contains a finding that any part of any deficiency attributable to an adjustment with respect to the taxable year is due to fraud with intent to evade tax or to willfull failure to file an income tax return within the time prescribed by law or prescribed by the Secretary in pursuance of law.

"(j) PENALTY.

"For assessable penalty with respect to liability for tax of a qualified investment entity which is allowed a deduction under subsection (a), see section 6697."

(b) ASSESSABLE PENALITIES.-Section 6697 (relating to assessable penalties with respect to liability for tax of real estate investment trusts) is amended to read as follows:

"SEC. 6697. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR TAX OF QUALIFIED INVESTMENT ENTITIES.

"(a) CIVIL PENALTY.-In addition to any other penalty provided by law, any qualified investment entity (as defined in section 860(b)) whose tax liability for any taxable year is deemed to be increased pursuant to section 860(cX1XA) (relating to interest and additions to tax determined with respect to the amount of the deduction for deficiency dividends allowed) shall pay a penalty in an amount equal to the amount of interest (for which such entity is liable) which is attributable solely to such increase.

"(b) 50-PERCENT LIMITATION.-The penalty payable under this section with respect to any determination shall not exceed one-half of the amount of the deduction allowed by section 860(a) for such taxable year.

"(c) DEFICIENCY PROCEDURES NOT TO APPLY.-Subchapter B of chapter 63 (relating to deficiency procedure for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty imposed by subsection (a).”

(c) LATE DESIGNATION AND PAYMENT OF Capital Gain DIVIDEND.— The first sentence of subparagraph (C) of section 852(b)(3) (defining capital gain dividend) is amended by inserting before the period at the end thereof the following: "; except that, if there is an increase in the excess described in subparagraph (A) of this paragraph for such year which results from a determination (as defined in section 860(e)), such designation may be made with respect to such increase at any time before the expiration of 120 days after the date of such determination".

(d) TECHNICAL and Conforming AmendmentS.—

(1) Paragraph (3) of section 316(b) (relating to deficiency dividend distributions by a real estate investment trust) is amended

(A) by striking out "section 859(d)" and inserting in lieu thereof "section 860(f)", and

(B) by striking out "REAL ESTATE INVESTMENT TRUST" in the paragraph heading and inserting in lieu thereof "REGULATED INVESTMENT COMPANY OR REAL ESTATE INVESTMENT TRUST". (2) Paragraph (25) of section 381(c) is amended—

(A) by striking out "section 859(d)" and inserting in lieu thereof "section 860(f)",

(B) by striking out "section 859" and inserting in lieu thereof "section 860", and

(C) by striking out "REAL ESTATE INVESTMENT TRUST" in the paragraph heading and inserting in lieu thereof "REGULATED INVESTMENT COMPANY OR REAL ESTATE INVESTMENT TRUST”. (3) Subparagraph (C) of section 857(b)(3) is amended by striking out "section 859(c)" and inserting in lieu thereof "section 860(e)".

(4) Sections 6422(14) and 6515(5) are each amended

(A) by inserting "regulated investment company or" before "real estate investment trust”, and

(B) by striking out "859" and inserting in lieu thereof "860",

(5) Paragraph (5) of section 6503(i) is amended to read as follows:

“(5) Deficiency dividends in the case of a regulated investment company or a real estate investment trust, see section 860(h).”

(6) Part II of subchapter M of chapter 1 is amended by striking out section 859 and redesignating section 860 as section 859.

(7) The table of sections for part II of subchapter M of chapter 1 is amended by striking out the items relating to sections 859 and 860 and inserting in lieu thereof the following:

"Sec. 859. Adoption of annual accounting period."

(8) The table of parts for subchapter M of chapter 1 is amended by adding at the end thereof the following new item:

"Part III. Provisions which apply to both regulated investment companies and real estate investment trusts."

(9) The table of sections for subchapter B of chapter 68 is amended by striking out the item relating to section 6697 and inserting in lieu thereof the following:

"Sec. 6697. Assessable penalties with respect to liability for tax of qualified investment entities."

(e) EFFECTIVE DATE.-The amendments made by this section shall apply with respect to determinations (as defined in section 860(d) of the Internal Revenue Code of 1954) after the date of the enactment of this Act.

SEC. 363. REAL ESTATE INVESTMENT TRUST PROVISIONS.

(a) LIMITATIONS.

