (3) of section 856(d) of the Internal Revenue Code of 1986 (relating to independent contractor defined) 26 USC 856. is amended by adding at the end the following flush sentence: “In the event that any class of stock of either the real estate investment trust or such person is regularly traded on an established securities market, only persons who own, directly or indirectly, more than 5 percent of such class of stock shall be taken into account as owning any of the stock of such class for purposes of applying the 35 percent limitation set forth in subparagraph (B) (but all of the outstanding stock of such class shall be considered outstanding in order to compute the denominator for purpose of determining the applicable percentage of ownership).” .

79. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 542(a) · 113 Stat. 1860

    Inserted · 26 U.S.C. § 856(d)(7)(C)(i)

    Pub. L. 106–170, § 542(a), inserted “or through a taxable REIT subsidiary of such trust” after “income”

    Source evidence

    Code amendment note
    Subsec. (d)(7)(C)(i). Pub. L. 106–170, § 542(a), inserted “or through a taxable REIT subsidiary of such trust” after “income”.

    Enacted provision · exact public law section
    (a) Income From Taxable REIT Subsidiaries Not Treated as Impermissible Tenant Service Income.— Clause (i) of section 856(d)(7)(C) of the Internal Revenue Code of 1986 (relating to exceptions to impermissible tenant service income) is amended by inserting “or through a taxable REIT subsidiary of such trust” after “income”.

80. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 542(b)(1) · 113 Stat. 1860

    Added · 26 U.S.C. § 856(d)(8); 26 U.S.C. § 856(d)(9)

    Pub. L. 106–170, § 542(b)(1), added pars. (8) and (9)

    Source evidence

    Code amendment note
    Subsec. (d)(8), (9). Pub. L. 106–170, § 542(b)(1), added pars. (8) and (9).

    Enacted provision · exact public law section
    (1) In general.— Subsection (d) of section 856 of such Code (relating to rents from real property defined) is amended by adding at the end the following new paragraphs: “(8) Special rule for taxable reit subsidiaries.— For purposes of this subsection, amounts paid to a real estate investment trust by a taxable REIT subsidiary of such trust shall not be excluded from rents from real property by reason of paragraph (2)(B) if the requirements of either of the following subparagraphs are met: “(A) Limited rental exception.— The requirements of this subparagraph are met with respect to any property if at least 90 percent of the leased space of the property is rented to persons other than taxable REIT subsidiaries of such trust and other than persons described in section 856(d)(2)(B). The preceding sentence shall apply only to the extent that the amounts paid to the trust as rents from real property (as defined in paragraph (1) without regard to paragraph (2)(B)) from such property are substantially comparable to such rents made by the other tenants of the trust’s property for comparable space. “(B) Exception for certain lodging facilities.— The requirements of this subparagraph are met with respect to an interest in real property which is a qualified lodging facility 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. “(9) Eligible independent contractor.— For purposes of paragraph (8)(B)— “(A) In general.— The term ‘eligible independent contractor’ means, with respect to any qualified lodging facility, 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 the facility, such contractor (or any related person) is actively engaged in the trade or business of operating qualified lodging facilities 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 by reason of any of the following: “(i) The taxable REIT subsidiary bears the expenses for the operation of the facility pursuant to the management agreement or other similar service contract. “(ii) The taxable REIT subsidiary receives the revenues from the operation of such facility, 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. “(C) Renewals, etc., of existing leases.— For purposes of subparagraph (B)(iii)— “(i) a lease shall be treated as in effect on January 1, 1999, without regard to its renewal after such date, so long as such renewal is pursuant to the terms of such lease as in effect on whichever of the dates under subparagraph (B)(iii) is the latest, and “(ii) a lease of a property entered into after whichever of the dates under subparagraph (B)(iii) is the latest shall be treated as in effect on such date if— “(I) on such date, a lease of such property from the trust was in effect, and “(II) under the terms of the new lease, such trust receives a substantially similar or lesser benefit in comparison to the lease referred to in subclause (I). “(D) Qualified lodging facility.— For purposes of this paragraph— “(i) In general.— The term ‘qualified lodging facility’ means any lodging facility unless wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. “(ii) Lodging facility.— The term ‘lodging facility’ means a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis. “(iii) Customary amenities and facilities.— The term ‘lodging facility’ includes customary amenities and facilities operated as part of, or associated with, the lodging facility so long as such amenities and facilities are customary for other properties of a comparable size and class owned by other owners unrelated to such real estate investment trust. “(E) Operate includes manage.— References in this paragraph to operating a property shall be treated as including a reference to managing the property. “(F) Related person.— Persons shall be treated as related to each other if such persons are treated as a single employer under subsection (a) or (b) of section 52.” .

81. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 532(c)(2)(J) · 113 Stat. 1860

    Substituted · 26 U.S.C. § 856(e)(1)

    Pub. L. 106–170, § 532(c)(2)(J), substituted “section 1221(a)(1)” for “section 1221(1)”

    Source evidence

    Code amendment note
    Subsec. (e)(1). Pub. L. 106–170, § 532(c)(2)(J), substituted “section 1221(a)(1)” for “section 1221(1)”.

    Enacted provision · exact public law section
    (J) Section 856(e)(1).

82. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 551(a) · 113 Stat. 1860

    Added · 26 U.S.C. § 856(e)(6)

    Pub. L. 106–170, § 551(a), added par. (6)

    Source evidence

    Code amendment note
    Subsec. (e)(6). Pub. L. 106–170, § 551(a), added par. (6).

    Enacted provision · exact public law section
    (a) Special Foreclosure Rule for Health Care Properties.— Subsection (e) of section 856 of the Internal Revenue Code 26 USC 856. of 1986 (relating to special rules for foreclosure property) is amended by adding at the end the following new paragraph: “(6) Special rule for qualified health care properties.— For purposes of this subsection— “(A) Acquisition at expiration of lease.— The term ‘foreclosure property’ shall include any qualified health care property acquired by a real estate investment trust as the result of the termination of a lease of such property (other than a termination by reason of a default, or the imminence of a default, on the lease). “(B) Grace period.— In the case of a qualified health care property which is foreclosure property solely by reason of subparagraph (A), in lieu of applying paragraphs (2) and (3)— “(i) the qualified health care property shall cease to be foreclosure property as of the close of the second taxable year after the taxable year in which such trust acquired such property, and “(ii) if the real estate investment trust establishes to the satisfaction of the Secretary that an extension of the grace period in clause (i) is necessary to the orderly leasing or liquidation of the trust’s interest in such qualified health care property, the Secretary may grant one or more extensions of the grace period for such qualified health care property. Any such extension shall not extend the grace period beyond the close of the 6th year after the taxable year in which such trust acquired such qualified health care property. “(C) Income from independent contractors.— For purposes of applying paragraph (4)(C) with respect to qualified health care property which is foreclosure property by reason of subparagraph (A) or paragraph (1), income derived or received by the trust from an independent contractor shall be disregarded to the extent such income is attributable to— “(i) any lease of property in effect on the date the real estate investment trust acquired the qualified health care property (without regard to its renewal after such date so long as such renewal is pursuant to the terms of such lease as in effect on such date), or “(ii) any lease of property entered into after such date if— “(I) on such date, a lease of such property from the trust was in effect, and “(II) under the terms of the new lease, such trust receives a substantially similar or lesser benefit in comparison to the lease referred to in subclause (I). “(D) Qualified health care property.— “(i) In general.— The term ‘qualified health care property’ means any real property (including interests therein), and any personal property incident to such real property, which— “(I) is a health care facility, or “(II) is necessary or incidental to the use of a health care facility. “(ii) Health care facility.— For purposes of clause (i), the term ‘health care facility’ means a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility (as defined in section 7872(g)(4)), or other licensed facility which extends medical or nursing or ancillary services to patients and which, immediately before the termination, expiration, default, or breach of the lease of or mortgage secured by such facility, was operated by a provider of such services which was eligible for participation in the medicare program under title XVIII of the Social Security Act with respect to such facility.” .

83. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 543(b) · 113 Stat. 1860

    Inserted · 26 U.S.C. § 856(i)(2)

    Pub. L. 106–170, § 543(b), inserted at end “Such term shall not include a taxable REIT subsidiary.”

    Source evidence

    Code amendment note
    Subsec. (i)(2). Pub. L. 106–170, § 543(b), inserted at end “Such term shall not include a taxable REIT subsidiary.”

    Enacted provision · exact public law section
    (b) Conforming Amendment.— Paragraph (2) of section 856(i) of such Code is amended by adding at the end the following new sentence: “Such term shall not include a taxable REIT subsidiary.”.

84. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 532(c)(2)(K) · 113 Stat. 1860

    Substituted · 26 U.S.C. § 856(j)(2)(B)

    Pub. L. 106–170, § 532(c)(2)(K), substituted “section 1221(a)(1)” for “section 1221(1)”

    Source evidence

    Code amendment note
    Subsec. (j)(2)(B). Pub. L. 106–170, § 532(c)(2)(K), substituted “section 1221(a)(1)” for “section 1221(1)”.

