Real Estate Investment Trusts

S 6 T H CONGRESS ) HOUSE OF REPRESENTATIVES J REPORT
2d Session j 1 No. 2020
REAL ESTATE INVESTMENT TRUSTS
JUNE 28, 1960.—Committed to the Committee of the Whole House on the State
of the Union and ordered to be printed
Mr. MILLS, from the Committee on Ways and Means, submitted the
following
REPORT
[To accompany H.R. 12559]
The Committee on Ways and Means, to whom was referred the bill
(H.R. 12559) to amend the Internal Revenue Code of 1954 to provide
a special method of taxation for real estate investment trusts, having
considered the same, report favorably thereon with amendments and
recommend that the bill as amended do pass.
The amendments are as follows:
Page 1, strike out lines 3 and 4.
Page 1, line 7, after "chapter 1" insert "of the Internal Revenue
Code of 1954".
Page 4, line 16, strike out "share" and insert "shares".
Page 5, line 3, after "years;" insert "and".
Page 7, line 12, strike out " ( b ) , " and insert "(c),".
Page 7, line 15, after "accrued" insert ", directly or indirectly,".
Page 8, line 9, strike out "person." and insert "person; and".
Page 8, lines 11 and 12, strike out "trust or association" and insert
"real estate investment trust".
Page 8, line 15, strike out "or association".
Page 9, strike out lines 6 to 11, inclusive, and insert:
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 sub-
stituted for '50 percent' in subparagraph (C) of section
318(a)(2).
49006—60 1
311
2 REAL ESTATE INVESTMENT TRUSTS
Page 13, strike out line 23 and all that follows through line 18 on
page 14, and insert: '
"(c) RESTRICTIONS APPLICABLE TO DIVIDENDS R E C E I V E D
F R O M R E A L ESTATE INVESTMENT TRUSTS.—For purposes of
section 34(a) (relating to credit for dividends received by
individuals), section 116 (relating to an exclusion for divi-
dends received by individuals), and section 243 (relating to
deductions, for dividends received by corporations), a divi-
dend received from a real estate investment trust which
meets the requirements of this part shall not be considered
as a dividend.
"(d) E A R N I N G S AND P R O F I T S . — T h e earnings and profits
of a real estate investment trust for any taxable year (but
not its accumulated earnings and profits) shall not be re-
duced 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).
Page 16, line 2, after "chapter 1" insert "of the Internal Revenue
Code of 1954".
Page 16, line 15, after "chapter 1" insert "of such Code".
Page 16, strike out lines 16 and 17 and insert:
by inserting—
and real estate investment trusts
after—•
Regulated investment companies.
Page 16, line 18, after "Section 11(d)(3)" insert "of such Code".
Page 16, line 21, after "Section 34(c)" insert "of such Code".
Page 17, line 8, after "Section 116(b)" insert "of such Code".
Page 17, line 18, after "Section 243(c)" insert "of such Code".
Page 17, line 21, strike out "any" and insert "Any".
Page 18, line 1, after "Section 318(b)" insert "of such Code".
Page 18, strike out lines 7, 8, and 9, and insert:
(6) section 856(d) (relating to definition of rents from real proper-
erty in the case of real estate investment trusts).
Page 18; line 10, after "Section 443(d)" insert "of such Code".
;
Page 18, strike out lines 13 and 14, and insert:
(5) The taxable income of a real estate investment trust, see
section 857(b)(2)(D).
Page 18, line 15, after "Section 1504(b)(6)" insert "of such Code".
Page 18, strike out lines 18 and 19, and insert:
SEC. 3. E F F E C T I V E D A T E .
The amendments made by sections Land 2 of this Act shall
apply with respect to
I. SUMMARY STATEMENT
H.R. 12559 provides substantially the same tax treatment for real
estate investment trusts as present law provides for regulated invest-
ment companies. Real estate trusts are organizations -specializing
312
<. REAL ESTATE INVESTMENT TRUSTS 3
in investments hi real estate and real estate mortgages, while the
regulated investment companies specialize in investments in stocks
and securities. Under present law regulated investment companies
, which distribute 90 percent or more of their ordinary income are taxed
only on their retained earnings. Thus, the distributed earnings of
these companies are taxed only to the shareholders. This same type
of tax treatment is accorded by this bill to real estate investment
* trusts. This bill restricts this "pass through" of the income for tax
purposes to what is clearly passive income from real estate invest-
ments, as contrasted to income from the active operation of businesses
involving real estate.
This bill has been reported unanimously by your committee and the
Treasury Department has indicated that it has no objection to the
assage of this bill.
II. REASONS FOR THE BILL

In the case of regulated investment companies, individuals desir-
ing to invest in stocks and securities pool their funds by buying shares
in investment companies, which in turn invest these resources in
stocks and securities of operating companies.
These companies investing in stock and securities are known as
regulated investment companies if they meet various requirements
with respect to asset diversification, capital structure, and operations.
Such companies if they distribute at least 90 percent of their ordinary
income are taxed only on then- undistributed income. Dividends
paid by such companies generally are taxed in the usual manner to
shareholders, except that dividends arising from capital gains realized
by the company receive capital gains treatment in the hands of the
recipient and dividends, which to an important degree are attributable
to interest or other nondividend income, are, to the extent of that
portion of the distribution by the regulated investment company, not
eligible for the dividends received credit, exclusion, or deduction.
The omission of the corporate income tax in the case of distributed
earnings, which present law provides for regulated investment com-
panies, secures for investors in these companies essentially the same
tax treatment as they would have received if they had invested di-
rectly in the operating companies. H.R. 12559 extends this same type
of tax treatment to real estate investment trusts specializing in in-
vestments in real estate equities and mortgages as distinct from the
stock and security holdings of regulated investment companies.
- Thus this secures for the trust beneficiaries the same type of tax treat-
ment, they would receive if they held the real estate equities and
mortgages directly and, therefore, equates their treatment with t h a t
.accorded investors in regulated investment companies.
Your committee believes that the equality of tax treatment between
the beneficiaries of real estate investment trusts and the shareholders
of regulated investment companies is desirable since in both cases the
methods of investment constitute pooling arrangements whereby
small investors can secure advantages normally available only to
those with larger resources. These advantages include the spreading
of the risk of loss by the greater diversification of investment which
can be secured through the pooling arrangements; the opportunity to
* secure the benefits of expert investment counsel; and the means of
313
4 REAL ESTATE INVESTMENT TRUSTS .(P*
collectively financing projects which the investors could not under-
take singly.
In addition to providing equality of tax treatment between the
trust beneficiaries and the investment company shareholders, your
committee believes it is also desirable to remove taxation to the extent
possible as a factor in determining the relative size of investments in
stocks and securities on one hand, and real estate equities and mort-
gages on the other. This is particularly important at the present
time because of the shortage of private capital and mortgage money
for individual homes, apartment houses, office buildings, factories,
and hotels. At the present time the financing of these real estate
equities and mortgages is dependent largely on Government-guaran-
teed money, and investments b y special groups, such as insurance
companies and pension trusts
I t has sometimes been argued that real estate investment trusts
differ from regulated investment companies in that the income of the
latter already has been subjected to income tax while the income of
the former has not. This refers to the fact t h a t the dividend income
of the regulated investment company already has been taxed as a
p a r t of a corporation's income before it was received by the regulated
iavestment company while the rental income received by the real
•estate trust has not.
This overlooks the fact that the interest income of regulated invest-
m e n t companies, as well as their capital gain income, has not previ-
ously been subjected to the corporate income tax. Moreover, this
interest income is an important element in the portfolios of these
companies. This absence of a prior tax in the case of a significant
portion of the income of regulated investment companies demonstrates
that the concept of a regulated investment company is not to impose,
or retain, any specified number of taxes with respect to income, b u t
rather, to accord individuals of small means an opportunity to pool
their investments in one of these companies, yet receive the same
treatment as those of greater wealth can obtain by direct investments.
As is pointed out in the next part of this report, H.R. 12559, to the
full extent feasible, makes the requirements and conditions now
applicable to regulated investment trusts, applicable to the real estate
investment trusts. In addition, your committee has also taken care
to draw a sharp line between passive investments and the active
operation of business, and has extended the regulated investment
company type of tax treatment only to income from the passive in-
vestments of real estate investment trusts. Your committee believes
t h a t any real estate trust engaging in active business operations should
continue to be subject to the corporate tax in the same manner as is
true in the case of similar operations carried on by other comparable
enterprises.
III. GENERAL EXPLANATION OF THE BILL

