[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4187 Introduced in House (IH)]







109th CONGRESS
  1st Session
                                H. R. 4187

To amend the Internal Revenue Code of 1986 to limit the recognition of 
gain under section 355(e) of such Code to certain leveraged spin-merger 
                             transactions.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            November 1, 2005

  Mr. Cantor introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
To amend the Internal Revenue Code of 1986 to limit the recognition of 
gain under section 355(e) of such Code to certain leveraged spin-merger 
                             transactions.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. AMENDMENT OF SECTION 355(E).

    (a) In General.--Subsection (e) of section 355 of the Internal 
Revenue Code of 1986 (relating to recognition of gain on certain 
distributions of stock or securities in connection with acquisitions) 
is amended to read as follows:
    ``(e) Recognition of Gain on Certain Distributions of Stock or 
Securities in Connection With Certain Leveraged Spin-Merger 
Transactions.--
            ``(1) In general.--If there is a distribution to which this 
        subsection applies, gain shall be recognized immediately prior 
        to the distribution to the extent of the lesser of--
                    ``(A) the excess relative leverage at the time of 
                the distribution, and
                    ``(B) the gain realized as a result of the 
                distribution.
            ``(2) Distributions to which subsection applies.--This 
        subsection shall apply to any distribution that would otherwise 
        qualify under subsection 355(a) if--
                    ``(A) there is a prearranged change in control,
                    ``(B) the change in control company is highly 
                leveraged immediately after the distribution 
                (determined without regard to any post-distribution 
                transactions), and
                    ``(C) the change in control company has excess 
                relative leverage.
            ``(3) Definition of prearranged change in control.--
                    ``(A) In general.--For purposes of this subsection, 
                a prearranged change in control shall be deemed to 
                occur if the distribution is part of a plan (or series 
                of related transactions) pursuant to which 1 or more 
                persons acquire directly or indirectly stock 
                representing a 50-percent or greater interest in the 
                distributing corporation or any controlled corporation.
                    ``(B) Plan presumed to exist in certain cases.--If 
                1 or more persons acquire directly or indirectly stock 
                representing a 50-percent or greater interest in the 
                distributing corporation or any controlled corporation 
                during the 4-year period beginning on the date that is 
                2 years before the date of the distribution, such 
                acquisition shall be treated as pursuant to a plan 
                described in subparagraph (A) unless it is established 
                that the distribution and the acquisition are not 
                pursuant to a plan or series of related transactions.
                    ``(C) Certain plans disregarded.--A plan or series 
                of related transactions shall not be treated as 
                described in subparagraph (A) if, immediately after the 
                completion of such plan or series of transactions, the 
                distributing corporation and all controlled 
                corporations are members of a single affiliated group 
                (as defined in section 1504 without regard to 
                subsection (b) thereof).
                    ``(D) Certain acquisitions not taken into 
                account.--Except as provided in regulations, the 
                following acquisitions shall not be taken into account 
                in applying subparagraph (A):
                            ``(i) The acquisition of stock in any 
                        controlled corporation by the distributing 
                        corporation.
                            ``(ii) The acquisition by a person of stock 
                        in any controlled corporation by reason of 
                        holding stock or securities in the distributing 
                        corporation.
                            ``(iii) The acquisition by a person of 
                        stock in any successor corporation of the 
                        distributing corporation or any controlled 
                        corporation by reason of holding stock or 
                        securities of such distributing or controlled 
                        corporation.
                            ``(iv) The acquisition of stock in the 
                        distributing corporation or any controlled 
                        corporation to the extent that the percentage 
                        of stock owned directly or indirectly in such 
                        corporation by each person owning stock in such 
                        corporation immediately before the acquisition 
                        does not decrease.
                This subparagraph shall not apply to any acquisition if 
                the stock held before the acquisition was acquired 
                pursuant to a plan (or series of related transactions) 
                described in subparagraph (A).
                    ``(E) Asset acquisitions.--Except as provided in 
                regulations, for purposes of this subsection, if the 
                assets of the distributing corporation or any 
                controlled corporation are acquired by a successor 
                corporation in a transaction described in subparagraph 
                (A), (C) or (D) of section 368(a)(1) or any other 
                transaction specified in regulations by the Secretary, 
                the shareholders (immediately before the acquisition) 
                of the corporation acquiring such assets shall be 
                treated as acquiring stock in the corporation from 
                which the assets were acquired.
                    ``(F) Definitions and special rules.--For purposes 
                of this subsection--
                            ``(i) Change in control company.--The term 
                        `change in control company' means, with respect 
                        to any prearranged change in control, the 
                        distributing or controlled corporation (or 
                        both) that undergoes such change in control.
