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(b) METHOD OF TAXATION OF CAPITAL GAIN DIVIDENDS TO SHAREHOLDERS OR HOLDERS OF BENEFICIAL INTERESTS IN REAL ESTATE INVESTMENT TRUSTS AND ASSOCIATIONS WITH TRANSFERABLE SHARES.

(1) A capital gain dividend shall be treated by the shareholders or holders of beneficial interests as gains from the sale of capital assets held for more than six months.

(2) As used in this section, the term 'capital gain dividend' means any distribution or part thereof which is designated by the trust or association as a capital gain dividend or distribution in a written notice mailed to its shareholders at any time prior to the expiration of thirty days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the trust or association is greater than the excess of the net long term capital gain over the net short term capital loss for the taxable year, the portion of each distribution which shall be a capital gain dividend shall be only that portion 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.”

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PROPOSED AMENDMENTS TO SUBCHAPTER M, CHAPTER 1, OF SUBTITLE A OF H. R.

8300, TO PROVIDE FOR A SPECIAL METHOD OF TAXATION OF REAL ESTATE INVESTMENT TRUSTS

1. To change the title (p. 201) to read as follows:

“Subchapter M-Regulated Investment Companies and Real Estate Investment Trusts”.

2. To add, immediately following said title, the following subheading:
"Part I-Regulated Investment Companies”.
3. To add the following, immediately after section 855 (p. 206):

"Part II-REAL ESTATE INVESTMENT TRUSTS.

“SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST.

(a) IN GENERAL.—For the purposes of this part, the term real estate investment trust' means a nonincorporated trust or association managed by one or more trustees, the beneficial ownership of which is evidenced by transferable shares or certificates of beneficial interest and which (except for the provisions of this part) would be taxable as a corporation, and the gross income of which is principally derived from the ownership of real estate or interests in real estate, including real estate mortgages and shares of real estate trusts or real estate associations.

“(b) LIMITATIONS.-A trust or association shall not be considered a real estate investment trust for any taxable year unless

“(1) at least 90 per centum of its gross income is derived from dividends, interest (including interest on real estate mortgages), rents of real estate, gains from the sale or other disposition of stock or securities, or real estate, interests in real estate or real estate mortgages or abatements or refunds of local real estate taxes :

“(2) at least 60 per centum of its gross income is derived from rents of real estate, interest on real estate mortgages, gains from the sale or other disposition of real estate or interests in real estate or real estate mortgages, or from dividends or distributions on, or gains from the sale or other disposition of, shares or transferable interests in other real estate trusts or associations, or abatements or refunds of local real estate taxes ;

“(3) less than 30 per centum of its gross income comprises net gain from the sale or other disposition of stock or securities held for less than six months; and

(4) less than 30 per centum of its gross income comprises net gain from the voluntary sale or other disposition of real estate held for less than five

years. (c) RENTS OF REAL ESTATE.—The term 'rents of real estate', as used in subsections (b) (1), and (2) shall not include amounts received or accrued by hotels, inns or lodging houses from guests, boarders or lodgers in consideration for the occupancy of furnished rooms or furnished apartments or for food, refreshments, or personal services rendered.

"SEC. 857. TAXATION OF REAL ESTATE INVESTMENT TRUSTS.

(a) REQUIREMENTS APPLICABLE TO REAL ESTATE INVESTMENT TRUSTS.—The provisions of this Part shall not be applicable to a real estate investment trust unless

“(1) it distributes to its stockholders or holders of beneficial interests not less than 90 per centum of its net income for the taxable year computed without regard to net long term and net short term gains, and

“(2) the real estate investment trust complies for such year with regulations prescribed by the secretary or his delegate for the purpose of ascertaining the actual ownership of the shares or certificates of beneficial interest

of such trust. “(b) METHOD OF TAXATION OF REAL ESTATE INVESTMENT TRUSTS AND HOLDERS OF SHARES OR CERTIFICATES OF BENEFICIAL INTEREST.

(1) IMPOSITION OF NORMAL TAX AND SURTAX ON REAL ESTATE INVESTMENT TRUSTS.—There is hereby imposed for each taxable year upon the real estate investment trust taxable income of every real 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 the purposes of computing the normal tax under section 11, the taxable income and the dividends paid deduction of such real estate investment trust for the taxable year (computed without regard to capital gains dividends) shall be reduced by the deduction provided by section 242 (relating to partially tax-exempt interest).