A. Definition of Real Estate Investment Trust
1. General requirements.—In general terms, real estate investment
trusts are defined as unincorporated trusts or associations meeting
certain general requirements and, in addition, meeting a series of
requirements as to amounts of various types of gross income and as
to types of investments.' Most of these requirements are similar to
314
^U REAL ESTATE INVESTMENT TRUSTS 5
requirements now applying in the case of regulated investment com-

panies but are adapted to real estate, rather than stock, investments.
The general requirements include provisions that the trusts be man-
aged by trustees, have transferable shares or certificates of beneficial
interest, and that they be a type of organization which would be taxed
as an ordinary domestic corporation in the absence of the provisions
of this bill. These are the commonly accepted characteristics of
real estate trusts.
The bill also provides t h a t : the beneficial ownership of qualifying
real estate trusts must be held by 100 or more persons; the trust,
apart from the nature of its gross income, must not be a personal
holding company (i.e., no five individuals may directly or indirectly
own more than 50 percent of the trust); it must elect to be treated as
a real estate investment trust; and it may not hold any property
primarily for sale to customers in the ordinary course of its trade or
business.
Three of the above requirements are similar to conditions which
must be met by regulated investment companies. The 100-or-more
ownership test, is substantially the equivalent of a requirement which
regulated investment companies must meet in complying with the
Investment Company Act of 1940. The test which requires the trust
not to be a personal holding company, apart from the gross income
requirement, also is derived from the requirement that a regulated
investment company may not be a personal holding company. I n
addition, the provision as to the election is substantially the same as
a provision applying at present to regulated investment companies.
The requirement that the trust not hold property primarily for
sale to customers in the ordinary course of its trade or business is
designed to make sure that the trust does not engage in an active
business enterprise. Another provision of this type is discussed further
below.
2. Income requirements.—The income requirements, all of which
must be met by a qualifying real estate trust, are divided into three
categories. The first of these tests provides that 90 percent or more
of a trust's gross income must be of the type specified if it is to qualify.
The types of income which qualify for the 90-percent test are dividends;
interest; rents from real property; gains from the sale of stock,
securities, and real property; and abatements and refunds of taxes on
real property. This provision is substantially the same as the present
90-percent test provided for regulated investment companies, except
for the addition of the various types of income derived from real
property.
The second income test provided for real estate trusts is entirely
new; there is no corresponding provision for the regulated investment
companies. Under this test at least 75 percent of the trust's income
must, in one manner or another, be derived from real property. The
types of income within the 75 percent category include rents from real
property, interest on obligations secured by mortgages on real property,
gain from the sale of real propert} 7 , dividends and other distributions
from other real estate trusts qualifying under this bill, and abatements
and refunds of taxes on real property.
The interaction of the 90-percent and 75-percent tests requires a t
least 75 percent of the trust's income to be derived from real property;
another 15 percent must be derived either from real property or from
315
sources from which a regulated investment company would be required

to derive most of its income.
The third income requirement is concerned with relatively short-
term gains from the sale of property. This test provides that short-term
gains on security sales and gains on the sale of real property held for
less than 4 years (apart from involuntary conversions) must represent
less than 30 percent of the trust's gross income. This • provision is
somewhat similar to a provision in present law applying to regulated
investment companies. The 30 percent in the case of the trust applies
to sales of real property held for less than 4 years and to sales of
securities held for less than 6 months, while that for regulated invest-
ment companies in present law applies only to sales of securities held
for less than 3 months.
The application of the 30 percent limitation in the case of gross
income which may be derived from the sale of real property held
for less than 4 years, in conjunction with the general requirement
t h a t the trust must not hold any property primarily for sale to
customers in the ordinary course of its' trade or business, will give
assurance of qualifying little, if any, income from trading in real
property, thus substantially restricting these transactions to sales of
investment property.
3. Investment requirements.—Two tests as to the nature of their
investments must also be met by qualifying real estate investment
trusts. Both of these tests are somewhat similar to tests which must
be met by regulated investment companies. The first test is designed
to give assurance that the bulk of the trusts' investments are in real
estate: this requires that 75 percent of the value of its assets be in real
estate assets, cash and cash items and Government securities. The
second test is designed to provide diversification in any of the trust
investments other than the real estate assets (or cash, cash items, or
Government securities): this test requires that not more than 25
percent of the value of the trusts' assets may be represented b y
securities (other than those described above) of any one issuer in an
amount greater in value than 5 percent of the trusts' total assets
and not more than 10 percent of the voting securities of the issuer.
Rules are provided to make sure that a real estate trust does not
become disqualified under these investment tests because of changes in
values of property after acquisitions. The rules also provide that
where disqualification otherwise would occur because of the purchase
of property this disqualification can be overcome if the investment
tests are met within 30 days after the close of the calendar quarter in
question.
4-. Definition of rents from real property.—One of the principal
purposes of your committee in imposing restrictions on types of income
of a qualifjang real estate investment trust is to be sure that the bulk j
of its income is from passive income sources and not from the active
conduct of a trade or business. This, for example, accounted for the
limitation in the general provisions providing that the trust must
not hold any property primarily for sale to customers in the ordinary
course of its trade or business. This interest in restricting the income
of the trust to that of a passive nature also accounts for two of the
restrictions provided in the definition of "rents from real property."
This definition is important because such rents are one of the principal
types of income allowed under the 90-percent and 75-percent gross
income tests.
3 1 6 <:
REAL ESTATE INVESTMENT TRUSTS 7
One of the restrictions provided to limit this income to that of a
passive nature, specifies that rental income from real property does not
include amounts received from such property where the determination
of this amount depends in whole or in part on the income or profits
derived from the property. This gives assurance that no profit-
sharing arrangement WTII in effect make the trust an active participant
in the operation of the property.
An exception to the general rule is provided for amounts based on a
fixed percentage or percentages of receipts or sales since these are
customary types of rental contracts and are not generally considered
related to the profit or loss of the lessee. Generally speaking, there-
fore, rents received from real property would not be disqualified solely
by reason of the fact that the rent is based on a fixed percentage of
total receipts or sales of the lessee.
A second restriction, intended to limit the definition of rents from
real property to those of a passive nature, excludes from the definition
amounts where the trust directly furnishes or renders services to the
tenants or manages or operates the property. However, the bill
permits these services, or management or operation of the property to
be provided through an independent contractor. The independence
of the contractor is assured by providing t h a t : The trust may not
receive any income from the contractor; the contractor may not own
more than a 35 percent interest in the trust; and not more than
35 percent of the stock (or voting power) of a corporate contractor
(or interest in the assets and profits if not a corporation) can be
held by a person or persons holding a 35 percent or greater interest
in the trust.
Still a third restriction provided in the case of rents from real prop-
erty excludes from the definition of rents amounts received from any
person if the trust has an interest of 10 percent or more in the assets
or profits of that person. This prevents the avoidance of the restric-
tions described above with respect to rents from real property through
the device of setting up a related organization. I t also forecloses
the opportunity of any substantial relationship between the trust
and the business of any tenant.
B. Taxation of Real Estate Investment Trusts and Their Beneficiaries
As has been previously indicated, this bill provides the regulated
investment company type of tax treatment in the case of real estate
investment trusts which distribute 90 percent or more of their ordinary
taxable income (exclusive of net long-term and short-term capital
gains). Any amount in excess of the 90 percent which the trust
retains, however, is to be subject to the regular corporate income tax.
The real estate investment trust taxable income which is distributed
will be taxable to the beneficiaries as ordinary income. No dividend
received deductions, credits or exclusions will be allowed even for
the portion of the trust income receiyed as dividends, since the pur-
pose of these provisions is to encourage* the investment in rental real
estate and real estate mortgages. Capital gains of the trust, however,
to the extent they are distributed, are to be taxed at the beneficiary
level as long-term capital gains rather than as ordinary income. No
provision is made, however, to extend to real estate investment trusts
the procedure, presently available for regulated investment companies,
whereby capital gains which are not distributed can be taxed to the
beneficiaries rather than to the trust-..
31
As is similarity provided in the case of regulated investment com-

panies, where a share or interest in a real estate investment trust is
held for 30 days or less any loss on the sale or exchange of the share
or interest, to the extent of any capital gain dividend received in the
30-day period, is to be a long-term capital loss.
The treatment outlined above for real estate investment trusts is
substantially that now provided in the case of regulated investment
companies although there are several differences, such as the variations
noted above in the treatment of dividend income and undistributed
capital gains, and also the absence of any provision permitting com-
panies specializing in foreign investments to pass on the benefits of
any foreign tax credit to their shareholders.
The provisions of this bill are to apply as of taxable years beginning
after December 31, 1960.
IV. TECHNICAL EXPLANATION OF T H E BILL