                            ``(ii) 50-percent or greater interest.--The 
                        term `50-percent or greater interest' has the 
                        meaning given such term by subsection (d)(4).
                            ``(iii) Distributions in title 11 or 
                        similar case.--Paragraph (1) shall not apply to 
                        any distribution made in a title 11 or similar 
                        case (as defined in section 368(a)(3)).
                            ``(iv) Aggregation and attribution rules.--
                                    ``(I) Aggregation.--The rules of 
                                paragraph (7)(A) of subsection (d) 
                                shall apply.
                                    ``(II) Attribution.--Section 
                                318(a)(2) shall apply in determining 
                                whether a person holds stock or 
                                securities in any corporation. Except 
                                as provided in regulations, section 
                                318(a)(2)(C) shall be applied without 
                                regard to the phrase `50 percent or 
                                more in value' for purposes of the 
                                preceding sentence.
                            ``(v) Successors and predecessors.--Any 
                        reference to a controlled corporation or a 
                        distributing corporation shall include a 
                        reference to any predecessor or successor of 
                        such corporation.
            ``(4) Definition of highly leveraged.--For purposes of this 
        subsection--
                    ``(A) In general.--A change in control company 
                shall be considered to be highly leveraged for purpose 
                of this subsection if its ratio of debt to equity 
                exceeds 2 to 1.
                    ``(B) Ratio of debt to equity.--The term `ratio of 
                debt to equity' means the ratio which the total 
                indebtedness of the company bears to the value of the 
                company's equity.
                    ``(C) When to measure ratio of debt to equity.--The 
                ratio of debt to equity of the distributing and 
                controlled corporations shall be measured immediately 
                following the distribution, but prior to any 
                transactions occurring after the distribution involving 
                the distributing or controlled corporations.
                    ``(D) Indebtedness.--Indebtedness--
                            ``(i) shall not include indebtedness 
                        between corporations that are members of an 
                        affiliated group immediately after the 
                        distribution,
                            ``(ii) shall not include any liabilities 
                        described in section 357(c)(3),
                            ``(iii) shall be computed with reference to 
                        the adjusted issue price (as defined in section 
                        1272(a)(4)), and
                            ``(iv) shall include stock described in 
                        section 1504(a)(4).
                    ``(E) Value of company's equity.--The value of the 
                company's equity shall be based on the fair market 
                value of all the company's equity immediately after the 
                distribution excluding the value of any equity 
                described subparagraph (D)(iv).
                    ``(F) Affiliated groups.--In any case in which the 
                issuing corporation of any indebtedness is a member of 
                an affiliated group (within the meaning of section 
                1504(a)) which includes the distributing or controlled 
                corporation, the calculation of the debt to equity 
                ratio for purposes of this subsection shall be 
                determined, pursuant to regulations prescribed by the 
                Secretary, by treating all the members of the 
                affiliated group in the aggregate as the issuing 
                corporation of such indebtedness.
                    ``(G) Special rules for banks, lending or finance 
                companies.--With respect to any corporation which is a 
                bank (as defined in section 581) or primarily engaged 
                in a lending or finance business, in determining the 
                debt to equity ratio of such corporation (or of the 
                affiliated group of which such corporation is a member) 
                for purposes of this subsection, the total indebtedness 
                of such corporation shall be reduced by an amount equal 
                to the total indebtedness owed to such corporation 
                which arises out of the banking business of such 
                corporation, or out of the lending or finance business 
                of such corporation, as the case may be.
                    ``(H) Outside leverage test.--If ratio of debt to 
                equity of the change in control company equals or 
                exceeds 6 to 1 and paragraph (2)(A) is met with respect 
                to a distribution, then--
                            ``(i) the requirements of subparagraphs (B) 
                        and (C) of paragraph (2) shall be treated as 
                        met with respect to such distribution and
                            ``(ii) the gain realized as a result of the 
                        distribution shall be recognized 
                        notwithstanding paragraph (1).
            ``(5) Definition of excess relative leverage.--For purposes 
        of this subsection--
                    ``(A) In general.--The term `excess relative 
                leverage' means the excess, if any, of--
                            ``(i) the actual indebtedness of the change 
                        in control company, over
                            ``(ii) the maximum permitted indebtedness 
                        of the change in control company.
                    ``(B) Maximum permitted indebtedness.--The maximum 
                permitted indebtedness of a change in control company 
                equals the greater of--
                            ``(i) the amount of indebtedness that would 
                        result in the change in control company having 
                        a debt to equity ratio of 2.0, and
                            ``(ii)(I) if the change in control company 
                        is the controlled company in the distribution, 
                        the amount of indebtedness that would result in 
                        the controlled corporation having a debt to 
                        equity ratio that equals the sum of the debt to 
                        equity ratio of the distributing corporation 
                        plus 0.25, or
                            ``(II) if the change in control company is 
                        the distributing company in the distribution, 
                        the amount of indebtedness that would result in 
                        the distributing corporation having a debt to 
                        equity ratio that equals the sum the debt to 
                        equity ratio of the controlled corporation plus 
                        0.25.