(1) Section 856(c)(2) (relating to limitations) is amended by striking out the word "and" at the end of subparagraph (F), by inserting the word "and" at the end of subparagraph (G), and by adding the following new subparagraph at the end thereof:

"(H) gain from the sale or other disposition of a real estate asset which is not a prohibited transaction solely by reason of section 857(b)(6);".

(2) Section 856(c)(3) (relating to limitations) is amended by striking out the word "and" at the end of subparagraph (F), by inserting the word "and" at the end of subparagraph (G), and by adding the following new subparagraph at the end thereof:

"(H) gain from the sale or other disposition of a real estate asset which is not a prohibited transaction solely by reason of section 857(b)(6);".

(3) Subparagraph (B) of section 856(c)(4) (relating to limitations) is amended to read as follows:

"(B) property in a transaction which is a prohibited transaction; and".

(b) PROHIBITED TRANSACTIONS.-Paragraph (6) of section 857(b) (relating to income from prohibited transactions) is amended by adding the following subparagraphs at the end thereof:

"(C) CERTAIN SALES NOT TO CONSTITUTE PROHIBITED TRANSACTIONS. For purposes of this part, the term 'prohibited transaction' does not include a sale of property which is a real estate asset as defined in section 856(c)(6)(B) if

“(i) the trust has held the property for not less than 4 years;

"(ii) aggregate expenditures made by the trust, or any partner of the trust, during the 4-year period preceding the date of sale which are includible in the basis of the property do not exceed 20 percent of the net selling price of the property;

"(iii) during the taxable year the trust does not make more than 5 sales of property (other than foreclosure property); and

"(iv) in the case of property, which consists of land or improvements, not acquired through foreclosure (or deed in lieu of foreclosure), or lease termination, the trust has held the property for not less than 4 years for production of rental income.

"(D) SPECIAL RULES.-In applying subparagraph (C) the following special rules apply:

"(i) The holding period of property acquired through foreclosure (or deed in lieu of foreclosure), or termination of the lease, includes the period for which the trust held the loan which such property secured, or the lease of such property.

"(ii) In the case of a property acquired through foreclosure (or deed in lieu of foreclosure), or termination of a lease, expenditures made by, or for the account of, the mortgagor or lessee after default became imminent will be regarded as made by the trust.

"(iii) Expenditures (including expenditures regarded as made directly by the trust, or indirectly by any partner of the trust, under clause (ii)) will not be taken into account if they relate to foreclosure property and did not cause the property to lose its status as foreclosure property.

"(iv) Expenditures will not be taken into account if they are made solely to comply with standards or requirements of any government or governmental authority having relevant jurisdiction, or if they are made to restore the property as a result of losses arising from fire, storm or other casualty.

"(v) The term 'expenditures' does not include advances on a loan made by the trust.

"(vi) The sale of more than one property to one buyer as part of one transaction constitutes one sale.

"(vii) The term 'sale' does not include any transaction in which the net selling price is less than $10,000. "(E) SALES NOT MEETING REQUIREMENTS.-In determining whether or not any sale constitutes a 'prohibited transaction' for purposes of subparagraph (A), the fact that such sale does not meet the requirements of subparagraph (C) of this paragraph shall not be taken into account; and such determination, in the case of a sale not meeting such requirements, shall be made as if subparagraphs (C) and (D) had not been enacted."

(c) EXTENSIONS.-Paragraph (3) of section 856(e) (relating to extensions) is amended to read as follows:

"(3) EXTENSIONS.-If the real estate investment trust establishes to the satisfaction of the Secretary that an extension of the grace period is necessary for the orderly liquidation of the trust's interests in such property, the Secretary may grant one or more extensions of the grace period for such property. Any such

extension shall not extend the grace period beyond the date which is 6 years after the date such trust acquired such property."

(d) EFFECTIVE DATE.-The amendments made by subsections (a) and (b) shall apply to taxable years ending after the date of the enactment of this Act. The amendment made by subsection (c) shall apply to extensions granted after the date of the enactment of this Act with respect to periods beginning after December 31, 1977.

SEC. 364. CONTRIBUTIONS IN AID OF CONSTRUCTION.