This bill amends subchapter M of chapter 1 of the code by adding
a part I I thereto which provides a special method of taxation for
real estate investment trusts.
New section 856(a) defines a real estate investment trust as an
unincorporated trust or 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 new pt. II) 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 (a&
defined in sec. 542) if all of its gross income constituted personal
holding company income (as defined in sec. 543) and (7) which meets
certain specified gross income and other requirements.
Subsection (b) of section 856 provides that to qualify under sub-
chapter M, the trust must meet the conditions described in items
(1) through (4) above during the entire taxable year of the trust,
while the condition described in item (5) must be met during a t
least 335 days of a taxable year of 12 months, or during a proportionate
part of a taxable year of less than 12 months.
Under section 856(c)(1) the provisions of the bill will not apply
unless the trust elects to be treated as a real estate investment trust.
I t must also meet the gross income, diversification, and distribution
requirements under section 856(c).
The gross income requirements of section 856(c) are divided into
three categories. First, under section 856(c)(2), at least 90 percent
of the trust's gross income must be derived from dividends, interest,
rents from real propertj^, gains 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 abatements and
refunds of taxes on real property. This corresponds to the 90
percent income test provided for regulated investment companies.
Under the second gross income test (provided by sec. 856(c)(3))
at least 75 percent of the trust's gross income must be derived from
real property; that is, from rents from real property, from interest
on obligations secured by mortgages on real property or on interests
318
HEAL ESTATE INVESTMENT TRUSTS 9
in real property, gain from the sale or other disposition of real property
{including interests in real propert} 7 and interests in mortgages on real
property), dividends or other distributions on and gain from the sale
or other disposition of, transferrable shares in other qualifying real
estate investment trusts, and abatements and refunds of taxes on
real property.
The third gross income requirement (provided by sec. 856(c)(4))
relates to the sale or other disposition of stock, securities, and real
property. Under this requirement, the aggregate of the gains
from the sale or other disposition of stock or securities held for less
than 6 months and gains on the sale or other disposition of real
property (including interests in real property) held for less than 4
years (and not involuntarily converted within the meaning of sec.
1033) must represent less than 30 percent of the trust's gross income.
For the purpose of this test losses are not netted with gains.
Under section 856(c)(5) at the close of each quarter of the taxable
year a t least 75 percent of the value of the trust's total assets must be
represented by real estate assets, cash and cash items (including
receivables), and Government securities. Further, at the close of
each quarter of the taxable year not more than 25 percent of the
value of the trust's total assets may be represented by securities of
other corporation's limited in respect of any one issuer to an amount
not greater in value than 5 percent of the value of the trust's total
assets and to not more than 10 percent of the outstanding voting
securities of the issuer. Paragraph (5) also provides that varia-
tions from the required percentages resulting from mere fluctuations
in the value of any security or other property shall not result in the
loss of status of a real estate investment trust. Also, failure to meet
these asset requirements at the end of any quarter by reason of
acquisitions of any security or other property during such quarter
shall not cause the trust to lose its status as a real estate investment
trust if such discrepany is eliminated within 30 days after the close of
such quarter. This provision is similar to that in section 851(d)
relating to regulated investment companies.
Section 856(c)(6) defines the terms "value," "real estate assets,"
and "interest in real property." The definition of "value" is con-
sistent with the definition of the same terra in section 851(c)(4) (relat-
ing to regulated investment companies) with such changes as are
necessary to adapt it to the conditions laid down with respect to real
estate investment trusts. "Real estate assets" are defined as including
not only real property but interests in real property and interests in
mortgages on real property as well as shares (or transferable certificates
of beneficial interest) in other real estate investment trusts which meet
the requirements of the new part I I . The term "interest in real prop-
e r t y " is defined to include fee ownership and coownership of land or
improvements thereon and leaseholds of land or improvements thereon,
b u t does not include mineral, oil, or gas royalty interests. All other
terms are to have the same meaning as when used in the Investment
Company Act of 1940, as amended.
Section 856(d) defines "rents from real property." Restrictions
and limitations are provided in the definition to prevent income from
active business operations from being included therein. This is de-
signed to insure that active business income is not to be given "conduit"
tax treatment. Specifically, under section 856(d)(3), the term "rents
H. Kept 2020, 8 6 - 2 2
319
from real property" does not include amounts received with respect
to real property if the trust furnishes or renders services to the tenants
of the property or manages or operates the property, other than
through an independent contractor from whom the trust itself does
not derive or receive any income. If any services are performed for
tenants, or if management fees are received therefor, these services
must be performed and these fees must be received by an independent
contractor rather than by the real estate investment trust itself. This
provision is not intended to require the trustees to delegate or con-
tract out their fiduciary duty to manage the trust, as distinguished
from the servicing and the operation of the building, or buildings,
owned by the trust. The requirement that the trust not receive any
income from the independent contractor requires that the relation-
ship between the two be an arm's length relationship. In furtherance
of this objective, the term "independent contractor" is specifically
defined in section 856(d)(3). Under that definition, the independent
contractor can not own more than 35 percent of the shares, or certi-
ficates of beneficial interest, in the trust; and one or more persons
owning more than 35 percent or more of the trust cannot own more
than 35 percent of the stock, assets, or net profits of the "independent
contractor."
Section 856(d)(2) prevents any substantial relationship between
the trust and the business of any tenant by excluding from the defini-
tion of rents from real property amounts received from any person if
the trust has an interest of 10 percent or more in the stock, assets, or
net profits of that person.
The rules prescribed by section 318(a) are made applicable in
determining ownership of stock, assets, or net profits for purposes of
section 856(d) (2) and (3), except that "10 percent" is substituted for
the "50 percent" in section 318(a)(2)(C).
Furthermore, section 856(d)(1) excludes from the definition of
"rents from real property" any amount derived from 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.
An exception is provided for amounts based on a fixed percentage or
percentages of receipts or sales of the lessee (whether or not adjusted
for such items as returned merchandise, or Federal, State, or local
sales taxes). I t is not intended to disqualify rents under situations
where the lease provides for differing percentages of receipts or sales
from different departments or from separate floors of a retail store,
for example, so long as each percentage is fixed at the time of entering
into the lease.
However, the fact that a lease is based upon a percentage of total
receipts would not necessarily qualify the amount received or accrued
as "rent from real property." Thus, for example, an amount would
not qualify as rent from real property if the lease provides for an
amount measured hj varjong percentages of receipts and the arrange-
ment does not conform with normal business practices where rental
percentages are based on receipts but is in reality used as a means of
basing the rent on income or profits.
Section 857 sets forth the method of taxation of real estate invest-
ment trusts and their beneficiaries. Section 857(b)(1) imposes the
corporate income tax prescribed in section 11 on the real estate invest-
ment trust's taxable income. The definition of real estate investment
320
trust taxable income is given in section 857(b)(2). The definition

follows that used for regulated investment companies in 852(b)(2).
The taxable income of the trust is adjusted as follows: a deduction
is permitted for dividends paid (other than capital gains dividends),
the excess of net long-term capital gains over net short-term capital
losses is excluded, the corporate deductions provided in p a r t V I I I
(except sec. 248) of subchapter B are not allowed, section 443(b) is
disregarded and the net operation of loss deduction provided in sec-
tion 172 is not allowed. Section 857(b)(3) provides for the imposition
of a 25 percent tax in the case of the trust on the excess of the net
long-term capital gains over the sum of the net short-term capital
loss and the deduction for dividends paid (as denned in sec. 561)
determined with reference to capital gains dividends only. Section
857(b)(3)(B) provides that a capital gain dividend (which is denned
in sec. 857(b)(3)(C)) shall be treated by the shareholder or holders
of beneficial interests as a gain from the sale or exchange of a capital
asset held for more than 6 months. Section 857(b)(4) contains
a restriction relating to losses on the sale or exchange of stock or
interests in real estate investment trusts held for less than 31 days
similar to that provided with respect to regulated investment com-
panies. In such case any loss on the sale or exchange of a share or
interest, to the extent of any capital gain dividend received during
that period, is to be treated as a long-term capital loss.
The tax treatment for real estate investment trusts and their share-
holders as just specified is limited by section 857(a) to a real estate
investment trust with respect to which the deduction for dividends
paid during the taxable year (as denned in sec. 561 of the Code, b u t
without regard to capital gains dividends) equals or exceeds 90 percent
of its real estate investment trust taxable income (computed without
regard to the deduction for dividends paid). The trust must also
comply with regulations prescribed by the Secretary or his delegate
for the purpose of ascertaining actual ownership of shares of certificates
of beneficial interest.
Section 857(c) provides that dividends received from real estate
investment trusts meeting the requirements of the new part I I shall
not qualify for the credit for dividends received by individuals (sec.
34), for the exclusion of dividends received by individuals (sec. 116),
or for the deduction for dividends received b y corporations (sec. 243).
Section 857(d) provides that a real estate investment trust's earnings
and profits for any taxable year (but not its accumulated earnings
and profits) are not to be reduced by amounts which it cannot deduct
in computing its taxable income.
Section 858 is substantially the same as section 855. I t provides
rules under which dividends paid by a real estate investment trust
after the close of its taxable year may be deemed to have been paid
during such taxable year.
Section 2 of the bill contains a number of technical amendments.
I t makes conforming amendments to sections 34, 116, and 243 of the
code to exclude from the benefits of those sections dividends received
from a real estate investment trust which for the taxable years of the
trust in which the dividends are paid (or are deemed to have been paid
under sec. 858) qualify under part I I of subchapter M for conduit
treatment. Thus, for example, trust W qualifies as a real estate
investment trust under subchapter M for the taxable vear ending
s
l i . •
321
12 EEAL ESTATE • INVESTMENT TRUSTS
.December 31, 1961. In February 1962, the W trust declares and pays
an ordinary dividend to its shareholders. The trust makes an elec-
tion under section 858 to treat t h a t dividend as having been paid
•during 1961 so that it can meet the 90-percent income distribution
requirement of section 857(a) for 1961. Whether or not the W trust
qualifies in 1962 as a real estate investment trust under subchapter M,
the dividend which it paid in February 1962 and which related to the
taxable year 1961 (by reason of sec. 858) is not considered a dividend
for purposes of the dividend received credit, exclusion, or deduction
under section 34, 116, or 243, respectively.
V. CHANGES IN EXISTING LAW