                To the extent the distribution involves more than one 
                controlled corporation, the debt to equity ratio of the 
                controlled corporation for purposes of the preceding 
                sentence shall be determined by calculating aggregate 
                indebtedness and equity value of all the controlled 
                corporations.
            ``(6) Gain realized as result of distribution.--For 
        purposes of this subsection, the term `gain realized as a 
        result of the distribution' means the excess (if any) of--
                    ``(A) the value of the controlled corporation's 
                stock distributed pursuant to the distribution, over
                    ``(B) the distributing corporation's tax basis in 
                the controlled corporation's stock distributed pursuant 
                to the distribution.
            ``(7) Cross-reference to section 362 regarding basis step-
        up in connection with distributions to which this subsection 
        applies.--To the extent gain is recognized pursuant to this 
        subsection, there shall be a corresponding basis step-up in the 
        assets of the change in control company with excess relative 
        leverage under section 362(f).
            ``(8) Coordination with subsection (d).--This subsection 
        shall not apply to any distribution to which subsection (d) 
        applies.
            ``(9) Certain capital contributions not taken into 
        account.--
                    ``(A) In general.--Any equity capital received by a 
                change in control company at the time of or prior to a 
                distribution that is part of a plan a principal purpose 
                of which is to avoid or reduce the gain that would 
                otherwise be recognized pursuant to this subsection 
                shall not be taken into account for purposes of 
                calculating the debt to equity ratio and excess 
                relative leverage of such change in control company.
                    ``(B) Certain contributions presumed to be part of 
                plan.--For purposes of subparagraph (A), any capital 
                contribution received by the change in control company 
                during the 12 month period ending on the date of the 
                distribution shall be treated as pursuant to a plan 
                described in subparagraph unless it is established that 
                none of the principal purposes of the capital 
                contribution was to avoid or reduce the gain that would 
                otherwise have to be recognized pursuant to this 
                subsection.
            ``(10) Statute of limitations.--If there is a distribution 
        to which paragraph (1) applies--
                    ``(A) the statutory period for the assessment of 
                any deficiency attributable to any part of the gain 
                recognized under this subsection by reason of such 
                distribution shall not expire before the expiration of 
                3 years from the date the Secretary is notified by the 
                taxpayer (in such manner as the Secretary may by 
                regulations prescribe) that such distribution occurred, 
                and
                    ``(B) such deficiency may be assessed before the 
                expiration of such 3-year period notwithstanding the 
                provisions of any other law or rule of law which would 
                otherwise prevent such assessment.
            ``(11) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the purposes of 
        this subsection, including regulations--
                    ``(A) preventing taxpayers from circumventing the 
                purpose of this subsection through distributions of 
                multiple controlled corporations, the use of 
                unaffiliated companies, capital contributions prior to 
                the distribution, or the use of strategies that attempt 
                to distort the debt to equity ratio calculations in a 
                manner inconsistent with the purpose of this 
                subsection, including, for example, transitory changes 
                in capital structure entered into for the principal 
                purpose of avoiding application of the debt to equity 
                ratio calculations which have effects inconsistent with 
                the purposes of section 355(e),
                    ``(B) providing for the application of this 
                subsection where there is more than 1 controlled 
                corporation, and
                    ``(C) providing for the application of rules 
                similar to the rules of subsection (d)(6) where 
                appropriate for the purposes of paragraph (3)(A).''.
    (b) Conforming Amendment.--Subsection (f) of section 362 of such 
Code is amended to read as follows:
    ``(f) Basis of Assets in Connection With Distribution to Which 
Section 355(e) Applies.--In the case of a distribution to which section 
355(e) applies, the basis of the assets of the change in control 
company (as defined in such section) and members of its affiliated 
group (other than stock in any member of the acquired group) shall be 
increased by the amount of the gain recognized pursuant to section 
355(e)(1) and such increase shall be allocated among such assets in a 
manner that reflects the relative amounts by which the fair market 
values of such assets exceed their respective adjusted bases. The 
Secretary shall prescribe regulations providing for corresponding 
adjustments in the basis of stock of members of the members of the 
affiliate group which includes the change in control company.''.
    (c) Effective Date.--The amendments made by this section shall to--
            (1) any distribution completed after the date of the 
        enactment of this Act, and
            (2) any distribution completed on or before such date to 
        the extent any transaction completed on or after such date 
        results in a prearranged change in control (as defined in 
        section 355(e) of the Internal Revenue Code of 1986, as amended 
        by this section).
                                 <all>