    Enacted provision · exact public law section
    (K) Section 856( j)(2)(B).

85. 1999

    Tax Relief Extension Act of 1999

    Pub. L. 106–170 § 543(a) · 113 Stat. 1860

    Added · 26 U.S.C. § 856(l)

    Pub. L. 106–170, § 543(a), added subsec. (l)

    Source evidence

    Code amendment note
    Subsec. (l). Pub. L. 106–170, § 543(a), added subsec. (l).

    Enacted provision · exact public law section
    (a) In General.— Section 856 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection: “(l) Taxable REIT Subsidiary.— For purposes of this part— “(1) In general.— The term ‘taxable REIT subsidiary’ means, with respect to a real estate investment trust, a corporation (other than a real estate investment trust) if— “(A) such trust directly or indirectly owns stock in such corporation, and “(B) such trust and such corporation jointly elect that such corporation shall be treated as a taxable REIT subsidiary of such trust for purposes of this part. Such an election, once made, shall be irrevocable unless both such trust and corporation consent to its revocation. Such election, and any revocation thereof, may be made without the consent of the Secretary. “(2) Thirty-five percent ownership in another taxable reit subsidiary.— The term ‘taxable REIT subsidiary’ includes, with respect to any real estate investment trust, any corporation (other than a real estate investment trust) with respect to which a taxable REIT subsidiary of such trust owns directly or indirectly— “(A) securities possessing more than 35 percent of the total voting power of the outstanding securities of such corporation, or “(B) securities having a value of more than 35 percent of the total value of the outstanding securities of such corporation. The preceding sentence shall not apply to a qualified REIT subsidiary (as defined in subsection (i)(2)). The rule of section 856(c)(7) shall apply for purposes of subparagraph (B). “(3) Exceptions.— The term ‘taxable REIT subsidiary’ shall not include— “(A) any corporation which directly or indirectly operates or manages a lodging facility or a health care facility, and “(B) any corporation which directly or indirectly provides to any other person (under a franchise, license, or otherwise) rights to any brand name under which any lodging facility or health care facility is operated. Subparagraph (B) shall not apply to rights provided to an eligible independent contractor to operate or manage a lodging facility if such rights are held by such corporation as a franchisee, licensee, or in a similar capacity and such lodging facility is either owned by such corporation or is leased to such corporation from the real estate investment trust. “(4) Definitions.— For purposes of paragraph (3)— “(A) Lodging facility.— The term ‘lodging facility’ has the meaning given to such term by paragraph (9)(D)(ii). “(B) Health care facility.— The term ‘health care facility’ has the meaning given to such term by subsection (e)(6)(D)(ii).” .

86. 2000

    Consolidated Appropriations Act, 2001

    Pub. L. 106–554 § 1(a)(7)(tIII)(s319)(9) · 114 Stat. 2763

    Substituted · 26 U.S.C. § 856(c)(7)

    Pub. L. 106–554, § 1(a)(7) [title III, § 319(9)], substituted “paragraph (4)(B)(iii)(III)” for “paragraph (4)(B)(ii)(III)” in introductory provisions

    Source evidence

    Code amendment note
    Subsec. (c)(7). Pub. L. 106–554, § 1(a)(7) [title III, § 319(9)], substituted “paragraph (4)(B)(iii)(III)” for “paragraph (4)(B)(ii)(III)” in introductory provisions.

    Enacted provision · exact public law section
    (7) H.R. 5662, as introduced on December 14, 2000.

87. 2000

    Consolidated Appropriations Act, 2001

    Pub. L. 106–554 § 1(a)(7)(tIII)(s319)(10) · 114 Stat. 2763

    Substituted · 26 U.S.C. § 856(l)(4)(A)

    Pub. L. 106–554, § 1(a)(7) [title III, § 319(10)], substituted “subsection (d)(9)(D)(ii)” for “paragraph (9)(D)(ii)”

    Source evidence

    Code amendment note
    Subsec. (l)(4)(A). Pub. L. 106–554, § 1(a)(7) [title III, § 319(10)], substituted “subsection (d)(9)(D)(ii)” for “paragraph (9)(D)(ii)”.

    Enacted provision · exact public law section
    (7) H.R. 5662, as introduced on December 14, 2000.

88. 2004

    Pub. L. 108–357 § 835(b)(4) · 118 Stat. 1418

    Struck · 26 U.S.C. § 856(c)(5)(E)

    Pub. L. 108–357, § 835(b)(4), struck out last sentence which read as follows: “The principles of the preceding provisions of this subparagraph shall apply to regular interests in a FASIT.”

    Source evidence

    Code amendment note
    Subsec. (c)(5)(E). Pub. L. 108–357, § 835(b)(4), struck out last sentence which read as follows: “The principles of the preceding provisions of this subparagraph shall apply to regular interests in a FASIT.”

    Enacted provision · exact public law section
    (4) Subparagraph (E) of section 856(c)(5) is amended by striking the last sentence.

89. 2004

    Pub. L. 108–357 § 243(d) · 118 Stat. 1418

    Amended · 26 U.S.C. § 856(c)(5)(G)

    Pub. L. 108–357, § 243(d), reenacted heading without change and amended text of subpar. (G) generally. Prior to amendment, subpar. (G) provided that, except to the extent provided by regulations, 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 gain from the sale or other disposition of any such investment, would be treated as income qualifying under par. (2)

    Source evidence

    Code amendment note
    Subsec. (c)(5)(G). Pub. L. 108–357, § 243(d), reenacted heading without change and amended text of subpar. (G) generally. Prior to amendment, subpar. (G) provided that, except to the extent provided by regulations, 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 gain from the sale or other disposition of any such investment, would be treated as income qualifying under par. (2).

    Enacted provision · exact public law section
    (d) Conformity With General Hedging Definition.— Subparagraph (G) of section 856(c)(5) (relating to treatment of certain hedging instruments) is amended to read as follows: “(G) Treatment of certain hedging instruments.— Except to the extent provided by regulations, 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 paragraph (2) to the extent that the transaction hedges any indebtedness incurred or to be incurred by the trust to acquire or carry real estate assets.” .

90. 2004

    Pub. L. 108–357 § 243(f)(2) · 118 Stat. 1418

    1. Added · 26 U.S.C. § 856(c)(6)(A)

       Pub. L. 108–357, § 243(f)(2), added subpar. (A)

    2. Struck · 26 U.S.C. § 856(c)(6)(A)

       Pub. L. 108–357, § 243(f)(2), struck out former subpar. (A) which read as follows: “the nature and amount of each item of its gross income described in such paragraphs is set forth in a schedule attached to its income tax return for such taxable year;”

    Source evidence

    Code amendment note
    Subsec. (c)(6)(A). Pub. L. 108–357, § 243(f)(2), added subpar. (A) and struck out former subpar. (A) which read as follows: “the nature and amount of each item of its gross income described in such paragraphs is set forth in a schedule attached to its income tax return for such taxable year;”.

    Enacted provision · exact public law section
    (2) Modification of rules of application for failure to satisfy sections 856(c)(2) or 856(c)(3).— Paragraph (6) of section 856(c) (relating to definition of real estate investment trust) is amended by striking subparagraphs (A) and (B), by redesignating subparagraph (C) as subparagraph (B), and by inserting before subparagraph (B) (as so redesignated) the following new subparagraph: “(A) following the corporation, trust, or association’s identification of the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, for any taxable year, a description of each item of its gross income described in such paragraphs is set forth in a schedule for such taxable year filed in accordance with regulations prescribed by the Secretary, and” .

91. 2004

    Pub. L. 108–357 § 243(f)(2) · 118 Stat. 1418

    1. Redesignated · 26 U.S.C. § 856(c)(6)(B); 26 U.S.C. § 856(c)(6)(C)

       Pub. L. 108–357, § 243(f)(2), redesignated subpar. (C) as (B)

    2. Struck · 26 U.S.C. § 856(c)(6)(B); 26 U.S.C. § 856(c)(6)(C)

       Pub. L. 108–357, § 243(f)(2), struck out former subpar. (B) which read as follows: “the inclusion of any incorrect information in the schedule referred to in subparagraph (A) is not due to fraud with intent to evade tax; and”

    Source evidence

    Code amendment note
    Subsec. (c)(6)(B), (C). Pub. L. 108–357, § 243(f)(2), redesignated subpar. (C) as (B) and struck out former subpar. (B) which read as follows: “the inclusion of any incorrect information in the schedule referred to in subparagraph (A) is not due to fraud with intent to evade tax; and”.

    Enacted provision · exact public law section
    (2) Modification of rules of application for failure to satisfy sections 856(c)(2) or 856(c)(3).— Paragraph (6) of section 856(c) (relating to definition of real estate investment trust) is amended by striking subparagraphs (A) and (B), by redesignating subparagraph (C) as subparagraph (B), and by inserting before subparagraph (B) (as so redesignated) the following new subparagraph: “(A) following the corporation, trust, or association’s identification of the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, for any taxable year, a description of each item of its gross income described in such paragraphs is set forth in a schedule for such taxable year filed in accordance with regulations prescribed by the Secretary, and” .