I n compliance with clause 3 of rule X I I I of the Rules of the House
of Representatives, changes in existing law made bj^ the bill, as in-
troduced, are shown as follows (existing law proposed to be omitted
is enclosed in black brackets, new matter is printed in italics, existing
law in which no change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1954

CHAPTER 1—NORMAL TAXES AND SURTAXES
SUBCHAPTER A. Determination of tax liability.
SUBCHAPTER B. Computation of taxable income.
SUBCHAPTEK C. Corporate distribution and adjustments.
SUBCHAPTER D. Deferred compensation, etc.
SUBCHAPTER E. Accounting periods and methods of accounting.
SUBCHAPTER F. Exempt organizations.
SUBCHAPTER G. Corporations used to avoid income tax on share-
holders.
SUBCHAPTER H. Banking institutions.
SUBCHAPTER I. Natural resources.
SUBCHAPTER J. Estates, trusts, beneficiaries, and decedents.
SUBCHAPTER K. Partners and partnerships.
SUBCHAPTER. L. Insurance companies.
SUBCHAPTER M. Regulated investment companies and real estate
investment trusts.
SUBCHAPTER N. Tax based on income from sources within or with-
out the United States.
SUBCHAPTER 0 . Gain or loss on disposition of property.
SUBCHAPTER P. Capital gains and losses.
SUBCHAPTER Q. Readjustment of tax between years and special
limitations.
SUBCHAPTER R. Election of certain partnerships and proprietor-
ships as to taxable status.
SUBCHAPTER S. Election of certain small business corporations as
to taxable status.
*. * * * * * *
SEC. 11. TAX IMPOSED.
(a) CORPORATIONS IN G E N E R A L . — A tax is hereby imposed for each
taxable year on the taxable income of every corporation. The tax
shall consist of a normal tax computed under subsection (b) and a sur-
tax computed under subsection (c).
(b) NORMAL T A X . —
(1) TAXABLE YEARS BEGINNING BEFORE JULY I, i960.^-Tn the
case of a taxable 3^ear beginning before July 1, 1960, the normal
tax is equal to 30 percent of the taxable income.
322
(2) T A X A B L E YEARS BEGINNING AFTER JUNE SO, i960.—In the

case of a taxable year beginning after June 30, 1960, the normal
tax is equal to 25 percent of the taxable income.
(c) SURTAX.—The surtax is equal to 22 percent of the amount by
which the taxable income (computed without regard to the deduction,
if any, provided in section 242 for partially tax-exempt interest)
exceeds $25,000.
Source: Sees. 15(b), 104(b), 261, 1939 Code.
(d) EXCEPTIONS.—Subsection (a) shall not apply to a corporation
subject to a tax imposed by—
(1) section 594 (relating to mutual saving banks conducting life
insurance business),
(2) subchapter L (sec. 801 and following, relating to insurance
companies),
(3) subchapter M (sec. 851 and following, relating to regulated
investment companies and real estate investment trusts), or
(4) section 881(a) (relating to foreign corporations not engaged
in business in United States).
* * * * * * *
SEC. 34. DIVIDENDS RECEIVED BY INDIVIDUALS.
(a) GENERAL RULE.—Effective with respect to taxable years ending
after July 31, 1954, there shall be allowed to an individual, as a credit
against the tax imposed by this subtitle for the taxable year, an amount
equal to 4 percent of the dividends which are received after July 31,
1954, from domestic corporations and are included in gross income.
(b) LIMITATION ON AMOUNT OF CREDIT.—The credit allowed by
subsection (a) shall not exceed whichever of the following is the lesser:
(1) the amount of the tax imposed by this chapter for the
taxable year, reduced by the credit allowable under section 33
(relating to foreign tax credit); or
(2) the following percent of the taxable income for the taxable
year:
(A) 2 percent, in the case of a taxable year ending before
January 1, 1955.
(B) 4 percent, in the case of a taxable year ending after
December 31, 1954.
(c) N o CREDIT ALLOWED FOR DIVIDENDS FROM CERTAIN CORPO-
RATIONS.—Subsection (a) shall not apply to any dividend from—
(1) a corporation organized under the China Trade Act, 1922
(see sec. 941); [ o r ]
(2) 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) a corporation exempt from tax under section 501
(relating to certain charitable, etc., organizations) or section
521 (relating to farmers' cooperative associations); or
(B) a corporation to which section 931 (relating to income
from sources within possessions of the United States) ap-
p l i e s ^ ] ; or
(3) 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 (sec. 856 and following).
323
SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDI-

VIDUALS.
(a) EXCLUSION FROM GROSS INCOME.—Effective with respect to
any taxable year ending after July 31, 1954, gross income does not
include amounts received by an individual as dividends from domestic
corporations, to the extent t h a t the dividends, do not exceed $50. If
the dividends received in a taxable year exceed $50, the exclusion
provided by the preceding sentence shall apply to the dividends first
received in such year.
Source: New.
(b) CERTAIN DIVIDENDS EXCLUDED.—Subsection (a) shall n o t
apply to any dividend from—
(1) a corporation organized under the China Trade Act, 1922
(see sec. 941); [ o r J
(2) a corporation which, for the taxable year of the corporation
in which the distribution is made, or for the next preceding tax-
able, year of the corporation, is—
(A) a corporation exempt from tax under section 501 (re-
lating to certain charitable, etc., organizations) or section 521
(relating to farmers' cooperative associations); or
(B) a corporation to which section 931 (relating to income
from sources within possessions of the United States)
applies [ . ] ; or
(8) a real estate investment trust which, Jor the taxable year of the
trust in which the dividend is paid, qualifies under part II of sub-
chapter M {sec. 856 and following).
* * * * * * *
SEC. 243. DIVIDENDS RECEIVED BY CORPORATIONS.
(a) GENERAL R U L E . — I n the case of a corporation (other t h a n a
small business investment company operating under the Small Busi-
ness Investment Act of 1958) there shall be allowed as a deduction
an amount equal to 85 percent of the amount received as dividends
(other than dividends described in paragraph (1) of section 244,
relating to dividends on the preferred stock of a public utility) from a
•domestic corporation which is subject to taxation under this chapter.
(b) SMALL BUSINESS INVESTMENT COMPANIES.—In the case of a
small business investment company operating under the Small Busi-
ness Investment Act of 1958, there shall be allowed as a deduction an
amount equal to 100 percent of the ainount received as dividends
(other than dividends described in paragraph (1) of section 244,
relating to dividends on preferred stock of a public utility) from a
domestic corporation which is subject to taxation under this chapter.
(c) SPECIAL R U L E S FOR CERTAIN DISTRIBUTIONS.—For purposes
of subsections (a) and (b)—
(1) Any amount allowed as a deduction under section 591
(relating to deduction for dividends paid by mutual savings banks,
etc.) shall not be treated as a dividend.
(2) A dividend received from a regulated investment company
shall be subject to the limitations prescribed in section 854.
(8) any dividend received from 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 (sec. 856 and following)
shall not be treated as a dividend.
* * * 1 O* M * * *
HEAL ESTATE INVESTMENT TRUSTS 15
SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.