“(2) REAL ESTATE TRUST TAXABLE INCOME.-The real estate investment trust taxable income shall be the taxable income of the real estate investment trust adjusted as follows:

“(A) There shall be excluded the excess, if any, of the net long-term capital gain over the net short-term loss.

*(B) The deductions for corporations provided in Part VIII (except section 248) in subchapter B (section 241 and following, relating to the deduction for dividends received, etc.) shall not be allowed.

“(C) A deduction shall be allowed for the dividends (other than capital gains dividends) paid during the taxable year computed in accordance with the rules provided in section 562.

(D) The taxable income shall be computed without regard to section 443 (b) (relating to computation of tax on change of annual account

ing period).
(3) CAPITAL GAINS.-

“(A) Imposition of Tax.--There is hereby imposed for each taxable year in the case of every real estate investment trust a tax of 25 percent of the excess, if any, of the net long-term capital gain over the sum of

“(i) the net short-term capital loss, and

“(ii) the amount of capital gain dividends paid during the year. For purposes of this subparagraph, the amount of dividends paid shall be computed nder th les provided in section 562.

“(B) Treatment of Capital Gain Dividends by Shareholders.-A capital gain dividend shall be treated by the shareholders or holders of beneficial interests as a gain from the sale or exchange of a capital asset held for more than 6 months.

"(C) Definition of Capital Gain Dividend.-A capital gain dividend means any dividend, or part thereof, which is designated by the real estate investment trust as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests at any time prior to the expiration of 30 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the trust (including capital gains dividends paid after the close of the taxable year described in section 859) 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.

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"(c) 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. “SEC. 858. LIMITATIONS APPLICABLE TO DIVIDENDS RECEIVED FROM

REAL ESTATE INVESTMENT TRUST. “(a) CAPITAL GAIN DIVIDEND.—For 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 corporations), a capital gain dividend (as defined in section 857 (b) (3)) received from a real estate investment trust shall not be considered as a dividend. “(b) OTHER DIVIDENDS.

“(1) GENERAL RULE.—In the case of a dividend received from a real estate investment trust (other than a dividend to which subsection (a) applies) —

“(A) if such real estate investment trust meets the requirements of section 856 for the taxable year during which it paid such dividend; and

“(B) the aggregate dividends received by such trust 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 the aggregate dividends received by such trust during such taxable year bears to its gross income for such taxable year.

“(2) NOTICE TO SHAREHOLDERS.-A real estate investment trust to which paragraph (1) is applicable for any taxable year shall, in a written notice to shareholders or holders of beneficial interests mailed not later than 30 days after the close of the taxable year, designate the portion of dividends paid by the real estate investment trust during such taxable year which may be taken into account under paragraph (1) for purposes of the credit under section 34, the exclusion under section 116, and the deduction under section 243. “(3) DEFINITIONS.—For purposes of the subsection

(A) gross income does not include gain from the sale or other disposition of stock, securities or real estate, and

(B) the term 'aggregate dividends received' includes dividends only to the extent that such amounts would be taken into account as a

dividend under paragraph (1). “SEC. 859. DIVIDENDS PAID BY REAL ESTATE INVESTMENT TRUST

AFTER CLOSE OF TAXABLE YEAR. “(a) GENERAL RULE.—For purposes of this chapter, if a real estate investment trust

“(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 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 pay

ment 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) is applicable shall be treated as received by the shareholder or holder of beneficial interest in the taxable year in which the distribution is made.

“(c) NOTICE TO SHAREHOLDERS.—In the case of amounts to which subsection (a) is applicable, any notice to shareholders or holders of beneficial interests required under this subchapter with respect to such amounts shall be made not later than 30 days after the close of the taxable year in which the distribution is made.”

The CHAIRMAN. Mr. Avent.

STATEMENT OF I. M. AVENT, ATTORNEY, INDEPENDENT NATURAL

GAS ASSOCIATION

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The CHAIRMAN. Identify yourself to the reporter, please, and make yourself comfortable.

Mr. AVENT. Mr. Chairman, and gentlemen, my name is Ira M. Avent, of Shreveport, La. I am an attorney and member of the tax committee of the Independent Natural Gas Association.

The CHAIRMAN. Speak a little louder, if possible. We have a little noise in here. Let the group be in order, please.

Mr. AVENT. I appear today in behalf of the Independent Natural Gas Association of America, whose membership consists of oil and gas producers, both corporate and individual, as well as companies engaged in the transmission and distribution of natural gas.

Senator MALONE. Could the witness talk a little louder?

The CHAIRMAN. If you could talk a little louder, it would be much appreciated.