92. 2004

    Pub. L. 108–357 § 243(f)(1) · 118 Stat. 1418

    Added · 26 U.S.C. § 856(c)(7)

    Pub. L. 108–357, § 243(f)(1), added par. (7)

    Source evidence

    Code amendment note
    Subsec. (c)(7). Pub. L. 108–357, § 243(f)(1), added par. (7).

    Enacted provision · exact public law section
    (1) Rules of application for failure to satisfy section 856(c)(4).— Section 856(c) (relating to definition of real estate investment trust) is amended by inserting after paragraph (6) the following new paragraph: “(7) Rules of application for failure to satisfy paragraph (4).— “(A) De minimis failure.— A corporation, trust, or association that fails to meet the requirements of paragraph (4)(B)(iii) for a particular quarter shall nevertheless be considered to have satisfied the requirements of such paragraph for such quarter if— “(i) such failure is due to the ownership of assets the total value of which does not exceed the lesser of— “(I) 1 percent of the total value of the trust’s assets at the end of the quarter for which such measurement is done, and “(II) $10,000,000, and “(ii) (I) the corporation, trust, or association, following the identification of such failure, disposes of assets in order to meet the requirements of such paragraph within 6 months after the last day of the quarter in which the corporation, trust or association’s identification of the failure to satisfy the requirements of such paragraph occurred or such other time period prescribed by the Secretary and in the manner prescribed by the Secretary, or “(II) the requirements of such paragraph are otherwise met within the time period specified in subclause (I). “(B) Failures exceeding de minimis amount.— A corporation, trust, or association that fails to meet the requirements of paragraph (4) for a particular quarter shall nevertheless be considered to have satisfied the requirements of such paragraph for such quarter if— “(i) such failure involves the ownership of assets the total value of which exceeds the de minimis standard described in subparagraph (A)(i) at the end of the quarter for which such measurement is done, “(ii) following the corporation, trust, or association’s identification of the failure to satisfy the requirements of such paragraph for a particular quarter, a description of each asset that causes the corporation, trust, or association to fail to satisfy the requirements of such paragraph at the close of such quarter of any taxable year is set forth in a schedule for such quarter filed in accordance with regulations prescribed by the Secretary, “(iii) the failure to meet the requirements of such paragraph for a particular quarter is due to reasonable cause and not due to willful neglect, “(iv) the corporation, trust, or association pays a tax computed under subparagraph (C), and “(v) (I) the corporation, trust, or association disposes of the assets set forth on the schedule specified in clause (ii) within 6 months after the last day of the quarter in which the corporation, trust or association’s identification of the failure to satisfy the requirements of such paragraph occurred or such other time period prescribed by the Secretary and in the manner prescribed by the Secretary, or “(II) the requirements of such paragraph are otherwise met within the time period specified in subclause (I). “(C) Tax.— For purposes of subparagraph (B)(iv)— “(i) Tax imposed.— If a corporation, trust, or association elects the application of this subparagraph, there is hereby imposed a tax on the failure described in subparagraph (B) of such corporation, trust, or association. Such tax shall be paid by the corporation, trust, or association. “(ii) Tax computed.— The amount of the tax imposed by clause (i) shall be the greater of— “(I) $50,000, or “(II) the amount determined (pursuant to regulations promulgated by the Secretary) by multiplying the net income generated by the assets described in the schedule specified in subparagraph (B)(ii) for the period specified in clause (iii) by the highest rate of tax specified in section 11. “(iii) Period.— For purposes of clause (ii)(II), the period described in this clause is the period beginning on the first date that the failure to satisfy the requirements of such paragraph (4) occurs as a result of the ownership of such assets and ending on the earlier of the date on which the trust disposes of such assets or the end of the first quarter when there is no longer a failure to satisfy such paragraph (4). “(iv) Administrative provisions.— For purposes of subtitle F, the taxes imposed by this subparagraph shall be treated as excise taxes with respect to which the deficiency procedures of such subtitle apply.” .

93. 2004

    Pub. L. 108–357 § 243(a)(1) · 118 Stat. 1418

    Struck · 26 U.S.C. § 856(c)(7)

    Pub. L. 108–357, § 243(a)(1), struck out par. (7) which provided that securities of an issuer which were straight debt would not be taken into account in applying paragraph (4)(B)(iii)(III), if the issuer was an individual, if the only securities of such issuer which were held by the trust or a taxable REIT subsidiary of the trust were straight debt, or if the issuer was a partnership and the trust held at least a 20 percent profits interest in the partnership

    Target inherited from the preceding amendment note.

    Source evidence

    Code amendment note
    Pub. L. 108–357, § 243(a)(1), struck out par. (7) which provided that securities of an issuer which were straight debt would not be taken into account in applying paragraph (4)(B)(iii)(III), if the issuer was an individual, if the only securities of such issuer which were held by the trust or a taxable REIT subsidiary of the trust were straight debt, or if the issuer was a partnership and the trust held at least a 20 percent profits interest in the partnership.

    Enacted provision · exact public law section
    (1) in subsection (c) by striking paragraph (7), and

94. 2004

    Pub. L. 108–357 § 243(b) · 118 Stat. 1418

    Amended · 26 U.S.C. § 856(d)(8)(A)

    Pub. L. 108–357, § 243(b), reenacted heading without change and amended text of subpar. (A) generally. Prior to amendment, text read as follows: “The requirements of this subparagraph are met with respect to any property if at least 90 percent of the leased space of the property is rented to persons other than taxable REIT subsidiaries of such trust and other than persons described in section 856(d)(2)(B). The preceding sentence shall apply only to the extent that the amounts paid to the trust as rents from real property (as defined in paragraph (1) without regard to paragraph (2)(B)) from such property are substantially comparable to such rents made by the other tenants of the trust’s property for comparable space.”

    Source evidence

    Code amendment note
    Subsec. (d)(8)(A). Pub. L. 108–357, § 243(b), reenacted heading without change and amended text of subpar. (A) generally. Prior to amendment, text read as follows: “The requirements of this subparagraph are met with respect to any property if at least 90 percent of the leased space of the property is rented to persons other than taxable REIT subsidiaries of such trust and other than persons described in section 856(d)(2)(B). The preceding sentence shall apply only to the extent that the amounts paid to the trust as rents from real property (as defined in paragraph (1) without regard to paragraph (2)(B)) from such property are substantially comparable to such rents made by the other tenants of the trust’s property for comparable space.”

    Enacted provision · exact public law section
    (b) Clarification of Application of Limited Rental Exception.— Subparagraph (A) of section 856(d)(8) (relating to special rules for taxable REIT subsidiaries) is amended to read as follows: “(A) Limited rental exception.— “(i) In general.— The requirements of this subparagraph are met with respect to any property if at least 90 percent of the leased space of the property is rented to persons other than taxable REIT subsidiaries of such trust and other than persons described in paragraph (2)(B). “(ii) Rents must be substantially comparable.— Clause (i) shall apply only to the extent that the amounts paid to the trust as rents from real property (as defined in paragraph (1) without regard to paragraph (2)(B)) from such property are substantially comparable to such rents paid by the other tenants of the trust’s property for comparable space. “(iii) Times for testing rent comparability.— The substantial comparability requirement of clause (ii) shall be treated as met with respect to a lease to a taxable REIT subsidiary of the trust if such requirement is met under the terms of the lease— “(I) at the time such lease is entered into, “(II) at the time of each extension of the lease, including a failure to exercise a right to terminate, and “(III) at the time of any modification of the lease between the trust and the taxable REIT subsidiary if the rent under such lease is effectively increased pursuant to such modification. With respect to subclause (III), if the taxable REIT subsidiary of the trust is a controlled taxable REIT subsidiary of the trust, the term ‘rents from real property’ shall not in any event include rent under such lease to the extent of the increase in such rent on account of such modification. “(iv) Controlled taxable reit subsidiary.— For purposes of clause (iii), the term ‘controlled taxable REIT subsidiary’ means, with respect to any real estate investment trust, any taxable REIT subsidiary of such trust if such trust owns directly or indirectly— “(I) stock possessing more than 50 percent of the total voting power of the outstanding stock of such subsidiary, or “(II) stock having a value of more than 50 percent of the total value of the outstanding stock of such subsidiary. “(v) Continuing qualification based on third party actions.— If the requirements of clause (i) are met at a time referred to in clause (iii), such requirements shall continue to be treated as met so long as there is no increase in the space leased to any taxable REIT subsidiary of such trust or to any person described in paragraph (2)(B). “(vi) Correction period.— If there is an increase referred to in clause (v) during any calendar quarter with respect to any property, the requirements of clause (iii) shall be treated as met during the quarter and the succeeding quarter if such requirements are met at the close of such succeeding quarter.” .