(a) GENERAL RULE.—-For purposes of those provisions of this sub-
chapter to which the rules contained in this section are expressly
made applicable—•
(1) M E M B E R S OF FAMILY.—•
(A) I N GENERAL.—An individual shall be considered as
owning the stock owned, directly or indirectly, by or for—
(i) his spouse (other than a spouse who is legally
separated from the individual under a decree of divorce
or separate maintenance), and
(ii) his children, grandchildren, and parents.
(B) E F F E C T OF ADOPTION.—For purposes of subparagraph
(A)(ii), a legally adopted child of an individual shall be
treated as a child of such individual by blood.
(2) PARTNERSHIPS, ESTATES, TRUSTS, AND CORPORATIONS.—
(A) PARTNERSHIPS AND ESTATES.—Stock owned, directly
or indirectly, by or for a partnership or estate shall be con-
sidered as being owned proportionately by its partners or
beneficiaries. Stock owned, directly or indirectly, by or for
a partner or a beneficiary of an estate shall be considered as
being owned by the partnership or estate.
(B) TRUSTS.—Stock owned, directly or indirectly, by or
for a trust shall be considered as being owned by its benefi-
ciaries in proportion to the actuarial interest of such benefi-
ciaries in such trust. Stock owned, directly or indirectly,
by or for a beneficiary of a trust shall be considered as being
owned by the trust, unless such beneficiary's interest in the
trust is a remote contingent interest. For purposes of the
preceding sentence, a contingent interest of a beneficiary in
a trust shall be considered remote if, under the maximum
exercise of "discretion by the trustee in favor of such bene-
ficiary, the value of such interest, computed actuarially, is
5 percent or less of the value of the trust property. Stock
owned, directly or indirectly, by or for any portion of a trust
of which a person is considered the owner under subpart E
of part I of subchapter J (relating to grantors and others
treated as substantial owners) shall be considered as being
owned by such person; and such trust shall be treated as
owning the stock owned, directly or indirectly, by or for that
person. This subparagraph shall not apply with respect to
any employees' trust described in section 401(a) which is
exempt from tax under section 501(a).
(C) CORPORATIONS.—If 50 percent or more hi value of
the stock in a corporation is owned, directly or indirectly,
by or for any person, then—
(i) such person, .shall be considered as owning the
stock owned, directly or indirectly, by or for that cor-
poration, in that proportion which the value of the
stock which such person so owns bears to the value of
all the stock in such corporation; and
(ii) such corporation shall be considered as owning
the stock owned, directly or indirectly, by or for that
person.
325
(3) OPTIONS.—If any person has an option to acquire stock,

such stock shall be considered as owned by such person. F o r
purposes of this paragraph, an option to acquire such an option,
and each one of a series of such options, shall be considered as an
option to acquire such stock.
(4) CONSTRUCTIVE OWNERSHIP AS ACTUAL OWNERSHIP.—
(A) I N GENERAL.—Except as provided in subparagraph
(B), stock constructively owned by a person by reason of the
application of paragraph (1), (2), or (3) shall, for purposes
of applying paragraph (1), (2), or (3), be treated as actually
owned b y such person.
(B) M E M B E R S OF FAMILY.—Stock constructively owned
by an individual by reason of the application of paragraph
(1) shall not be treated as owned by him for purposes of
again applying paragraph (1) in order to make another the
constructive owner of such stock.
(C) OPTION RULE IN LIEU OF FAMILY RULE.—For purposes
of this paragraph, if stock may be considered as owned by
an individual under paragraph (1) or (3), it shall be con-
sidered as owned by him under paragraph (3).
(b) CROSS R E F E R E N C E S . —
For provisions to which the rules contained in subsection (a) apply,
see—
(1) section 302 (relating to redemption of stock);
(2) section 304 (relating to redemption by related corporations);
(3) section 306(b)(1)(A) (relating to disposition of section 306
stock);
(4) section 334(b)(3)(C) (relating to basis of property received
in certain liquidations of subsidiaries); [and J
(5) section 382(a) (3) (relating to special limitations on net oper-
ating loss carryovers) [ . ] ; and
(6) section 856(d)(2) (relating to definition of rents front-
real property in the case of real estate investment trusts).
* » * * * • •
SEC. 443. RETURNS FOR A PERIOD OF LESS THAN 12 MONTHS.
(a) R E T U R N S FOR SHORT PERIOD.—-A return for a period of less than
12 months (referred to in this section as "short period") shall be made
under any of the following circumstances:
(i) CHANGE OF ANNUAL ACCOUNTING PERIOD.—When the tax-
payer, with the approval of the Secretary or his delegate, changes
his annual accounting period. In such a case, the return shall be
made for the short period beginning on the day after the close
of the former taxable year and ending a t the close of the day
before the day designated as the first day of the new taxable year.
(2) TAXPAYER NOT IN EXISTENCE FOR ENTIRE TAXABLE Y E A R . —
When the taxpayer is in existence during only part of what would
otherwise be his taxable year.
(3) TERMINATION OF TAXABLE YEAR FOR JEOPARDY.—When
the Secretary or his delegate terminates the taxpayer's taxable
year under section 6851 (relating to tax in jeopardy).
(b) COMPUTATION OF T A X ON CHANGE OF ANNUAL ACCOUNTING-
PERIOD.—
(1) GENERAL RULE.—If a return is made under paragraph (1)
of subsection (a), the taxable income for the short period shall be.
326
placed on an annual basis by multiplying such income by 12 and
dividing the result by the number of months in the short period.
The tax shall be the same part of the tax computed on the annual
basis as the number of months in the short period is of 12 months.
(2) E X C E P T I O N . —
(A) COMPUTATION BASED ON 12-MONTH PERIOD.—If the
taxpayer applies for the benefits of this paragraph and estab-
lishes the amount of his taxable income for the 12-month
period described in subparagraph (B), computed as if that
period were a taxable year and under the law applicable to
that year, then the tax for the short period, computed under
paragraph (1), shall be reduced to the greater of the following:
(i) an amount which bears the same ratio to the tax
computed on the taxable income for the 12-month period
as the taxable income computed on the basis of the short
period bears to the taxable income for the 12-month
period; or
(ii) the tax computed on the taxable income for the-
short period without placing the taxable income on an
annual basis.
The taxpayer (other than a taxpayer to whom subparagraph
(B) (ii) applies) shall compute the tax and file his return-
without the application of this paragraph.
(B) 12-MONTH PERIOD.—The 12-month period referred to-
rn subparagraph (A) shall be—
(i) the period of 12 months beginning on the first d a y
of the short period, or
(ii) the period of 12 months ending at the close of the-
last day of the short period, if at the end of the 12
months referred to in clause (i) the taxpayer is not in.
existence or (if a corporation) has theretofore disposed
of substantially all of its assets.
(C) APPLICATION FOR BENEFITS.—Application for the-
benefits of this paragraph shall be made in such manner and
at such time as the regulations prescribed under subpara-
graph (D) may require; except that the time so prescribed
shall not be later than the time (including extensions.) for
filing the return for the first taxable year which ends on o r
after the day which is 12 months after the first day of the-
short period. Such application, in case the return was filed
without regard to this paragraph, shall be considered a claim
for credit or refund with respect to the amount by which
the tax is reduced under this paragraph.
(D) EEGULATIONS.—The Secretary or his delegate shaH
prescribe such regulations as he deems necessary for the-
application of this paragraph.
(c) ADJUSTMENT IN DEDUCTION FOR PERSONAL E X E M P T I O N . — I n the
case of a taxpayer other than a corporation, if a return is made for a
short period by reason of subsection (a)(1) and if the tax is not com-
puted under subsection (b)(2), then the exemptions allowed as a
deduction under section 151 (and any deduction in lieu thereof) shall
be reduced to amounts which bear the same ratio to the full exemptions;
as the number of months in the short period bears to 12.
327
18 HEAL, ESTATE INVESTMENT TRUSTS
(d) CROSS REFERENCES.—

For inapplicability of subsection (b) in computing—
(1) Accumulated earnings tax, s e e section 536.
(2) Personal holding company tax, s e e section 546.
(3) Undistributed foreign personal holding company income, s e e
section 557.
(4) The taxable income of a regulated investment company, s e e
section 852 (b) (2) (E).
(5) the taxable income of a real estate investment trust, see
section 857(6) (2)(D).
* * * * * * *
Subchapter M—Regulated Investment Companies
and Real Estate Investment Trusts
Part I. Regulated investment companies.
Part II. Real estate investment trusts.
PART I—REGULATED INVESTMENT COMPANIES

