[Congressional Record Volume 141, Number 72 (Wednesday, May 3, 1995)]
[Extensions of Remarks]
[Page E944]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]



  Mr. ARCHER. Mr. Speaker, recent news reports suggest that corporate 
taxpayers may be attempting to dispose of stock of other corporations 
through stock redemption transactions that are the economic equivalent 
of sales. The transactions are structured so that the redeemed 
corporate shareholder apparently expects to take the position that the 
transaction qualifies for the corporate dividends received deduction 
and therefore substantially avoids the payment of full tax on the gain 
that would apply to a sales transaction.
  For example, it has been reported that Seagram Co. intends to take 
the position that the corporate dividends received deduction will 
eliminate tax on significant distributions received from DuPont Co. in 
a redemption of almost all the DuPont stock held by Seagram, coupled 
with the issuance of certain rights to reacquire DuPont stock.--See, 
for example Landro and Shapiro, Hollywood Shuffle, Wall Street Journal 
pp. A1 and A11, April 7, 1995; Sloan, For Seagram and DuPont, a Tax 
Deal that No One Wants to Brandy About, Washington Post p.D3, April 11, 
1995; Sheppard, Can Seagram Bail Out of DuPont without Capital Gain 
Tax, Tax Notes Today, 95 TNT 75-4, April 10, 1995.--Moreover, it is 
reported that investment bankers and other advisors are actively 
marketing this potential transaction. We would like to express our 
appreciation to Congressman Stephen Horn for his efforts in bringing 
this issue to our attention.
  Today we introduce legislation intended to curtail the use of such 
transactions immediately. We believe the approach adopted in the bill 
is the correct approach, given the incentives under present law for 
corporations to structure transactions in an attempt to obtain the 
benefits of the dividends received deduction. We welcome comments on 
the bill and recognize that additional or alternative legislative 
changes may also be appropriate. However, it is anticipated that any 
legislative change that is enacted would apply to transactions after 
May 3, 1995.
  No inference is intended that any transaction of the type described 
in the proposed legislation would in fact produce the results 
apparently sought by the taxpayers under present law. The bill does not 
address and does not modify present law regarding whether a transaction 
would otherwise be eligible for the dividends received deduction, nor 
is it intended to restrict the IRS or Treasury Department from issuing 
guidance regarding these or other issues.
  The bill is directed at corporate shareholders because it is believed 
that the existence of the dividends received deduction
 under present law creates incentives for corporate taxpayers to report 
transactions selectively as dividends or sales. No inference is 
intended that any transaction characterized as a sale under the bill 
necessarily would be so characterized if the shareholder were an 
individual.


                        description of the bill

  Under the bill, except as provided in regulations, any non pro rata 
redemption or partial liquidation distribution to a corporate 
shareholder that is otherwise eligible for the dividends received 
deduction under section 243, 244, or 245 of the code would be treated 
as a sale of the stock redeemed. The bill applies to dividends to 80-
percent shareholders that would qualify for the 100-percent dividends 
received deduction as well as to other transactions qualifying for a 
lesser dividends received deduction. It is not intended to apply to 
dividends that are eliminated between members of affiliated groups 
filing consolidated returns. However, it is expected that the Treasury 
Department will consider whether any changes to the consolidated return 
regulations would be necessary to prevent avoidance of the purposes of 
the bill.
  The bill would replace the present law provision (sec. 1059(e)(1)) 
that requires a corporate shareholder to reduce basis--but not 
recognize immediate gain--in the case of certain non pro rata 
redemptions or partial liquidation distributions.
  It is intended that the bill apply to all non pro rata redemptions 
except to the extent provided by regulations.
  The bill retains the existing Treasury Department regulatory 
authority, contained in section 1059(g) of present law, to issue 
regulations, including regulations that provide for the application of 
the provision in the case of stock dividends, stock splits, 
reorganizations, and other similar transactions and in the case of 
stock held by pass through entities. Thus, the Treasury Department can 
issue regulations to carry out the purposes or prevent the avoidance of 
the bill.
  It is expected that recapitalizations or other transactions that 
could accomplish results similar to any non pro rata redemption or 
partial liquidation will also be subject to the provisions of the bill 
as appropriate.
  It is also expected that redemptions of shares held by a partnership 
will be subject to the provision to the extent there are corporate 
partners.
  There are concerns that taxpayers might seek to structure 
transactions to take advantage of sale treatment and inappropriately 
recognize losses. It is expected that the Treasury Department will by 
regulations address these and other concerns, including by denying 
losses in appropriate cases or providing rules for the allocation of 
basis.
  It is anticipated that the private tax bar and other tax experts will 
provide input concerning the proposed legislation before its enactment. 
It is hoped that this process will identify any problems with the 
proposed legislation and potential improvements. Comment is encouraged 
in particular with respect to the loss disallowance provision, 
including whether the loss disallowance should be mandatory. Comment is 
also encouraged as to whether additional transition should be provided 
for existing rights to redeem contained in the terms of outstanding 
stock or otherwise.


                             Effective Date

  The bill would be effective for redemptions occurring after May 3, 
1995, unless pursuant to the terms of a written binding contract in 
effect on May 3, 1995 or pursuant to the terms of a tender offer 
outstanding on May 3, 1995.
  No inference is intended regarding the tax treatment of any 
transaction within the scope of the bill. For example, no inference is 
intended that any transaction within the scope of the bill would 
otherwise be treated as a sale or exchange under the provisions of 
present law. At the same time, no inference is intended that any 
distribution to an individual shareholder that would be within the 
scope of the bill if made to a corporation should be treated as a sale 
or exchange to that individual because of the existence of the bill.


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