CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF SHAREHOLDERS.

SEC. 1261. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF SHAREHOLDERS. (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 111 STAT. 1031Secretary 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.”. (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”.