Sec. 8 5 1 . Definition of regulated investment company.
Sec. 852. Taxation of regulated i n v e s t m e n t companies and their
shareholders.
Sec. 853. Foreign tax credit allowed to shareholders.
Sec. 854. Limitations applicable t o dividends received from regu-
lated i n v e s t m e n t company.
Sec. 855. Dividends paid by regulated i n v e s t m e n t company after
close of taxable year.
SEC. 851. DEFINITION OF REGULATED INVESTMENT COMPANY.
(a) G E N E R A L R U L E . — F o r purposes of this subtitle, the term
"regulated investment company" means any domestic corporation
(other than a personal holding company as denned in section 542)—
(1) which,.at all times during the taxable year, is registered
under the Investment Company Act of 1940, as amended (54
Stat. 789; 15 U.S.C. 80 a-1 to 80 b-2), either as a management
company or as a unit investment trust, or
(2) which is a common trust fund or similar fund excluded by
section 3(c)(3) of such Act (15 U.S.C. 80a-3(c)) from the defini-
tion of "investment company" and is not included in the definition
of "common trust fund" by section 584(a).
(b) LIMITATIONS.—A corporation shall not be considered a regulated
investment company for any taxable year unless—
(1) it files with its return for the taxable year an election to be
a regulated investment company or has made such election for
a previous taxable year which began after December 31, 1941;
(2) at least 90 percent of its gross income is derived from divi-
dends, interest, and gains from the sale or other disposition of
stock or securities;
(3) less than 30 percent of its gross income is derived from the
sale or other disposition of stock or securities held for less than
3 months; and
(4) at the close of each quarter of the taxable year—•
(A) at least 50 percent of the value of its total assets is
represented by—
(i) cash and cash items (including receivables), Gov-
ernment securities and securities of other regulated in-
vestment companies, and
328
(ii) other securities for purposes of this calculation

limited, except and to the extent provided in subsection
(e), 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 taxpayer and to not more than 10 percent of the
outstanding voting securities of such issuer, and
(B) not more than 25 percent of the value of its total
assets is invested in the securities (other than Government
securities or the securities of other regulated investment
companies) of any one issuer, or of two or more issuers which
the taxpayer controls and which are determined, under
regulations prescribed b y the Secretary or his delegate, to
be engaged in the same or similar trades or businesses or
related trades or businesses.
(c) R U L E S APPLICABLE TO SUBSECTION (b) (4).—For purposes of
subsection (b) (4) and this subsection—
(1) In ascertaining the value of the taxpayer's investment in the
securities of an issuer, for the purposes of subparagraph (B), there
shall be included its proper proportion of the investment of any
other corporation, a member of a controlled group, in the securi-
ties of such issuer, as determined under regulations prescribed by
the Secretary or his delegate.
(2) The term "controls" means the ownership in a corporation
of 20 percent or more of the total combined voting power of all
classes of stock entitled to vote.
(3) The term "controlled group" means one or more chains of
corporations connected through stock ownership with the tax-
payer if—
(A) 20 percent or more of the total combined voting power
of all classes of stock entitled to vote of each of the corpora-
tions (except the taxpayer) is owned directly by one or more
of the other corporations, and
(B) the taxpayer owns directly 20 percent or more of the
total combined voting power of all classes of stock entitled to
vote, of at least one of the other corporations.
(4) The term "value" means, with respect to securities (other
than those of majority-owned subsidiaries) for which market
quotations are readuy available, the market value of such securi-
ties; and with respect to other securities and assets, fair value as
determined in good faith by the board of directors, except that in
the case of securities of majority-owned subsidiaries which are
investment companies such fair value shall not exceed market
value or asset value, whichever is higher.
(5) All other terms shall have the same meaning as when used
in the Investment Company Act of 1940, as amended.
(d) DETERMINATION OF STATUS.—A corporation which meets the
requirements of subsections (b)(4) and (c) a t the close of any quarter
shall not lose its status as a regulated investment company 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
corporation which does not meet such requirements at the close of any
quarter by reason of a discrepancy existing immediately after the
329
20 HEAL. ESTATE INVESTMENT TRUSTS
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 regulated investment company 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
a t the close of such quarter for purposes of applying the preceding
sentence.
(e) INVESTMENT COMPANIES FURNISHING CAPITAL TO D E V E L O P -
MENT CORPORATIONS.—
(1) G E N E R A L RULE.—-If the Securities and Exchange Commis-
sion determines, in accordance with regulations issued by it, and
certifies to the Secretary or his delegate not earlier than 60 days
prior to the close of the taxable year of a registered management
company, that such investment company is principally engaged in
the furnishing of capital to other corporations which are princi-
pally engaged in the development of exploitation of inventions,
technological improvements, new processes, or products not
previously generally available, such investment company may, in
the computation of 50 percent of the value of its assets under sub-
paragragh (A) of subsection (b)(4) for any quarter of such
. taxable year, include the value of any securities of an issuer,
whether or not the investment company owns more than 10 per-
cent of the outstanding voting securities of such issuer, the basis
of which, when added to the basis of the investment company
for securities of such issuer previously acquired, did not exceed 5
percent of the value of the total assets of the investment company
at the time of the subsequent acquisition of securities. The pre-
ceding sentence shall not apply to the securities of an issuer if the
investment company has continuously held any security of such
issuer (or of any predecessor company of such issuer as determined
under regulations prescribed by the Secretary or his delegate) for
10 or more years preceding such quarter of such taxable year.
(2) LIMITATION.—The provisions of this subsection shall not
apply at the close of any quarter of a taxable year to an invest-
ment company if at the close of such quarter more than 25 per-
cent of the value of its total assets is represented by securities of
issuers with respect to each of which the investment company
holds more than 10 percent.of the outstanding voting securities
of such issuer and in respect of each of which or any predecessor
thereof the investment company has continuously held any secu-
rity for 10 or more years preceding such quarter unless the value
of its total assets so represented is reduced to 25 percent or less
within 30 days after the close of such quarter.
(3) DETERMINATION OF STATUS.—For purposes of this sub-
section, unless the Securities and Exchange Commission de-
termines otherwise, a corporation shall be considered to be prin-
cipally engaged in the development or exploitation of inventions,
technological improvements, new processes, or products not
previously generally available, for a t least 10 years after the date
of the first acquisition of any security in such corporation or
any predecessor thereof by such investment company if at the
date of such acquisition the corporation or its predecessor was
principally so engaged, and an investment company shall be
considered at any date to be furnishing capital to any company
330
whose securities it holds if within 10 years prior to such date it has
acquired any of such securities, or any securities surrendered in ex-
change therefor, from such other company or predecessor thereof.
For purposes of the certification under this subsection, the Se-
curities and Exchange Commission shall have authority to issue
such rules, regulations and orders, and to conduct such investi-
gations and hearings, either public or private, as it may deem
appropriate.
(4) DEFINITIONS.—The terms used in this subsection shall
have the same meaning as in subsections (b)(4) and (c) of this
section.
SEC. 852. TAXATION OF REGULATED INVESTMENT COMPANIES AND
THEIR SHAREHOLDERS.
P (a) REQUIREMENTS APPLICABLE TO REGULATED INVESTMENT C O M -
PANIES.—The provisions of this [ s u b c h a p t e r ] part (other than sub-
section (c) of this section) shall not be applicable to a regulated
investment company for a taxable year unless—
(1) the deduction for dividends paid during the taxable year (as
denned in section 561, but without regard to capital gains divi-
dends) equals or exceeds 90 percent of its investment company
taxable income for the taxable year (determined without regard
to subsection (b)(2)(D)), and
(2) the investment company complies for such year with regu-
lations prescribed by the Secretary or his delegate for the purpose
of ascertaining the actual ownership of its outstanding stock.
"(b) M E T H O D OF TAXATION OF COMPANIES AND SHAREHOLDERS.—
(1) IMPOSITION OF NORMAL TAX AND SURTAX ON REGULATED
INVESTMENT COMPANIES.—There is hereby imposed for each tax-
able year upon the investment company taxable income of every
regulated investment company a normal tax and surtax computed
as provided in section 11, as though the investment company
taxable income were the taxable income referred to in section 11.
F o r purposes of computing the normal tax under section 11, the
taxable income and the dividends paid deduction of such invest-
m e n t company for the taxable year (computed without regard to
•capital gains dividends) shall be reduced b y the deduction pro-
"vided by section 242 (relating to partially tax-exempt interest).
(2) INVESTMENT COMPANY TAXABLE INCOME.—The investment
company taxable income shall be the taxable income of the regu-
lated investment company 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 net operating loss deduction provided in section
172 shall not be allowed.
(C) The deductions for corporations provided in part V I I I
(except section 248) in subchapter B (section 241 and follow-
ing, relating to the deduction for dividends received, etc.)
. shall not be allowed.
(D) The deduction for dividends paid (as defined in sec-
tion 561) shall be allowed,, but shall be computed without
regard to capital gains dividends.
(E) The taxable income shall be computed without regard
to section 443 (b) (relating to computation of tax on change
of annual accounting period).
331
REAL ESTATE INVESTMENT TRUSTS
(3) CAPITAL GAINS.—