(a) IN GENERAL.-Section 118(b) (relating to contributions in aid of construction) is amended

(1) by striking out "water" in the portion of paragraph (1) preceding subparagraph (A) thereof and inserting in lieu thereof 'electric energy, gas (through a local distribution system or transportation by pipeline), water,";

(2) by striking out "water" in paragraph (1)(B) and inserting in lieu thereof "electric energy, gas, steam, water,";

(3) by striking out "water" in paragraph (2)(A)(ii) and by inserting in lieu thereof "electric energy, gas, steam, water,"; (4) by striking out "property" in paragraph (3)(A) and by inserting in lieu thereof "line" and by striking out "a main water or sewer line" in paragraph (3)(A) and by inserting in lieu thereof "an electric line, a gas main, a steam line, or a main water or sewer line"; and

(5) by amending paragraph (3)(C) to read as follows:

"(C) REGULATED PUBLIC UTILITY.-The term 'regulated public utility' has the meaning given such term by section 7701(a)(33); except that such term shall not include any such utility which is not required to provide electric energy, gas, water, or sewerage disposal services to members of the general public (including in the case of a gas transmission utility, the provision of gas services by sale for resale to the general public) in its service area."

(b) EFFECTIVE DATE.-The amendments made by this section shall apply to contributions made after January 31, 1976.

SEC. 365. LIABILITIES OF CONTROLLED CORPORATIONS.

(a) IN GENERAL.-Subsection (c) of section 357 (relating to assumption of liability) is amended by adding at the end thereof the following new paragraph:

"(3) CERTAIN LIABILITIES EXCLUDED.—

“(A) IN GENERAL.—If—

"(i) the taxpayer's taxable income is computed under the cash receipts and disbursements method of accounting, and

"(ii) such taxpayer transfers, in an exchange to which section 351 applies, a liability which is either

"(I) an account payable payment of which would give rise to a deduction, or

"(II) an amount payable which is described in section 736(a),

then, for purposes of paragraph (1), the amount of such liability shall be excluded in determining the amount of liabilities assumed or to which the property transferred is subject.

"(B) EXCEPTION.-Subparagraph (A) shall not apply to any liability to the extent that the incurrence of the liability

resulted in the creation of, or an increase in, the basis of any property."

(b) BASIS OF DISTRIBUTEES.—Subsection (d) of section 358 (relating to basis to distributees) is amended to read as follows:

"(d) ASSUMPTION OF LIABILITY.

"(1) IN GENERAL.-Where, as part of the consideration to the taxpayer, another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this section, be treated as money received by the taxpayer on the exchange.

"(2) EXCEPTION.-Paragraph (1) shall not apply to the amount of any liability excluded under section 357(c)3).

(c) EFFECTIVE DATE.-The amendments made by subsections (a) and (b) shall apply to transfers occurring on or after the date of the enactment of this Act.

SEC. 366. MEDICAL EXPENSE REIMBURSEMENT PLANS.

(a) GENERAL RULE.-Section 105 (relating to accident and health plans) is amended by adding at the end thereof the following: "(h) AMOUNT PAID TO HIGHLY COMPENSATED INDIVIDUALS UNDER A DISCRIMINATORY SELF-INSURED MEDICAL EXPENSE REIMBURSEMENT PLAN.

"(1) IN GENERAL.-In the case of amounts paid to a highly compensated individual under a self-insured medical reimbursement plan which does not satisfy the requirements of paragraph (2) for a plan year, subsection (b) shall not apply to such amounts to the extent they constitute an excess reimbursement of such highly compensated individual.

(2) PROHIBITION OF DISCRIMINATION.-A self-insured medical reimbursement plan satisfies the requirements of this paragraph only if—

"(A) the plan does not discriminate in favor of highly compensated individuals as to eligibility to participate; and "(B) the benefits provided under the plan do not discriminate in favor of participants who are highly compensated individuals.

"(3) NONDISCRIMINATORY ELIGIBILITY CLASSIFICATIONS.—

"(A) IN GENERAL.-A self-insured medical reimbursement plan does not satisfy the requirements of subparagraph (A) of paragraph (2) unless such plan benefits

"(i) 70 percent or more of all employees, or 80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all employees are eligible to benefit under the plan; or

(ii) such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated participants.

"(B) EXCLUSION OF CERTAIN EMPLOYEES.-For purposes of subparagraph (A), there may be excluded from consideration

"(i) employees who have not completed 3 years of service;

"(ii) employees who have not attained age 25;

"(iii) part-time or seasonal employees;

"(iv) employees not included in the plan who are included in a unit of employees covered by an agreement