Mr. AVENT. A statement has been filed with the clerk of the committee, setting forth the suggestions and comments of this association with respect to treatment of various items in H. R. 8300, Internal Revenue Code of 1954.

The CHAIRMAN. The audience will be in order, please.

Mr. AVENT. It would be appreciated if that statement could be incorporated in the record.

The CHAIRMAN. Incorporate it, please. (The statement referred to follows:)

a

STATEMENT OF INDEPENDENT NATURAL GAS ASSOCIATION OF AMERICA, RE PROVI

SIONS OF THE INTERNAL REVENUE CODE OF 1954, H. R. 8300 The Independent Natural Gas Association of America submitted to the House Ways and Means Committee several suggestions as to changes in the Internal Revenue Code that it believed would be helpful to the Government and to the taxpayer. For your ready reference copies of data on some of the topics presented to such committee are attached hereto as appendix A. A brief outline of the treatment in H. R. 8300 of the topics on which suggestions were made, is submitted in the following pages with our further comments thereon. Your attention is respectfully directed to such comments, to the new subject-matter submitted herein under the caption "General and New Matters,” and particularly to the suggestion regarding the effective date of the proposed code.

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Topic 4, deductions of charitable contributions, interest, taxes, and casualty

losses Our recommendations under this topic were primarily that stamp taxes on bond and stock issues should be allowed as deductions as taxes paid in the year in which stamps were purchased and affixed. The memorandum submitted by this association may be found on page 170 of the published hearings of the Committee on Ways and Means of the House of Representatives, 83d Congress, 1st session and on page 1 of appendix A attached.

We find no provision in H. R. 8300 that permits a deduction of this expense as taxes. For the reasons expressed in our previous presentation as above referred to, it is urged that further consideration be given to this question and that the relief requested be granted. Topic 22, capital gains and losses (H. R. 8300, sec. 165)

It was our recommendation that the Internal Revenue Code be amended so that, in the case of a corporation, the net long-term capital losses incurred as a result of investments in a corporation entered into for business purposes, should be allowed as a deduction. The present law provides that this loss will be allowed only as an offset against capital gains except where the corporation owning the securities holds 95 percent or more of the stock of the company on which the loss was incurred. Our presentation on this question may be found on page 1195 of the published hearings of the House Ways and Means Committee and on page 2 of appendix A attached.

We find in H. R. 8300, section 165 (g) (3) (A) that the stock ownership in the subsidiary where the loss is allowed as an ordinary loss, is reduced from the 95 percent to 80 percent.

For the reasons stated in our previous memorandum above referred to, we urge the stock ownership limitation be eliminated entirely and that where losses are incurred in investments incidental to the principal business, then such losses should be allowed as an ordinary loss without regard to whether or not the investing company was in control of the company in which the investment is made. Topic 24, the net operating loss (H. R. 8300, sec. 172)

It was the recommendation of this association that the net operating loss carryover should be the tax loss incurred. Our memorandum on this subject may be found at page 1238 of the published hearings of the House Ways and Means Committee and page 3 of appendix A attached.

Partial relief in this loss carryover situation has been provided for in H. R. 8300, section 172; however, it is urged that the full tax loss be carried over without adjustment to either the year of loss or the year to which the loss is carried. Topic 26, consolidated returns and intercorporate dividends

It was our recommendation that the present 2 percent surtax penalty for filing consolidated returns be removed and the tax on intercorporate dividends received be eliminated. Our memorandum on this topic may be found at page 1294 of the published hearings of the House Ways and Means Committee and page 4 of appendix A attached.

The Ways and Means Committee first agreed in principle to both of our recommendations and tentatively approved amendments to the code which provided that the 2-percent surtax penalty and the tax on intercorporate dividends would be eliminated, a part each year, over the next 3-year period.

After these provisions were tentatively approved by the House Ways and Means Committee they were recalled and reconsidered, and the previous ap proval was rescinded. H. R. 8300 as passed by the House, therefore, does not have any provision in it allowing the equitable relief requested and apparently recognized. It is, therefore, again urged that further consideration be given this topic and the unjust penalty on consolidations and the duplication of es on intercorporate dividends be removed. Topic 33, the determination of taxable income-inclusions and exclusions (H. R.

8300, sec. 248) It was the recommendation of this association under the above subject that a corporation be permitted to amortize the expenses incurred in its organization or reorganization and in the issuance of its capital stock either at organi. zation or thereafter. Our memorandum on this may be found on page 1573 of the published hearings of the House Ways and Means Committee and on page 5 of appendix A attached.

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