95. 2004

    Pub. L. 108–357 § 243(f)(3)(A) · 118 Stat. 1418

    Inserted · 26 U.S.C. § 856(g)(1)

    Pub. L. 108–357, § 243(f)(3)(A), inserted “unless paragraph (5) applies” before “. Such termination”

    Source evidence

    Code amendment note
    Subsec. (g)(1). Pub. L. 108–357, § 243(f)(3)(A), inserted “unless paragraph (5) applies” before “. Such termination”.

    Enacted provision · exact public law section
    (A) in paragraph (1) by inserting before the period at the end of the first sentence the following: “unless paragraph (5) applies”, and

96. 2004

    Pub. L. 108–357 § 243(f)(3)(B) · 118 Stat. 1418

    Added · 26 U.S.C. § 856(g)(5)

    Pub. L. 108–357, § 243(f)(3)(B), added par. (5)

    Source evidence

    Code amendment note
    Subsec. (g)(5). Pub. L. 108–357, § 243(f)(3)(B), added par. (5).

    Enacted provision · exact public law section
    (B) by adding at the end the following new paragraph: “(5) Entities to which paragraph applies.— This paragraph applies to a corporation, trust, or association— “(A) which is not a real estate investment trust to which the provisions of this part apply for the taxable year due to one or more failures to comply with one or more of the provisions of this part (other than subsection (c)(6) or (c)(7) of section 856), “(B) such failures are due to reasonable cause and not due to willful neglect, and “(C) if such corporation, trust, or association pays (as prescribed by the Secretary in regulations and in the same manner as tax) a penalty of $50,000 for each failure to satisfy a provision of this part due to reasonable cause and not willful neglect.” .

97. 2004

    Pub. L. 108–357 § 243(a)(2) · 118 Stat. 1418

    Added · 26 U.S.C. § 856(m)

    Pub. L. 108–357, § 243(a)(2), added subsec. (m)

    Source evidence

    Code amendment note
    Subsec. (m). Pub. L. 108–357, § 243(a)(2), added subsec. (m).

    Enacted provision · exact public law section
    (2) by adding at the end the following new subsection: “(m) Safe Harbor in Applying Subsection (c)(4).— “(1) In general.— In applying subclause (III) of subsection (c)(4)(B)(iii), except as otherwise determined by the Secretary in regulations, the following shall not be considered securities held by the trust: “(A) Straight debt securities of an issuer which meet the requirements of paragraph (2). “(B) Any loan to an individual or an estate. “(C) Any section 467 rental agreement (as defined in section 467(d)), other than with a person described in subsection (d)(2)(B). “(D) Any obligation to pay rents from real property (as defined in subsection (d)(1)). “(E) Any security issued by a State or any political subdivision thereof, the District of Columbia, a foreign government or any political subdivision thereof, or the Commonwealth of Puerto Rico, but only if the determination of any payment received or accrued under such security does not depend in whole or in part on the profits of any entity not described in this subparagraph or payments on any obligation issued by such an entity, “(F) Any security issued by a real estate investment trust. “(G) Any other arrangement as determined by the Secretary. “(2) Special rules relating to straight debt securities.— “(A) In general.— For purposes of paragraph (1)(A), securities meet the requirements of this paragraph if such securities are straight debt, as defined in section 1361(c)(5) (without regard to subparagraph (B)(iii) thereof). “(B) Special rules relating to certain contingencies.— For purposes of subparagraph (A), any interest or principal shall not be treated as failing to satisfy section 1361(c)(5)(B)(i) solely by reason of the fact that— “(i) the time of payment of such interest or principal is subject to a contingency, but only if— “(I) any such contingency does not have the effect of changing the effective yield to maturity, as determined under section 1272, other than a change in the annual yield to maturity which does not exceed the greater of ¼ of 1 percent or 5 percent of the annual yield to maturity, or “(II) neither the aggregate issue price nor the aggregate face amount of the issuer’s debt instruments held by the trust exceeds $1,000,000 and not more than 12 months of unaccrued interest can be required to be prepaid thereunder, or “(ii) the time or amount of payment is subject to a contingency upon a default or the exercise of a prepayment right by the issuer of the debt, but only if such contingency is consistent with customary commercial practice. “(C) Special rules relating to corporate or partnership issuers.— In the case of an issuer which is a corporation or a partnership, securities that otherwise would be described in paragraph (1)(A) shall be considered not to be so described if the trust holding such securities and any of its controlled taxable REIT subsidiaries (as defined in subsection (d)(8)(A)(iv)) hold any securities of the issuer which— “(i) are not described in paragraph (1) (prior to the application of this subparagraph), and “(ii) have an aggregate value greater than 1 percent of the issuer’s outstanding securities determined without regard to paragraph (3)(A)(i). “(3) Look-through rule for partnership securities.— “(A) In general.— For purposes of applying subclause (III) of subsection (c)(4)(B)(iii)— “(i) a trust’s interest as a partner in a partnership (as defined in section 7701(a)(2)) shall not be considered a security, and “(ii) the trust shall be deemed to own its proportionate share of each of the assets of the partnership. “(B) Determination of trust’s interest in partnership assets.— For purposes of subparagraph (A), with respect to any taxable year beginning after the date of the enactment of this subparagraph— “(i) the trust’s interest in the partnership assets shall be the trust’s proportionate interest in any securities issued by the partnership (determined without regard to subparagraph (A)(i) and paragraph (4), but not including securities described in paragraph (1)), and “(ii) the value of any debt instrument shall be the adjusted issue price thereof, as defined in section 1272(a)(4). “(4) Certain partnership debt instruments not treated as a security.— For purposes of applying subclause (III) of subsection (c)(4)(B)(iii)— “(A) any debt instrument issued by a partnership and not described in paragraph (1) shall not be considered a security to the extent of the trust’s interest as a partner in the partnership, and “(B) any debt instrument issued by a partnership and not described in paragraph (1) shall not be considered a security if at least 75 percent of the partnership’s gross income (excluding gross income from prohibited transactions) is derived from sources referred to in subsection (c)(3). “(5) Secretarial guidance.— The Secretary is authorized to provide guidance (including through the issuance of a written determination, as defined in section 6110(b)) that an arrangement shall not be considered a security held by the trust for purposes of applying subclause (III) of subsection (c)(4)(B)(iii) notwithstanding that such arrangement otherwise could be considered a security under subparagraph (F) of subsection (c)(5).” .

98. 2005

    Tax Technical Corrections Act of 2005

    Pub. L. 109–135 § 403(d)(1) · 119 Stat. 2577

    Amended · 26 U.S.C. § 856(c)(7)

    Pub. L. 109–135, § 403(d)(1), reenacted heading without change and amended text generally. Prior to amendment, text consisted of subpars. (A) to (C) relating to rules of application for a corporation, trust, or association that fails to satisfy the requirements of paragraph (4) of this subsection

    Source evidence

    Code amendment note
    Subsec. (c)(7). Pub. L. 109–135, § 403(d)(1), reenacted heading without change and amended text generally. Prior to amendment, text consisted of subpars. (A) to (C) relating to rules of application for a corporation, trust, or association that fails to satisfy the requirements of paragraph (4) of this subsection.

    Enacted provision · exact public law section
    (1) Paragraph (7) of section 856(c) is amended to read as follows: “(7) Rules of application for failure to satisfy paragraph (4).— “(A) In general.— A corporation, trust, or association that fails to meet the requirements of paragraph (4) (other than a failure to meet the requirements of paragraph (4)(B)(iii) which is described in subparagraph (B)(i) of this paragraph) for a particular quarter shall nevertheless be considered to have satisfied the requirements of such paragraph for such quarter if— “(i) following the corporation, trust, or association’s identification of the failure to satisfy the requirements of such paragraph for a particular quarter, a description of each asset that causes the corporation, trust, or association to fail to satisfy the requirements of such paragraph at the close of such quarter of any taxable year is set forth in a schedule for such quarter filed in accordance with regulations prescribed by the Secretary, “(ii) the failure to meet the requirements of such paragraph for a particular quarter is due to reasonable cause and not due to willful neglect, and “(iii) (I) the corporation, trust, or association disposes of the assets set forth on the schedule specified in clause (i) within 6 months after the last day of the quarter in which the corporation, trust or association’s identification of the failure to satisfy the requirements of such paragraph occurred or such other time period prescribed by the Secretary and in the manner prescribed by the Secretary, or “(II) the requirements of such paragraph are otherwise met within the time period specified in subclause (I). “(B) Rule for certain de minimis failures.— A corporation, trust, or association that fails to meet the requirements of paragraph (4)(B)(iii) for a particular quarter shall nevertheless be considered to have satisfied the requirements of such paragraph for such quarter if— “(i) such failure is due to the ownership of assets the total value of which does not exceed the lesser of— “(I) 1 percent of the total value of the trust’s assets at the end of the quarter for which such measurement is done, and “(II) $10,000,000, and “(ii) (I) the corporation, trust, or association, following the identification of such failure, disposes of assets in order to meet the requirements of such paragraph within 6 months after the last day of the quarter in which the corporation, trust or association’s identification of the failure to satisfy the requirements of such paragraph occurred or such other time period prescribed by the Secretary and in the manner prescribed by the Secretary, or “(II) the requirements of such paragraph are otherwise met within the time period specified in subclause (I). “(C) Tax.— “(i) Tax imposed.— If subparagraph (A) applies to a corporation, trust, or association for any taxable year, there is hereby imposed on such corporation, trust, or association a tax in an amount equal to the greater of— “(I) $50,000, or “(II) the Regulations. amount determined (pursuant to regulations promulgated by the Secretary) by multiplying the net income generated by the assets described in the schedule specified in subparagraph (A)(i) for the period specified in clause (ii) by the highest rate of tax specified in section 11. “(ii) Period.— For purposes of clause (i)(II), the period described in this clause is the period beginning on the first date that the failure to satisfy the requirements of such paragraph (4) occurs as a result of the ownership of such assets and ending on the earlier of the date on which the trust disposes of such assets or the end of the first quarter when there is no longer a failure to satisfy such paragraph (4). “(iii) Administrative provisions.— For purposes of subtitle F, the taxes imposed by this subparagraph shall be treated as excise taxes with respect to which the deficiency procedures of such subtitle apply.” .

