[Congressional Record Volume 143, Number 46 (Thursday, April 17, 1997)]
[Senate]
[Pages S3359-S3361]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ROTH (for himself and Mr. Moynihan):
  S. 612. A bill to amend section 355 of the Internal Revenue Code of 
1986 to prevent the avoidance of corporate tax on prearranged sales of 
corporate stock, and for other purposes; to the Committee on Finance.


             CORPORATE ACQUISITION TRANSACTIONS LEGISLATION

  Mr. ROTH. Mr. President, I ask unanimous consent that the following 
joint statement by the ranking member of the Finance Committee, Senator 
Moynihan, and myself, be inserted in the Record at this point, along 
with the text of a bill we are introducing today.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 612

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

     SECTION 1. APPLICATION OF SECTION 355 TO DISTRIBUTIONS 
                   FOLLOWED BY ACQUISITIONS AND TO INTRAGROUP 
                   TRANSACTIONS.

       (a) Distributions Followed by Acquisitions.--Section 355 of 
     the Internal Revenue Code of 1986 (relating to distribution 
     of stock and securities of a controlled corporation) is 
     amended by adding at the end the following new subsection:
       ``(e) Recognition of Gain Where Certain Distributions of 
     Stock or Securities Are Followed by Acquisition.--
       ``(1) General rule.--If there is a distribution to which 
     this subsection applies, the following rules shall apply:
       ``(A) Acquisition of controlled corporation.--If there is 
     an acquisition described in paragraph (2)(A)(ii) with respect 
     to any controlled corporation (or any successor thereof), any 
     stock or securities in the controlled corporation shall not 
     be treated as qualified property for purposes of subsection 
     (c)(2) of this section or section 361(c)(2).
       ``(B) Acquisition of distributing corporation.--If there is 
     an acquisition described in paragraph (2)(A)(ii) with respect 
     to the distributing corporation (or any successor thereof), 
     the controlled corporation shall recognize gain in an amount 
     equal to the amount of net gain which would be recognized if 
     all the assets of the distributing corporation (immediately 
     after the distribution) were sold (at such time) for fair 
     market value. Any gain recognized under the preceding 
     sentence shall be treated as long-term capital gain and shall 
     be taken into account for the taxable year which includes the 
     day after the date of such distribution.
       ``(2) Distributions to which subsection applies.--
       ``(A) In general.--This subsection shall apply to any 
     distribution--
       ``(i) to which this section (or so much of section 356 as 
     relates to this section) applies, and
       ``(ii) which is part of a plan (or series of related 
     transactions) pursuant to which a person acquires stock 
     representing a 50-percent or greater interest in the 
     distributing corporation or any controlled corporation (or 
     any successor of either).
       ``(B) Plan presumed to exist in certain cases.--If a person 
     acquires stock representing a 50-percent or greater interest 
     in the distributing corporation or any controlled corporation 
     (or any successor of either) during the 4-year period 
     beginning on the date which is 2 years before the date of the 
     distribution, such acquisition shall be treated as pursuant 
     to a plan described in subparagraph (A)(ii) unless it is 
     established that the distribution and the acquisition are not 
     pursuant to a plan or series of related transactions.
       ``(C) Certain acquisitions not taken into account.--If--
       ``(i) a person acquires stock in any controlled corporation 
     by reason of holding stock in the distributing corporation, 
     and
       ``(ii) such person did not acquire the stock in the 
     distributing corporation pursuant to a plan described in 
     subparagraph (A)(ii),

     the acquisition described in clause (i) shall not be taken 
     into account for purposes of subparagraph (A)(ii) or (B).
       ``(D) Coordination with subsection (d).--This subsection 
     shall not apply to any distribution to which subsection (d) 
     applies.
       ``(3) Definition and special rules.--For purposes of this 
     subsection--
       ``(A) 50-percent or greater interest.--The term `50-percent 
     or greater interest' has

[[Page S3360]]

     the meaning given such term by subsection (d)(4).
       ``(B) 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)).
       ``(C) Aggregation and attribution rules.--
       ``(i) Aggregation.--The rules of paragraph (7) 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.
       ``(D) Statute of limitations.--If there is an acquisition 
     to which paragraph (1) (A) or (B) applies--
       ``(i) the statutory period for the assessment of any 
     deficiency attributable to any part of the gain recognized 
     under this subsection by reason of such acquisition 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 acquisition 
     occurred, and
       ``(ii) 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.
       ``(4) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection, including regulations--
       ``(A) providing for the application of this subsection 
     where there is more than 1 controlled corporation,
       ``(B) treating 2 or more distributions as 1 distribution 
     where necessary to prevent the avoidance of such purposes, 
     and
       ``(C) providing for the application of rules similar to the 
     rules of subsection (d)(6) where appropriate for purposes of 
     paragraph (2)(B).''
       (b) Section 355 Not To Apply to Certain Intragroup 
     Transactions.--Section 355 of the Internal Revenue Code of 
     1986, as amended by subsection (a), is amended by adding at 
     the end the following new subsection:
       ``(f) Section Not To Apply to Certain Intragroup 
     Transactions.--Except as provided in regulations, this 
     section shall not apply to the distribution of stock from 1 
     member of an affiliated group filing a consolidated return to 
     another member of such group, and the Secretary shall provide 
     proper adjustments for the treatment of such distribution, 
     including (if necessary) adjustments to--
       ``(1) the adjusted basis of any stock which--
       ``(A) is in a corporation which is a member of such group, 
     and
       ``(B) is held by another member of such group, and
       ``(2) the earnings and profits of any member of such 
     group.''
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to distributions after April 16, 1997.
       (2) Transition rule for distributions followed by 
     acquisitions.--The amendments made by subsection (a) shall 
     not apply to any distribution after April 16, 1997, if such 
     distribution is--
       (A) made pursuant to a written agreement which was (subject 
     to customary conditions) binding on such date and at all 
     times thereafter,
       (B) described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or
       (C) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission required solely by reason of the distribution.

     This paragraph shall not apply to any written agreement, 
     ruling request, or public announcement or filing unless it 
     identifies the acquirer of the distributing corporation or 
     any controlled corporation, whichever is applicable.
                                                                    ____



       JOINT INTRODUCTORY STATEMENT OF SENATORS ROTH AND MOYNIHAN

                               Background

  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 spin-
off--and, pursuant to a pre-arranged 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 spin-
off, while the proceeds of such indebtedness are retained by the other 
corporation.
  For Federal income tax purposes, the initial distribution generally 
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 pre-arranged structures designed to avoid 
corporate-level gain recognition. In essence, these transactions 
resemble sales.
  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 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 the 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,

[[Page S3361]]

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.
                                 ______