OTHER CHANGES IN LIMITATIONS AND REQUIREMENTS.

SEC. 1604. OTHER CHANGES IN LIMITATIONS AND REQUIREMENTS. (a) Increase in 90-Percent Gross Income Requirement to 95 Percent.— Section 856(c)(2) (relating to limitations) is amended by striking out “90 percent of its gross income” and inserting in lieu thereof “95 percent. (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions)”. (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 90 STAT. 1750estate 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).” (c) Commitment Fees.— (1) In general.— Paragraphs (2) and (3) of section 856(c) (relating to limitations) are each amended by striking out “and” after the semicolon at the end of subparagraph (E), by inserting “and” after the semicolon at the end of subparagraph (F), and by adding at the end thereof the following new subparagraph: “(G) amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property);”. (2) Conforming amendment.— Section 857(b)(4)(B) (relating to net income from foreclosure property) is amended by striking out “(D), or (E)” in subdivision (i) and inserting in lieu thereof “(D), (E), or (G)”. (d) Income From Sale or Mortgages Held Less Than 4 Years.— Section 856(c)(4) (relating to limitations) is amended to read as follows: “(4) less than 30 percent of its gross income is derived from the sale or other disposition of— 90 STAT. 1751 “(A) stock or securities held for less than 6 months; “(B) section 1221(1) property (other than foreclosure property); 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”. (e) Options To Purchase Real Property Treated as Interests in Real Property.— Section 856(c)(6)(C) (relating to limitations) is amended to read as follows: “(C) The term ‘interests in real property’ includes fee ownership 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.” (f) Real Estate Investment Trusts May Be Incorporated.— (1) In general.— So much of subsection (a) of section 856 (defining real estate investment trust) as precedes paragraph (3) thereof is amended to read as follows: “(a) In General.— For purposes of this title, the term ‘real estate investment trust’ means a corporation, trust, or association— “(1) which is managed by one or more trustees or directors; “(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;”. (2) Exception for financial institutions and insurance companies.— Section 856(a)(defining real estate investment trust) is amended by inserting after paragraph (3) the following new paragraph: “(4) 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;”. (3) Conforming amendment’s.— (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”. (B) The second sentence of section 857(d) (relating to earnings and profits) is amended by striking out “a domestic unincorporated trust” and inserting in lieu thereof “a domestic corporation, trust,”. (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 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’ 90 STAT. 1752solely 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.” (h) Certain Dividends.— The first sentence of section 858(a) (relating to dividends paid by real estate investment trust after close of taxable year) is amended— (1) by inserting “(and specifies in dollar amounts)” after “to the extent the trust elects in such return”, and (2) by striking out “paid during such taxable year” and inserting in lieu thereof “paid only during such taxable year”. (i) Adoption of Annual Accounting Period.— (1) Part II of subchapter M of chapter 1 (relating to real estate investment trusts) is amended by adding at the end thereof the following new section: “SEC. 860. ADOPTION OF ANNUAL ACCOUNTING PERIOD. “For purposes of this subtitle, a real estate investment trust shall not change to or adopt any annual accounting period other than the calendar year.” (2) The table of sections for such part II is amended by adding at the end thereof the following: “Sec. 860. Adoption of annual accounting period.” (j) Change in Distribution Requirements.— Section 857(a)(1) (relating to requirements applicable to real estate investment trusts) is amended to read as follows: “(1) the deduction for dividends paid during the taxable year (as defined in section 561, but determined without regard to capital gains dividends) equals or exceeds— “(A) the sum of— “(i) 95 percent (90 percent for taxable years beginning before January 1, 1980) 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); and “(ii) 95 percent (90 percent for taxable years beginning before January 1, 1980) of the excess of the net income from foreclosure property over the tax imposed on such income by subsection (b)(4)(A): minus “(B) the sum of— “(i) the amount of any penalty imposed on the real estate investment trust by section 6697 which is paid by such trust during the taxable year; and “(ii) the net loss derived from prohibited transactions, and”. (k) Manner and Effect of Termination or Revocation of Election.— 90 STAT. 1753 (1) In general.— Section 856 (relating to definition of real 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 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.” (2) Conforming Amendments.— (A) Section 856(c)(1) (relating to limitations) is amended by striking out the semicolon at the end and inserting in lieu thereof “, and such election has not been terminated or revoked under subsection (g);”. (B) Section 857(a) (relating to requirements applicable to real estate investment trust) is amended by striking out “(other than subsection (d) of this section)” and inserting in lieu thereof “(other than subsection (d) of this section and subsection (g) of section 856)”.