On Friday, December 16, 2005, the U.S. Congress agreed by unanimous consent to pass H.R. 4440, "The Gulf Opportunity Zone Act of 2005," which creates a Gulf Opportunity Zone in parts of Louisiana, Mississippi and Alabama that were devastated by hurricanes this year and creates tax incentives to help rebuild communities in the zone. In addition to providing tax cuts for Gulf rebuilding, the legislation also includes technical corrections to recently enacted tax legislation, including the American Jobs Creation Act of 2004 (the "AJCA"). These corrections include several provisions beneficial to real estate investment trusts ("REITs"). President Bush is expected to sign the legislation into law shortly.
Among other things, the legislation clarifies that if a REIT fails an asset test and the REIT cannot use the de minimis exception for the failure (which is only available for failures of the 5% value test or 10% vote and value tests), the REIT can use a reasonable cause exception for the failure enacted under the AJCA. The legislation also clarifies that the AJCA rules that allow a REIT to correct failures of REIT qualification without losing its REIT status – including the rules that permit deficiency dividends to correct distribution failures – apply to corrections of failures for which the requirements for correction are satisfied after the date of enactment, regardless of whether such failures occurred in taxable years beginning on, before, or after the date of enactment. The legislation additionally clarifies that the securities of a partnership held by a REIT prior to the AJCA, which would have qualified as straight debt securities under prior law, will continue to qualify as such while held by the REIT. Furthermore, the legislation clarifies that a non-U.S. holder of publicly traded REIT stock will not be treated as realizing gain on the sale of U.S. real property under the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, where the REIT pays a dividend to the holder attributable to the REIT’s gain on the sale of U.S. real property, as long as the holder did not own more than 5% of the class of stock on which the dividend was paid for the 1-year period preceding the dividend.
If signed into law by the President, the amendments made by the technical corrections in this legislation will take effect as if included in the original legislation to which each amendment relates.