[Congressional Record Volume 143, Number 46 (Thursday, April 17, 1997)]
[Extensions of Remarks]
[Pages E702-E703]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             LEGISLATION TO CLOSE A CORPORATE TAX LOOPHOLE

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                            HON. BILL ARCHER

                                of texas

                    in the house of representatives

                        Thursday, April 17, 1997

  Mr. ARCHER. Mr. Speaker, several recent news reports describe 
corporate acquisition transactions in which one corporation distributes 
the stock of one--or more--of its subsidiaries to its shareholders in a 
so-called spinoff and, pursuant to a prearranged plan, either the 
distributed subsidiary or the old parent corporation is acquired by 
another, unrelated corporation. Often, the corporation that is to be 
acquired borrows or assumes a large amount of debt incurred prior to 
the spinoff, while the proceeds of such indebtedness are retained by 
the other corporation.
  For Federal income tax purposes, taxpayers take the position, and the 
IRS apparently rules, that the initial distribution is tax-free 
pursuant to section 355 of the Internal Revenue Code and the subsequent 
acquisition is tax-free pursuant to one of the various reorganization 
provisions described in section 368. Such positions are consistent with 
the holding in the case of Commissioner v. Mary Archer W. Morris Trust, 
367 F.2d 794 (4th Cir. 1966) and published IRS rulings.
  Congress did not intend that section 355 apply to insulate these 
transactions from tax. Section 355 was intended to permit tax-free 
restructurings of several businesses among existing shareholders, with 
limitations to prevent the bail-out of corporate earnings and profits 
to the shareholders as capital gains. The recent transactions that 
raise concerns have very little to do with individual shareholder tax 
planning. Rather, they are prearranged structures designed to avoid 
corporate-level gain recognition. In essence, these transactions 
resemble sales. If such transactions were treated as sales for tax 
purposes, the remaining corporation would recognize gain with respect 
to the stock of the acquired corporation.
  Today's introduced legislation is intended to treat transactions 
occurring after April 16, 1997, the general effective date of the bill, 
as sales at the corporate level.
  A technical explanation of the legislation is provided below. This 
legislation affects complex transactions and additional or alternative 
legislative changes also may be appropriate. For example, it may be 
appropriate to amend or repeal present-law section 355(d) and to treat 
certain asset acquisitions as stock acquisitions. Written comments on 
the issues raised by this bill are welcome.


  description of proposal--acquisitions of distributing or controlled 
                     corporations pursuant to plan

  The proposal would adopt additional restrictions under section 355. 
Under the proposal, if

[[Page E703]]

pursuant to a plan or arrangement in existence on the date of 
distribution, either the controlled or distributing corporation is 
acquired, gain would be recognized by the other corporation as of the 
date of the distribution.
  Whether a corporation is acquired would be determined under rules 
similar to those of present-law section 355(d), except that 
acquisitions would not be restricted to purchase transactions. Thus, an 
acquisition would occur if a person--or persons acting in concert--
acquired more than 50 percent of the vote or value of the stock of the 
controlled or distributing corporation pursuant to a plan or 
arrangement. For example, assume a corporation, P distributes the stock 
of its wholly owned subsidiary S to its shareholders. If, pursuant to a 
plan or arrangement, either P or S is acquired, the proposal would 
apply to require gain recognition by the corporation not acquired. It 
is anticipated that certain asset acquisitions would be treated as 
stock acquisitions.
  Acquisitions occurring within the 4-year period beginning 2 years 
before the date of distribution would be presumed to have occurred 
pursuant to a plan or arrangement. Taxpayers could avoid gain 
recognition by showing that an acquisition occurring during this 4-year 
period was unrelated to the distribution.
  In the case of an acquisition of the controlled corporation, the 
amount of gain recognized by the distributing corporation would be the 
amount of gain that the distributing corporation would have recognized 
had stock of the controlled corporation been sold for fair market value 
on the date of distribution. In the case of an acquisition of the 
distributing corporation, the amount of gain recognized by the 
controlled corporation would be the amount of net gain that the 
distributing corporation would have recognized had it sold its assets 
for fair market value immediately after the distribution. This gain 
would be treated as long-term capital gain. No adjustment to the basis 
of the stock or assets of either corporation would be allowed by reason 
of the recognition of the gain.
  The proposal would not apply to a distribution pursuant to a title 11 
or similar case.
  The Treasury Department would be authorized to prescribe regulations 
as necessary to carry out the purposes of the proposal, including 
regulations to provide for the application of the proposal in the case 
of multiple distributions.


          treatment of distributions within affiliated groups

  Except as provided in Treasury regulations, section 355 would not 
apply to a distribution of stock of one member of an affiliated group 
of corporations filing a consolidated return to another member. In the 
case of a distribution of stock within an affiliated group, the 
Secretary of the Treasury would be instructed to provide appropriate 
rules for the treatment of the distribution, including rules governing 
adjustments to the adjusted basis of the stock and the earnings and 
profits of the members of the group.


                             effective date

  The proposal would be effective for distributions after April 16, 
1997, unless the distribution is: First, made pursuant to a written 
agreement with an acquirer which was--subject to customary conditions--
binding on or before such date and at all times thereafter; second, 
described in a ruling request that identifies the acquirer and is 
submitted to the IRS on or before such date; third, described in a 
Securities and Exchange Commission [SEC] filing made on or before such 
date, to the extent such filing was required to be made on account of 
the distribution and identifies the acquirer; or fourth, described in a 
public announcement that identifies the acquirer on or before such 
date. The exceptions for written agreements, IRS ruling requests, SEC 
filings, and public announcements would not apply to distributions of 
stock within a consolidated group of corporations.

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