99. 2005

    Tax Technical Corrections Act of 2005

    Pub. L. 109–135 § 412(hh) · 119 Stat. 2577

    Substituted · 26 U.S.C. § 856(g)(5)(A)

    Pub. L. 109–135, § 412(hh), substituted “paragraph (2), (3), or (4) of subsection (c)” for “subsection (c)(6) or (c)(7) of section 856”

    Source evidence

    Code amendment note
    Subsec. (g)(5)(A). Pub. L. 109–135, § 412(hh), substituted “paragraph (2), (3), or (4) of subsection (c)” for “subsection (c)(6) or (c)(7) of section 856”.

    Enacted provision · exact public law section
    (hh) Subparagraph (A) of section 856(g)(5) is amended by striking “subsection (c)(6) or (c)(7) of section 856” and inserting “paragraph (2), (3), or (4) of subsection (c)”.

100. 2005

     Tax Technical Corrections Act of 2005

     Pub. L. 109–135 § 403(d)(2) · 119 Stat. 2577

     Added · 26 U.S.C. § 856(m)(6)

     Pub. L. 109–135, § 403(d)(2), added par. (6)

     Source evidence

     Code amendment note
     Subsec. (m)(6). Pub. L. 109–135, § 403(d)(2), added par. (6).

     Enacted provision · exact public law section
     (2) Subsection (m) of 26 USC 856. section 856 is amended by adding at the end the following new paragraph: “(6) Transition rule.— “(A) In general.— Notwithstanding paragraph (2)(C), securities held by a trust shall not be considered securities held by the trust for purposes of subsection (c)(4)(B)(iii)(III) during any period beginning on or before October 22, 2004, if such securities— “(i) are held by such trust continuously during such period, and “(ii) would not be taken into account for purposes of such subsection by reason of paragraph (7)(C) of subsection (c) (as in effect on October 22, 2004) if the amendments made by section 243 of the American Jobs Creation Act of 2004 had never been enacted. “(B) Rule not to apply to securities held after maturity date.— Subparagraph (A) shall not apply with respect to any security after the later of October 22, 2004, or the latest maturity date under the contract (as in effect on October 22, 2004) taking into account any renewal or extension permitted under the contract if such renewal or extension does not significantly modify any other terms of the contract. “(C) Successors.— If the successor of a trust to which this paragraph applies acquires securities in a transaction to which section 381 applies, such trusts shall be treated as a single entity for purposes of determining the holding period of such securities under subparagraph (A).” .

101. 2007

     Tax Technical Corrections Act of 2007

     Pub. L. 110–172 § 9(b) · 121 Stat. 2473

     Amended · 26 U.S.C. § 856(d)(9)(D)(ii)

     Pub. L. 110–172, § 9(b), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “The term ‘lodging facility’ means a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis.”

     Source evidence

     Code amendment note
     Subsec. (d)(9)(D)(ii). Pub. L. 110–172, § 9(b), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “The term ‘lodging facility’ means a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis.”

     Enacted provision · exact public law section
     (b) Amendment Related to Section 542 of the Act.— Clause (ii) of section 856(d)(9)(D) is amended to read as follows: “(ii) Lodging facility.— The term ‘lodging facility’ means a— “(I) hotel, “(II) motel, or “(III) other establishment more than one-half of the dwelling units in which are used on a transient basis.” .

102. 2007

     Tax Technical Corrections Act of 2007

     Pub. L. 110–172 § 11(a)(18) · 121 Stat. 2473

     1. Inserted · 26 U.S.C. § 856(l)(2)

        Pub. L. 110–172, § 11(a)(18), in concluding provisions, inserted last sentence

     2. Struck · 26 U.S.C. § 856(l)(2)

        Pub. L. 110–172, § 11(a)(18), in concluding provisions, struck out former last sentence which read as follows: “The rule of section 856(c)(7) shall apply for purposes of subparagraph (B).”

     Source evidence

     Code amendment note
     Subsec. (l)(2). Pub. L. 110–172, § 11(a)(18), in concluding provisions, inserted last sentence and struck out former last sentence which read as follows: “The rule of section 856(c)(7) shall apply for purposes of subparagraph (B).”

     Enacted provision · exact public law section
     (18) Paragraph (2) of section 856(l) is amended by striking the last sentence and inserting the following: “For purposes of subparagraph (B), securities described in subsection (m)(2)(A) shall not be taken into account.”.

103. 2008

     Heartland, Habitat, Harvest, and Horticulture Act of 2008

     Pub. L. 110–246 § 15313(a) · 122 Stat. 1651

     Added · 26 U.S.C. § 856(c)(2)(I)

     Pub. L. 110–246, § 15313(a), added subpar. (I)

     Source evidence

     Code amendment note
     Subsec. (c)(2)(I). Pub. L. 110–246, § 15313(a), added subpar. (I).

     Enacted provision · exact public law section
     (a) In General.— Section 26 USC 856. 856(c)(2) is amended by striking “and” at the end of subparagraph (G), by inserting “and” at the end of subparagraph (H), and by adding after subparagraph (H) the following new subparagraph: “(I) mineral royalty income earned in the first taxable year beginning after the date of the enactment of this subparagraph from real property owned by a timber real estate investment trust and held, or once held, in connection with the trade or business of producing timber by such real estate investment trust;” .

104. 2008

     Heartland, Habitat, Harvest, and Horticulture Act of 2008

     Pub. L. 110–246 § 15314(a) · 122 Stat. 1651

     Inserted · 26 U.S.C. § 856(c)(4)(B)(ii)

     Pub. L. 110–246, § 15314(a), inserted “(in the case of a quarter which closes on or before the termination date, 25 percent in the case of a timber real estate investment trust)” after “REIT subsidiaries”

     Target inherited from the preceding amendment note.

     Source evidence

     Code amendment note
     Pub. L. 110–246, § 15314(a), inserted “(in the case of a quarter which closes on or before the termination date, 25 percent in the case of a timber real estate investment trust)” after “REIT subsidiaries”.

     Enacted provision · exact public law section
     (a) In General.— Section 856(c)(4)(B)(ii) is amended by inserting “(in the case of a quarter which closes on or before the termination date, 25 percent in the case of a timber real estate investment trust)” after “REIT subsidiaries”.

105. 2008

     Heartland, Habitat, Harvest, and Horticulture Act of 2008

     Pub. L. 110–246 § 15312(a) · 122 Stat. 1651

     Added · 26 U.S.C. § 856(c)(5)(H)

     Pub. L. 110–246, § 15312(a), added subpar. (H)

     Source evidence

     Code amendment note
     Subsec. (c)(5)(H). Pub. L. 110–246, § 15312(a), added subpar. (H).

     Enacted provision · exact public law section
     (a) In General.— Section 856(c)(5) is amended by adding after subparagraph (G) the following new subparagraph: “(H) Treatment of timber gains.— “(i) In general.— Gain from the sale of real property described in paragraph (2)(D) and (3)(C) shall include gain which is— “(I) recognized by an election under section 631(a) from timber owned by the real estate investment trust, the cutting of which is provided by a taxable REIT subsidiary of the real estate investment trust; “(II) recognized under section 631(b); or “(III) income which would constitute gain under subclause (I) or (II) but for the failure to meet the 1-year holding period requirement. “(ii) Special rules.— “(I) For purposes of this subtitle, cut timber, the gain from which is recognized by a real estate investment trust pursuant to an election under section 631(a) described in clause (i)(I) or so much of clause (i)(III) as relates to clause (i)(I), shall be deemed to be sold to the taxable REIT subsidiary of the real estate investment trust on the first day of the taxable year. “(II) For purposes of this subtitle, income described in this subparagraph shall not be treated as gain from the sale of property described in section 1221(a)(1). “(iii) Termination.— This subparagraph shall not apply to dispositions after the termination date.” .