(A) IMPOSITION OF TAX.—There is hereby imposed for
each taxable year in the case of every regulated investment
company 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 denned in
section 561) determined with reference to capital gains
dividends only.
(B) TREATMENT OF CAPITAL GAIN DIVIDENDS BY SHARE-
HOLDERS.—A capital gain dividend shall be treated by the
shareholders as a gain from the sale or exchange of a capital
asset held for more than 6 months.
(C) D E F I N I T I O N OF CAPITAL GAIN D I V I D E N D . — [ A capital
gain dividend m e a n s ] For purposes oj this part, a capital
gain dividend is any dividend, or part thereof, which is
designated by the company as a capital gain dividend in a
written notice mailed to its shareholders not later than 30
days after the close of its taxable year. If the aggregate
amount so designated with respect to a taxable year of the
company (including capital gains dividends paid after the
close of the taxable year described in section 855) is greater
than the excess of the net long-term capital gain over the
net short-term capital loss of the taxable 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.
(D) TREATMENT BY SHAREHOLDERS OF UNDISTRIBUTED
CAPITAL GAINS.—
(i) Every shareholder of a regulated investment com-
pany at the close of the company's taxable year shall
include, in computing his long-term capital gains in his
return for his taxable year in which the last day of the
company's taxable year falls, such amount as the com-
pany shall designate in respect of such shares in a
written notice mailed to its shareholders at any time
prior to the expiration of 30 days after close of its
taxable year, but the amount so includible by any share-
holder shall not exceed t h a t part of the amount sub-
jected to tax in subparagraph (A) which he would have
received if all of such amount had been distributed as
capital gain dividends by the company to the holders of
such shares at the close of its taxable year.
(ii) For purposes of this title, every such shareholder
shall be deemed to have paid, for his taxable year under
clause (i), the tax of 25 percent imposed by subparagraph
(A) on the amounts required by this subparagraph to
be included in respect of such shares in computing his
long-term capital gains for that year; and such share-
holder shall be allowed credit or refund, as the case may
be, for the tax so deemed to have been paid by him.
332
(iii) The adjusted basis of such shares in the hands of

the shareholder shall be increased by 75 percent of the
amounts required by this subparagraph to be included
in computing his long-term capital gains.
(iv) In the event of such designation the tax imposed
bjT subparagraph (A) shall be paid by the regulated
investment companj 7 within 30 days after close of its
taxable year.
(v) The earnings and profits of such regulated invest-
ment company, and the earnings and profits of any such
shareholder which is a corporation, shall be appropriately
adjusted in accordance with regulations prescribed by
the Secretary or his delegate.
(4) LOSS ON SALE OR EXCHANGE OF STOCK HELD LESS THAN 31
DAYS. I f
(A) under subparagraph (B) or (D) of paragraph (3) a
shareholder of a regulated investment company is required,
with respect to any share, to treat any amount as a long-
term capital gain, and
(B) such share is held by the taxpayer for less than 31 days,
then anj7' loss on the sale or exchange of such share shall, to the
extent of the amount described in subparagraph (A) of this
paragraph, be treated as loss from the sale or exchange of a
capital asset held for more than 6 months. For purposes of this
paragraph, the rules of section 246(c)(3) shall apply in deter-
mining whether any share of stock 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) EARNINGS AND PROFITS.—The earnings and profits of a regu-
lated investment company for any taxable j r ear (hut not its accumu-
lated 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 "regu-
lated investment companj 7 " includes a domestic corporation which is
a regulated investment company determined without regard to the
requirements of subsection (a).
SEC. 853. FOREIGN TAX CREDIT ALLOWED TO SHAREHOLDERS.
(a) GENERAL R U L E . — A regulated investment company—•
(1) more than 50 percent of the value (as defined in section
851(c)(4)) of whose total assets at the close of the taxable year
consists of stock or securities in foreign corporations, and
(2) which meets the requirements of section 852(a) for the
taxable year,
may, for such taxable year, elect the application of this section with
respect to income, war profits, and excess profits taxes described in
section 901(b)(1), whj<5h are paid by the investment company during
such taxable year to foreign countries and possessions of the United
States.
(b) E F F E C T OF ELECTION.—If the election provided in subsection
(a) is effective for a taxable year—
(1) the regulated investment company—
(A) shall not, with respect to such taxable year, be allowed
a deduction under section 164(a) or a credit under section 901
for taxes to which subsection (a) is applicable, and
333
(B) shall be allowed as a n addition to the dividends paid

deduction for such taxable year the amount of such taxes;
(2) each shareholder of such investment compan}^ shall—
(A) include in gross income and treat as paid by him his
proportionate share of such taxes, and
(B) treat as gross income from sources within the respec-
tive foreign countries and possessions of the United States,
for purposes of applying subpart A of part I I I of subchapter
N , the sum of his proportionate share of such taxes and the
portion of any dividend paid by such investment company
which represents income derived from sources within foreign
countries or possessions of the United States.
(c) N O T I C E TO SHAREHOLDERS.—The amounts to be treated by the
shareholder, for purposes of subsection (b)(2), as his proportionate
share of—
(1) taxes paid to any foreign c o u n t y or possession of the United
States, and
(2) gross income derived from sources within any foreign
country or possession of t h e United States.
shall not exceed the amounts so designated by the company in a written
notice mailed to its shareholders not later than 30 days after the close
of its taxable year.
(d) M A N N E R OP M A K I N G ELECTION AND NOTIFYING SHARE-
HOLDERS.—The election provided in subsection (a) and the notice to
shareholders required by subsection (c) shall be made in such manner
as the Secretary or his delegate m a y prescribe by regulations.
(e) CROSS 'REFERENCES.—
(1) For treatment by shareholders of taxes paid to foreign countries
and possessions of the United States, see section 164(a) and section 901.
(2) For definition of foreign corporation, see section 7701(a)(5).
SEC. 854. LIMITATIONS APPLICABLE TO DIVIDENDS RECEIVED FROM
REGULATED INVESTMENT COMPANY.
(a) CAPITAL G A I N D I V I D E N D . — F o r purposes of section 34(a)
(relating to credit for dividends received by individuals), section 116
(relating to an exclusion for dividends received by individuals), and
section 243 (relating to deductions for dividends received by corpora-
tions), a capital gain dividend (as defined in section 852(b) (3)) received
from a regulated investment company shall not be considered as a
dividend.
(b) OTHER D I V I D E N D S . —
(1) GENERAL RULE.—In the case of a dividend received from
a regulated investment company (other than a dividend to which
subsection (a) applies)—
(A) if such investment company meets the requirements
of section 852(a) for the taxable year during which it paid
such dividend; and
(B) the aggregate dividends received b y such company
during such taxable year are less than 75 percent of its gross
income,
then, in computing the credit under section 34(a), the exclusion
under section 116, and the deduction under section 243, there
shall be taken into account only that portion of the dividend
which bears the same ratio to the amount of such dividend as
334
the aggregate dividends received by such companj 7 during such

taxable year bear to its gross income for such taxable year.
(2) NOTICE TO SHAREHOLDERS.—The amount of any distribu-
tion by a regulated investment company which may be taken
into account as a dividend for purposes of the credit under section
34, the exclusion under section 116, and the deduction under
section 243 shall not exceed the amount so designated b y the
company in a written notice to its shareholders mailed not later
than 30 days after the close of its taxable year.
(3) DEFINITIONS.—For purposes of this subsection—
(A) The term "gross income" does not include gain from
the sale or other disposition of stock or securities.
(B) T h e term "aggregate dividends received" includes
only dividends received from domestic corporations other
than dividends described in section 116(b) (relating to
dividends excluded from gross income). In determining the
amount of any dividend for purposes of this subparagraph,
the rules provided in section 116(c) (relating to certain
distributions) shall apply.
SEC. 855. DIVIDENDS PAID BY REGULATED INVESTMENT COMPANY
AFTER CLOSE OF TAXABLE YEAR.
(a) GENERAL R U L E . — F o r purposes of this chapter, if a regulated
investment company—
(1) declares a dividend prior to 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 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 com-
pany elects in such return in accordance with regulations prescribed b y
the Secretary or his delegate, be considered as having been paid during
such taxable year, except as provided in subsections (b), (c) and (d).
(b) R E C E I P T BY SHAREHOLDER.—Amounts to which subsection (a)
is applicable shall be treated as received by the shareholder in the
taxable year in which the distribution is made.
(c) NOTICE TO SHAREHOLDERS.—In the case of amounts to which
subsection (a) is applicable, any notice to shareholders required under
this [subchapter] part with respect to such amounts shall be made
. not later than 30 days after the close of the taxable year in which t h e
distribution is made.
(d) FOREIGN T A X ELECTION.—If an investment company to which
section 853 is applicable for the taxable year makes a distribution as
provided in subsection (a) of this section, the shareholders shall con-
sider the amounts described in section 853(b)(2) allocable to such
distribution as paid or received, as the case may be, in the taxable
year in which the distribution is made.
PART II—REAL ESTATE INVESTMENT TRUSTS

Sec. 856. Definition of real estate investment trust.
Sec. 857. Taxation of real estate investment trusts and their bene-
ficiaries.
Sec. 858. Dividends paid by real estate investment trust after close of
taxablevear.
SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRLST.