106. 2008

     Heartland, Habitat, Harvest, and Horticulture Act of 2008

     Pub. L. 110–246 § 15313(b) · 122 Stat. 1651

     Added · 26 U.S.C. § 856(c)(5)(I)

     Pub. L. 110–246, § 15313(b), added subpar. (I)

     Source evidence

     Code amendment note
     Subsec. (c)(5)(I). Pub. L. 110–246, § 15313(b), added subpar. (I).

     Enacted provision · exact public law section
     (b) Timber Real Estate Investment Trust.— Section 856(c)(5), as amended by this Act, is amended by adding after subparagraph (H) the following new subparagraph: “(I) Timber real estate investment trust.— The term ‘timber real estate investment trust’ means a real estate investment trust in which more than 50 percent in value of its total assets consists of real property held in connection with the trade or business of producing timber.” .

107. 2008

     Heartland, Habitat, Harvest, and Horticulture Act of 2008

     Pub. L. 110–246 § 15312(b) · 122 Stat. 1651

     Added · 26 U.S.C. § 856(c)(8)

     Pub. L. 110–246, § 15312(b), added par. (8)

     Source evidence

     Code amendment note
     Subsec. (c)(8). Pub. L. 110–246, § 15312(b), added par. (8).

     Enacted provision · exact public law section
     (b) Termination Date.— Subsection (c) of section 856 is amended by adding at the end the following new paragraph: “(8) Termination date.— For purposes of this subsection, the term ‘termination date’ means, with respect to any taxpayer, the last day of the taxpayer’s first taxable year beginning after the date of the enactment of this paragraph and before the date that is 1 year after such date of enactment.” .

108. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3032(a) · 122 Stat. 2654

     Inserted · 26 U.S.C. § 856(c)(4)

     Pub. L. 110–289, § 3032(a), inserted “(including a discrepancy caused solely by the change in the foreign currency exchange rate used to value a foreign asset)” after “such requirements” in first sentence of concluding provisions

     Source evidence

     Code amendment note
     Subsec. (c)(4). Pub. L. 110–289, § 3032(a), inserted “(including a discrepancy caused solely by the change in the foreign currency exchange rate used to value a foreign asset)” after “such requirements” in first sentence of concluding provisions.

     Enacted provision · exact public law section
     (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”.

109. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3041 · 122 Stat. 2654

     1. Substituted · 26 U.S.C. § 856(c)(4)(B)(ii)

        Pub. L. 110–289, § 3041, substituted “than 25 percent” for “than 20 percent”

     2. Substituted · 26 U.S.C. § 856(c)(4)(B)(ii)

        Pub. L. 110–289, § 3041, substituted “REIT subsidiaries,” for “REIT subsidiaries (in the case of a quarter which closes on or before the termination date, 25 percent in the case of a timber real estate investment trust), and”

     Source evidence

     Code amendment note
     Subsec. (c)(4)(B)(ii). Pub. L. 110–289, § 3041, substituted “than 25 percent” for “than 20 percent” and “REIT subsidiaries,” for “REIT subsidiaries (in the case of a quarter which closes on or before the termination date, 25 percent in the case of a timber real estate investment trust), and”.

     Enacted provision · exact public law section
     SEC. 3041. CONFORMING TAXABLE REIT SUBSIDIARY ASSET TEST.   Section 856(c)(4)(B)(ii) is amended— (1) by striking “20 percent” and inserting “25 percent”, and (2) by striking “REIT subsidiaries” and all that follows, and inserting “REIT subsidiaries,”.

110. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3031(b) · 122 Stat. 2654

     Amended · 26 U.S.C. § 856(c)(5)(G)

     Pub. L. 110–289, § 3031(b), amended subpar. (G) generally. Prior to amendment, text read as follows: “Except to the extent provided by regulations, 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 paragraph (2) to the extent that the transaction hedges any indebtedness incurred or to be incurred by the trust to acquire or carry real estate assets.”

     Source evidence

     Code amendment note
     Subsec. (c)(5)(G). Pub. L. 110–289, § 3031(b), amended subpar. (G) generally. Prior to amendment, text read as follows: “Except to the extent provided by regulations, 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 paragraph (2) to the extent that the transaction hedges any indebtedness incurred or to be incurred by the trust to acquire or carry real estate assets.”

     Enacted provision · exact public law section
     (b) 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 of income or gain described in paragraph (2) or (3) (or any property which generates such income or gain), 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).” .

111. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3031(c) · 122 Stat. 2654

     Added · 26 U.S.C. § 856(c)(5)(J)

     Pub. L. 110–289, § 3031(c), added subpar. (J)

     Source evidence

     Code amendment note
     Subsec. (c)(5)(J). Pub. L. 110–289, § 3031(c), added subpar. (J).

     Enacted provision · exact public law section
     (c) 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: “(J) Secretarial authority to exclude other items of income.— To the extent necessary to carry out the purposes of this part, the Secretary is authorized to determine, solely for purposes of this part, whether any item of income or gain which— “(i) does not otherwise qualify under paragraph (2) or (3) may be considered as not constituting gross income for purposes of paragraphs (2) or (3), or “(ii) otherwise constitutes gross income not qualifying under paragraph (2) or (3) may be considered as gross income which qualifies under paragraph (2) or (3).” .

112. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3032(b) · 122 Stat. 2654

     Added · 26 U.S.C. § 856(c)(5)(K)

     Pub. L. 110–289, § 3032(b), added subpar. (K)

     Source evidence

     Code amendment note
     Subsec. (c)(5)(K). Pub. L. 110–289, § 3032(b), added subpar. (K).

     Enacted provision · exact public law section
     (b) Clarification of Permissible Asset Category.— Section 856(c)(5), as amended by section 3031(c), is amended by adding at the end the following new subparagraph: “(K) Cash.— If the real estate investment trust or its qualified business unit (as defined in section 989) uses any foreign currency as its functional currency (as defined in section 985(b)), the term ‘cash’ includes such foreign currency but only to the extent such foreign currency— “(i) is held for use in the normal course of the activities of the trust or qualified business unit which give rise to items of income or gain described in paragraph (2) or (3) of subsection (c) or are directly related to acquiring or holding assets described in subsection (c)(4), and “(ii) is not held in connection with an activity described in subsection (n)(4).” .

113. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3061(a) · 122 Stat. 2654

     Amended · 26 U.S.C. § 856(d)(8)(B)

     Pub. L. 110–289, § 3061(a), amended subpar. (B) generally. Prior to amendment, text read as follows: “The requirements of this subparagraph are met with respect to an interest in real property which is a qualified lodging facility 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.”

     Source evidence

     Code amendment note
     Subsec. (d)(8)(B). Pub. L. 110–289, § 3061(a), amended subpar. (B) generally. Prior to amendment, text read as follows: “The requirements of this subparagraph are met with respect to an interest in real property which is a qualified lodging facility 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.”

     Enacted provision · exact public law section
     (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 (as defined in paragraph (9)(D)) 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— “(i) directly or indirectly possesses a license, permit, or similar instrument enabling it to do so, or “(ii) employs individuals working at such facility or property located outside the United States, but only if an eligible independent contractor is responsible for the daily supervision and direction of such individuals on behalf of the taxable REIT subsidiary pursuant to a management agreement or similar service contract.” .

114. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3061(b) · 122 Stat. 2654

     Amended · 26 U.S.C. § 856(d)(9)(A); 26 U.S.C. § 856(d)(9)(B)

     Pub. L. 110–289, § 3061(b), amended subpars. (A) and (B) generally. Prior to amendment, subpar. (A) defined “eligible independent contractor” with respect to any qualified lodging facility and subpar. (B) set forth reasons by which a person would not fail to be treated as an independent contractor with respect to any qualified lodging facility

     Source evidence

     Code amendment note
     Subsec. (d)(9)(A), (B). Pub. L. 110–289, § 3061(b), amended subpars. (A) and (B) generally. Prior to amendment, subpar. (A) defined “eligible independent contractor” with respect to any qualified lodging facility and subpar. (B) set forth reasons by which a person would not fail to be treated as an independent contractor with respect to any qualified lodging facility.

     Enacted provision · exact public law section
     (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.” .

115. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3061(c) · 122 Stat. 2654

     Inserted · 26 U.S.C. § 856(l)(3)

     Pub. L. 110–289, § 3061(c), inserted “or a health care facility” after “a lodging facility” and “or health care facility” after “such lodging facility” in concluding provisions

     Source evidence

     Code amendment note
     Subsec. (l)(3). Pub. L. 110–289, § 3061(c), inserted “or a health care facility” after “a lodging facility” and “or health care facility” after “such lodging facility” in concluding provisions.

     Enacted provision · exact public law section
     (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”.

116. 2008

     Housing Assistance Tax Act of 2008

     Pub. L. 110–289 § 3031(a) · 122 Stat. 2654

     Added · 26 U.S.C. § 856(n)

     Pub. L. 110–289, § 3031(a), added subsec. (n)

     Source evidence

     Code amendment note
     Subsec. (n). Pub. L. 110–289, § 3031(a), added subsec. (n).

     Enacted provision · exact public law section
     (a) Foreign Currency Gains Not Gross Income in Applying REIT Income Tests.— Section 856 (defining real estate investment trust) is amended by adding at the end the following new subsection: “(n) Rules Regarding Foreign Currency Transactions.— “(1) In general.— For purposes of this part— “(A) passive foreign exchange gain for any taxable year shall not constitute gross income for purposes of subsection (c)(2), and “(B) real estate foreign exchange gain for any taxable year shall not constitute gross income for purposes of subsection (c)(3). “(2) Real estate foreign exchange gain.— For purposes of this subsection, the term ‘real estate foreign exchange gain’ means— “(A) foreign currency gain (as defined in section 988(b)(1)) which is attributable to— “(i) any item of income or gain described in subsection (c)(3), “(ii) the acquisition or ownership of obligations secured by mortgages on real property or on interests in real property (other than foreign currency gain attributable to any item of income or gain 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 gain attributable to any item of income or gain described in clause (i)), “(B) section 987 gain 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) 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 gain as determined by the Secretary. “(3) Passive foreign exchange gain.— For purposes of this subsection, the term ‘passive foreign exchange gain’ means— “(A) real estate foreign exchange gain, “(B) foreign currency gain (as defined in section 988(b)(1)) which is not described in subparagraph (A) and which is attributable to— “(i) any item of income or gain described in subsection (c)(2), “(ii) the acquisition or ownership of obligations (other than foreign currency gain attributable to any item of income or gain described in clause (i)), or “(iii) becoming or being the obligor under obligations (other than foreign currency gain attributable to any item of income or gain described in clause (i)), and “(C) any other foreign currency gain as determined by the Secretary. “(4) Exception for income from substantial and regular trading.— Notwithstanding this subsection or any other provision of this part, any section 988 gain derived by a corporation, trust, or association from dealing, or engaging in substantial and regular trading, in securities (as defined in section 475(c)(2)) shall constitute gross income which does not qualify under paragraph (2) or (3) of subsection (c). This paragraph shall not apply to income which does not constitute gross income by reason of subsection (c)(5)(G).” .

117. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 317(a)(2) · 129 Stat. 2242

     Inserted · 26 U.S.C. § 856(c)(3)(H)

     Pub. L. 114–113, § 317(a)(2), inserted “(other than a nonqualified publicly offered REIT debt instrument)” after “real estate asset”

     Source evidence

     Code amendment note
     Subsec. (c)(3)(H). Pub. L. 114–113, § 317(a)(2), inserted “(other than a nonqualified publicly offered REIT debt instrument)” after “real estate asset”.

     Enacted provision · exact public law section
     (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”.

118. 2015

     Energy and Water Development and Related Agencies Appropriations Act, 2016

     Pub. L. 114–113 § 312(a) · 129 Stat. 2242

     Substituted · 26 U.S.C. § 856(c)(4)(B)(ii)

     Pub. L. 114–113, § 312(a), substituted “20 percent” for “25 percent”

     Source evidence

     Code amendment note
     Subsec. (c)(4)(B)(ii). Pub. L. 114–113, § 312(a), substituted “20 percent” for “25 percent”.

     Enacted provision · exact public law section
     Sec. 312. None of the funds made available in this Act may be used— (1) to implement or enforce section 430.32(x) of title 10, Code of Federal Regulations; or (2) to implement or enforce the standards established by the tables contained in section 325(i)(1)(B) of the Energy Policy and Conservation Act (42 U.S.C. 6295(i)(1)(B)) with respect to BPAR incandescent reflector lamps, BR incandescent reflector lamps, and ER incandescent reflector lamps.

119. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 317(a)(3) · 129 Stat. 2242

     1. Added · 26 U.S.C. § 856(c)(4)(B)(iii); 26 U.S.C. § 856(c)(4)(B)(iv)

        Pub. L. 114–113, § 317(a)(3), added cl. (iii)

     2. Redesignated · 26 U.S.C. § 856(c)(4)(B)(iii); 26 U.S.C. § 856(c)(4)(B)(iv)

        Pub. L. 114–113, § 317(a)(3), redesignated former cl. (iii) as (iv)

     Source evidence

     Code amendment note
     Subsec. (c)(4)(B)(iii), (iv). Pub. L. 114–113, § 317(a)(3), added cl. (iii) and redesignated former cl. (iii) as (iv).

     Enacted provision · exact public law section
     (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” .

120. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 317(a)(1) · 129 Stat. 2242

     1. Inserted · 26 U.S.C. § 856(c)(5)(B)

        Pub. L. 114–113, § 317(a)(1), (b), inserted “or on interests in real property” after “interests in mortgages on real property”

     2. Substituted · 26 U.S.C. § 856(c)(5)(B)

        Pub. L. 114–113, § 317(a)(1), (b), substituted “, shares” for “and shares”

     3. Inserted · 26 U.S.C. § 856(c)(5)(B)

        Pub. L. 114–113, § 317(a)(1), (b), inserted “, and debt instruments issued by publicly offered REITs” before period at end of first sentence

     Source evidence

     Code amendment note
     Subsec. (c)(5)(B). Pub. L. 114–113, § 317(a)(1), (b), inserted “or on interests in real property” after “interests in mortgages on real property”, substituted “, shares” for “and shares”, and inserted “, and debt instruments issued by publicly offered REITs” before period at end of first sentence.

     Enacted provision · exact public law section
     (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.

121. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 319(b)(2)(A) · 129 Stat. 2242

     Struck · 26 U.S.C. § 856(c)(5)(G)(i)

     Pub. L. 114–113, § 319(b)(2)(A), struck out “which is clearly identified pursuant to section 1221(a)(7)” after “of section 1221(b)(2)(A))”

     Source evidence

     Code amendment note
     Subsec. (c)(5)(G)(i). Pub. L. 114–113, § 319(b)(2)(A), struck out “which is clearly identified pursuant to section 1221(a)(7)” after “of section 1221(b)(2)(A))”.

     Enacted provision · exact public law section
     (A) by striking “which is clearly identified pursuant to section 1221(a)(7)” in clause (i), and

122. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 319(b)(2)(B) · 129 Stat. 2242

     Struck · 26 U.S.C. § 856(c)(5)(G)(ii)

     Pub. L. 114–113, § 319(b)(2)(B), struck out before period at end “, 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)”

     Source evidence

     Code amendment note
     Subsec. (c)(5)(G)(ii). Pub. L. 114–113, § 319(b)(2)(B), struck out before period at end “, 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)”.

     Enacted provision · exact public law section
     (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).

123. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 319(a) · 129 Stat. 2242

     Added · 26 U.S.C. § 856(c)(5)(G)(iii)

     Pub. L. 114–113, § 319(a), added cl. (iii)

     Source evidence

     Code amendment note
     Subsec. (c)(5)(G)(iii). Pub. L. 114–113, § 319(a), added cl. (iii).

     Enacted provision · exact public law section
     (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 transactions which would be hedging transactions described in clause (ii) or (iii) of section 1221(b)(2)(A) with respect to any position referred to in subclause (I) if such position were ordinary property, 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.” .

124. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 319(b)(1) · 129 Stat. 2242

     Added · 26 U.S.C. § 856(c)(5)(G)(iv)

     Pub. L. 114–113, § 319(b)(1), added cl. (iv)

     Source evidence

     Code amendment note
     Subsec. (c)(5)(G)(iv). Pub. L. 114–113, § 319(b)(1), added cl. (iv).

     Enacted provision · exact public law section
     (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).” .

125. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 317(a)(4) · 129 Stat. 2242

     Added · 26 U.S.C. § 856(c)(5)(L)

     Pub. L. 114–113, § 317(a)(4), added subpar. (L)

     Source evidence

     Code amendment note
     Subsec. (c)(5)(L). Pub. L. 114–113, § 317(a)(4), added subpar. (L).

     Enacted provision · exact public law section
     (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’ has the meaning given such term by section 562(c)(2). “(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’.” .

126. 2015

     Energy and Water Development and Related Agencies Appropriations Act, 2016

     Pub. L. 114–113 § 311(b) · 129 Stat. 2242

     Redesignated · 26 U.S.C. § 856(c)(8)

     Pub. L. 114–113, § 311(b), added par. (8). Former par. (8) redesignated (9)

     Source evidence

     Code amendment note
     Subsec. (c)(8). Pub. L. 114–113, § 311(b), added par. (8). Former par. (8) redesignated (9).

     Enacted provision · exact public law section
     Sec. 311. Notwithstanding any other provision of law, the provisions of 40 U.S.C. 11319 shall not apply to funds appropriated in this title to Federally Funded Research and Development Centers sponsored by the Department of Energy.

127. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 318(a) · 129 Stat. 2242

     Redesignated · 26 U.S.C. § 856(c)(9)

     Pub. L. 114–113, § 318(a), added par. (9). Former par. (9) redesignated (10)

     Source evidence

     Code amendment note
     Subsec. (c)(9). Pub. L. 114–113, § 318(a), added par. (9). Former par. (9) redesignated (10).