(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 cus-
tomers 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 54-2) 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 para-
graphs (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 pro-
portionate 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, se-
curities, 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—
(^4) rents from real property;
(B) interest on obligations secured by mortgages on real
property or on interests in real property;
(d) 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 share (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 SO 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;
336
(5) at the close oj each quarter oj the taxable year—

(A) at least 75 percent oj the value oj 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 oj the value oj its total assets is
represented by securities (other than those includible under
subparagraph (A)) jor purposes oj this calculation limited in
respect oj any one issuer to an amount not greater in value than
5 percent oj the value oj the total assets of the trust and to not
more than 10 percent oj the outstanding voting securities oj
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 sub-
sequent 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 elimi-
nated within SO 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 oj this part—
(A) The term "value" means, with respect to securities jor
which market quotations are readily available, the market value
oj such securities; and with respect to other securities and assets,
jair value as determined in goodjaith by the trustees, except that
in the case oj securities oj real estate investment trusts such
jair 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 in mortgages
on real property) and shares (or transferable certificates oj
beneficial interest) in other real estate investment trusts which
meet the requirements oj this part.
(0) The term "interests in real property" includes jee
ownership and co-ownership oj land or improvements thereon
and leaseholds oj land or improvements thereon, but does not
include mineral, oil, or gas royalty interests.
(D) All othev terms shall have the same meaning as when used
in the Investntenl Company Act oj 1940, as amended,
(d) RENTS FROM REAL PROPERTY DEFINED.—For purposes oj para-
graphs (2) and (S) oj subsection (b), the term "rents jrom real property"
includes rents jrom interests in real property but does not include—
(1) any amount received or accrued with respect to any real
property, if the determination oj such amount depends in whole or
in part on the income or profits derived by any person jrom such
property (except that any amount so received or accrued shall not
be excluded jrom the term "rents jrom real property" solely by reason
oj being based on a fixed percentage or percentages oj receipts or
(2) any amount received or accrued directly or indirectly from

any person if the real estate investment trust owns, directly or in-
directly—
(A) in the case of any person which is a corporation, stock
of such person possessing 10 percent or more of the total com-
bined 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.
(8) any amount received or accrued, directly or indirectly, with
respect to any real property, if the trust or association furnishes or
renders services to the tenants of such property, or manages or
operates such property, other than through an independent con-
tractor from whom the trust or association itself does not derive or
receive any income. For purposes of this paragraph, the term
"independent contractor" means—•'
(.4) a person who does not own, directly or indirectly, more
than 85 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 85 percent of
the total combined voting power of whose stock (or 85 percent
of the total shares of all classes of whose stock), or, if not a cor-
poration, not more than 85 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.
For purposes of paragraphs (2) and (3) the rules prescribed by
section 818(a) for determining the ownership of stock shall apply in
determining the ownership of stock, assets or net profits of any per-
son; 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 a 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 IN-
TEREST.—
(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
338
estate investment trust a normal tax and surtax computed 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 oj
computing the normal tax under section 11, the taxable income and
the dividends paid deduction oj such real estate investment trust jor
the taxable year {computed without regard to capital gains dividends)
shall be reduced by the deducation provided by section 21$ (relating
to partially tax-exempt interest).
(2) REAL ESTATE INVESTMENT TRUST TAXABLE INCOME.—For
purposes oj this part, the term "real estate investment trust taxable
income" means the taxable income <?/ the real estate investment
trust, adjusted as jollows:
(A) There shall be excluded the excess, if any, oj the net
long-term capital gain over the net short-term capital loss.
(B) The deductions jor corporations provided in part VIII
(except section 248) oj subchapter B (section 241 and jollowing,
relating to the deduction jor dividends received, etc.) shall not
be allowed.
(C) The deduction jor dividends paid (as defined in section
561) shall be allowed, but shall be computed without regard to
capital gains dividends.
(D) The taxable income shall be computed without regard to
section 443(b) (relating to computation oj tax on change oj
annual accounting period).
(E) The net operating loss deduction provided in section 172
shall not be allowed.
(8) CAPITAL GAINS.—
(A) IMPOSITION OF TAX.—There is hereby imposed jor each
taxable year in the case oj every real estate investment trust a
tax oj 25 percent oj the excess, if any, oj the net long-term
capital gain over the sum oj—
(i) the net short-term capital loss; and
(ii) the deduction jor dividends paid (as defined in sec-
tion 561) determined with reference to capital gains divi-
dends only.
(B) TREATMENT OP CAPITAL OAIN DIVIDENDS BY SHARE-
HOLDERS.—A capital gain dividend shall be treated by the
shareholders or holders oj beneficial interests as a gainjrom the
sale or exchange oj a capital asset held jor more than 6 months.
(C) DEFINITION OP CAPITAL GAIN DIVIDEND.—For pur-
poses oj 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 oj beneficial interests at anytime bejore
the expiration oj SO days after the close oj its taxable year. Ij
the aggregate amount so designated with respect to a taxable
year of the trust (including capital gain dividends paid after the
close oj the taxable year described in section 858) is greater than
the excess-oj the net long-term capital gain over the net short-
term capital loss oj the taxable year, the portion oj each distribu-
tion which shall, be a capital gain dividend shall be only that
proportion oj the amount so designated which such excess oj the
net long-term capital gain over the net short-term capital loss
bears to the aggregate amount so designated.
339
(4) LOSS ON SALE OS EXCHANGE OF STOCK HELD LESS THAN SI

DAYS. If—
(A) under subparagraph (B) of paragraph (S) 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 bene-
ficial 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
SI 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 a capital
asset held for more than 6 months. For purposes of this paragraph,
the rules of section 246(c) (S) shall apply in determining whether any
share of stock or beneficial interest has been held for less than SI days;
except that "SO days" shall be substituted for the number of days
specified in subparagraph (B) of section 246(c)(3).
(G) RESTRICTIONS APPLICABLE TO DIVIDENDS RECEIVED
FROM REAL ESTATE INVESTMENT TRUSTS. For purposes of
section 34(a) (relating to credit for dividends received by indi-
viduals), section 116 (relating 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 re-
quirements 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 invest-
ment 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, be 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 sub-
section (a) applies,- any notice to shareholders or holders of beneficial
340
interests required under this part with respect to such amounts shall be
made not later than SO days after the close oj the taxable year in which
the distribution is made.
* * * * * * *
SEC. 1504. DEFINITIONS.
(a) D E F I N I T I O N OF "AFFILIATED G R O U P " . — A s used in this chapter,
the term "affiliated group" means one or more chains of includible
corporations connected through stock ownership with a common
parent corporation which is an includible corporation if—
(1) Stock possessing at least 80 percent of the voting power of
all classes of stock and at least 80 percent of each class of the
nonvoting stock of each of the includible corporations (except the
common parent corporation) is owned directly by one or more of
the other includible corporations; and
(2) The common parent corporation owns directly stock pos-
sessing at least 80 percent of the voting power of all classes of
stock and at least 80 percent of each class of the nonvoting stock
of a t least one of the other includible corporations.
As used in this subsection, the term "stock" does not include nonvoting
stock which is limited and preferred as to dividends.
(b) D E F I N I T I O N OF "INCLUDIBLE CORPORATION".—As used in this
chapter, the term "includible corporation" means any corporation
except—
(1) Corporations exempt from taxation under section 501.
(2) Insurance companies subject to taxation under section 802
or 821.
(3) Foreign corporations.
(4) Corporations entitled to the benefits of section 931, by
reason of receiving a large percentage of their income from sources
within possessions of the United States.
(5) Corporations organized under the China Trade Act, 1922.
(6) Regulated investment companies and real estate investment
trusts subject to tax under subchapter M of chapter 1.
(7) Unincorporated business enterprises subject to tax as cor-
porations under section 1361.
341

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S 6 T H CONGRESS ) HOUSE OF REPRESENTATIVES J REPORT

2d Session j 1 No. 2020

REAL ESTATE INVESTMENT TRUSTS

II. REASONS FOR THE BILL

III. GENERAL EXPLANATION OF THE BILL

requirements now applying in the case of regulated investment com-

sources from which a regulated investment company would be required

As is similarity provided in the case of regulated investment com-

IV. TECHNICAL EXPLANATION OF T H E BILL

trust taxable income is given in section 857(b)(2). The definition

V. CHANGES IN EXISTING LAW

INTERNAL REVENUE CODE OF 1954

(2) T A X A B L E YEARS BEGINNING AFTER JUNE SO, i960.—In the

SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDI-

SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.

(3) OPTIONS.—If any person has an option to acquire stock,

(d) CROSS REFERENCES.—

PART I—REGULATED INVESTMENT COMPANIES

(ii) other securities for purposes of this calculation

acquisition of any security or other property which is wholly or partly

(3) CAPITAL GAINS.—

(iii) The adjusted basis of such shares in the hands of

(B) shall be allowed as a n addition to the dividends paid

the aggregate dividends received by such companj 7 during such

PART II—REAL ESTATE INVESTMENT TRUSTS

SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRLST.

(5) at the close oj each quarter oj the taxable year—

(2) any amount received or accrued directly or indirectly from

(4) LOSS ON SALE OS EXCHANGE OF STOCK HELD LESS THAN SI

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