     Enacted provision · exact public law section
     (a) In General.— Subsection (c) of section 856, as amended by the preceding provisions of this Act, is amended by redesignating paragraph (9) as paragraph (10) and by inserting after paragraph (8) 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 obligation shall be treated— “(i) for purposes of paragraph (3)(B), as an obligation described therein, and “(ii) for purposes of paragraph (4)(A), as a real estate asset. 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).” .

128. 2015

     Energy and Water Development and Related Agencies Appropriations Act, 2016

     Pub. L. 114–113 § 311(b) · 129 Stat. 2242

     Redesignated · 26 U.S.C. § 856(c)(9)

     Pub. L. 114–113, § 311(b), redesignated par. (8) as (9)

     Target inherited from the preceding amendment note.

     Source evidence

     Code amendment note
     Pub. L. 114–113, § 311(b), redesignated par. (8) as (9).

     Enacted provision · exact public law section
     Sec. 311. Notwithstanding any other provision of law, the provisions of 40 U.S.C. 11319 shall not apply to funds appropriated in this title to Federally Funded Research and Development Centers sponsored by the Department of Energy.

129. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 318(a) · 129 Stat. 2242

     Redesignated · 26 U.S.C. § 856(c)(10)

     Pub. L. 114–113, § 318(a), redesignated par. (9) as (10)

     Source evidence

     Code amendment note
     Subsec. (c)(10). Pub. L. 114–113, § 318(a), redesignated par. (9) as (10).

     Enacted provision · exact public law section
     (a) In General.— Subsection (c) of section 856, as amended by the preceding provisions of this Act, is amended by redesignating paragraph (9) as paragraph (10) and by inserting after paragraph (8) 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 obligation shall be treated— “(i) for purposes of paragraph (3)(B), as an obligation described therein, and “(ii) for purposes of paragraph (4)(A), as a real estate asset. 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).” .

130. 2015

     Protecting Americans from Tax Hikes Act of 2015

     Pub. L. 114–113 § 321(a)(3) · 129 Stat. 2242

     Inserted · 26 U.S.C. § 856(e)(4)(C)

     Pub. L. 114–113, § 321(a)(3), inserted “or through a taxable REIT subsidiary” after “receive any income”

     Source evidence

     Code amendment note
     Subsec. (e)(4)(C). Pub. L. 114–113, § 321(a)(3), inserted “or through a taxable REIT subsidiary” after “receive any income”.

     Enacted provision · exact public law section
     (3) Foreclosure property grace period.— Subparagraph (C) of section 856(e)(4) 26 USC 856. is amended by inserting “or through a taxable REIT subsidiary” after “receive any income”.

131. 2018

     Energy and Water Development and Related Agencies Appropriations Act, 2018

     Pub. L. 115–141 § 401(a)(146) · 132 Stat. 348

     Substituted · 26 U.S.C. § 856(c)(7)(A); 26 U.S.C. § 856(c)(7)(B)

     Pub. L. 115–141, § 401(a)(146), in introductory provisions, substituted “paragraph (4)(B)(iv)” for “paragraph (4)(B)(iii)”

     Source evidence

     Code amendment note
     Subsec. (c)(7)(A), (B). Pub. L. 115–141, § 401(a)(146), in introductory provisions, substituted “paragraph (4)(B)(iv)” for “paragraph (4)(B)(iii)”.

     Enacted provision · exact public law section
     Sec. 401. The Nuclear Regulatory Commission shall comply with the July 5, 2011, version of Chapter VI of its Internal Commission Procedures when responding to Congressional requests for information.

132. 2018

     Department of Commerce Appropriations Act, 2018

     Pub. L. 115–141 § 101(n)(1) · 132 Stat. 348

     1. Amended · 26 U.S.C. § 856(c)(9)(A)

        Pub. L. 115–141, § 101(n)(1), designated existing provisions as cl. (i)

     2. Inserted · 26 U.S.C. § 856(c)(9)(A)

        Pub. L. 115–141, § 101(n)(1), inserted heading

     3. Added · 26 U.S.C. § 856(c)(9)(A)

        Pub. L. 115–141, § 101(n)(1), added cl. (ii)

     Source evidence

     Code amendment note
     Subsec. (c)(9)(A). Pub. L. 115–141, § 101(n)(1), designated existing provisions as cl. (i), inserted heading, and added cl. (ii).

     Enacted provision · exact public law section
     Sec. 101. During the current fiscal year, applicable appropriations and funds made available to the Department of Commerce by this Act shall be available for the activities specified in the Act of October 26, 1949 (15 U.S.C. 1514), to the extent and in the manner prescribed by the Act, and, notwithstanding 31 U.S.C. 3324, may be used for advanced payments not otherwise authorized only upon the certification of officials designated by the Secretary of Commerce that such payments are in the public interest.

133. 2018

     Department of Commerce Appropriations Act, 2018

     Pub. L. 115–141 § 101(n)(2) · 132 Stat. 348

     Amended · 26 U.S.C. § 856(c)(9)(B)

     Pub. L. 115–141, § 101(n)(2), amended subpar. (B) generally. Prior to amendment, subpar. (B) related to certain personal property mortgaged in connection with real property

     Source evidence

     Code amendment note
     Subsec. (c)(9)(B). Pub. L. 115–141, § 101(n)(2), amended subpar. (B) generally. Prior to amendment, subpar. (B) related to certain personal property mortgaged in connection with real property.

     Enacted provision · exact public law section
     Sec. 101. During the current fiscal year, applicable appropriations and funds made available to the Department of Commerce by this Act shall be available for the activities specified in the Act of October 26, 1949 (15 U.S.C. 1514), to the extent and in the manner prescribed by the Act, and, notwithstanding 31 U.S.C. 3324, may be used for advanced payments not otherwise authorized only upon the certification of officials designated by the Secretary of Commerce that such payments are in the public interest.

134. 2018

     Energy and Water Development and Related Agencies Appropriations Act, 2018

     Pub. L. 115–141 § 401(a)(147) · 132 Stat. 348

     Substituted · 26 U.S.C. § 856(m)(1); 26 U.S.C. § 856(3)(A); 26 U.S.C. § 856(m)(4)

     Pub. L. 115–141, § 401(a)(147), in introductory provisions, substituted “subsection (c)(4)(B)(iv)” for “subsection (c)(4)(B)(iii)”

     Source evidence

     Code amendment note
     Subsec. (m)(1), (3)(A), (4). Pub. L. 115–141, § 401(a)(147), in introductory provisions, substituted “subsection (c)(4)(B)(iv)” for “subsection (c)(4)(B)(iii)”.

     Enacted provision · exact public law section
     Sec. 401. The Nuclear Regulatory Commission shall comply with the July 5, 2011, version of Chapter VI of its Internal Commission Procedures when responding to Congressional requests for information.

135. 2018

     Energy and Water Development and Related Agencies Appropriations Act, 2018

     Pub. L. 115–141 § 401(a)(147) · 132 Stat. 348

     Substituted · 26 U.S.C. § 856(m)(5)

     Pub. L. 115–141, § 401(a)(147), substituted “subsection (c)(4)(B)(iv)” for “subsection (c)(4)(B)(iii)”

     Source evidence

     Code amendment note
     Subsec. (m)(5). Pub. L. 115–141, § 401(a)(147), substituted “subsection (c)(4)(B)(iv)” for “subsection (c)(4)(B)(iii)”.

     Enacted provision · exact public law section
     Sec. 401. The Nuclear Regulatory Commission shall comply with the July 5, 2011, version of Chapter VI of its Internal Commission Procedures when responding to Congressional requests for information.

136. 2018

     Energy and Water Development and Related Agencies Appropriations Act, 2018

     Pub. L. 115–141 § 401(b)(28) · 132 Stat. 348

     Struck · 26 U.S.C. § 856(m)(6)

     Pub. L. 115–141, § 401(b)(28), struck out par. (6) which related to transition rule

     Source evidence

     Code amendment note
     Subsec. (m)(6). Pub. L. 115–141, § 401(b)(28), struck out par. (6) which related to transition rule.

     Enacted provision · exact public law section
     Sec. 401. The Nuclear Regulatory Commission shall comply with the July 5, 2011, version of Chapter VI of its Internal Commission Procedures when responding to Congressional requests for information.

137. 2025

     Pub. L. 119–21 title VII § 70439(a) · 139 Stat. 250

     Substituted · 26 U.S.C. § 856(c)(4)(B)(ii)

     Pub. L. 119–21 substituted “25 percent” for “20 percent”

     Unresolved: Pub. L. 119–21 was not found in the local Statutes at Large index.

     Source evidence

     Code amendment note
     Subsec. (c)(4)(B)(ii). Pub. L. 119–21 substituted “25 percent” for “20 percent”.

     Effective date note
     Pub. L. 119–21, title VII, § 70439(b), July 4, 2025, 139 Stat. 250, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 2025.”

156 of 160 references resolved to an enrolled provision · 3 partial · 1 unresolved