[Congressional Record Volume 144, Number 67 (Friday, May 22, 1998)]
[Extensions of Remarks]
[Pages E960-E961]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             A BILL TO ELIMINATE AN UNWARRANTED TAX BENEFIT

                                 ______
                                 

                            HON. BILL ARCHER

                                of texas

                    in the house of representatives

                          Friday, May 22, 1998

  Mr. ARCHER. Mr. Speaker, today, in coordination with the Treasury 
Department, I am introducing H.R. 3947, a bill to eliminate an 
unwarranted tax benefit which involves the liquidation of a Regulated 
Investment Company (``RIC'') or Real Estate Investment Trust 
(``REIT''), where at least 80 percent of the liquidating RIC or REIT is 
owned by a single corporation. Identical legislation is being 
introduced in the Senate by Senator Roth and Senator Moynihan.
  The RIC and REIT rules allow individual shareholders to invest in 
stock and securities (in the case of RICs) and real estate assets (in 
the case of REITs) with a single level of tax. The single level of tax 
is achieved by allowing RICs and REITs to deduct the dividends they pay 
to their shareholders.
  Some corporations, however, have attempted to use the ``dividends 
paid deduction'' in combination with a separate rule that allows a 
corporate parent to receive property from an 80 percent subsidiary 
without tax when the subsidiary is liquidating. Taxpayers argue that 
the combination of these two rules permits income deducted by the RIC 
or REIT and paid to the parent corporation to be entirely tax-free 
during the period of liquidation of the RIC or REIT (which can extend 
over a period of years). The legislation is intended to eliminate this 
abusive application of these rules by requiring that amounts which are 
deductible dividends to the RIC or REIT are consistently treated as 
dividends by the corporate parent.
  RICs and REITs are important investment vehicles, particularly for 
small investors. The RIC and REIT rules are designed to encourage 
investors to pool their resources and achieve the type of investment 
opportunities, subject to a single level of tax, that would otherwise 
be available only to a larger investor. This legislation will not 
affect the intended beneficiaries of the RIC and REIT rules.
  The legislation applies to distributions on or after today. A 
technical explanation of the legislation is provided below.
  The bill provides that any amount which a liquidating RIC or REIT may 
take as a deduction for dividends paid with respect to an otherwise 
tax-free distribution to an 80-percent corporate owner is includible in 
the income of the recipient corporation. The includible amount is 
treated as a dividend received from the RIC or REIT. The liquidating 
corporation may designate the amount treated as a dividend as a capital 
gain dividend or, in the case of a RIC, an exempt interest dividend or 
a dividend eligible for the 70-percent dividends received deduction, to 
the extent provided by the RIC or REIT provisions of the Code.
  The bill does not otherwise change the tax treatment of the 
distribution under sections 332 or 337. Thus, for example, the 
liquidating corporation will not recognize gain (if any) on the 
liquidating distribution and the recipient corporation will hold the 
assets at a carryover basis.
  The bill is effective for distributions on or after May 22, 1998, 
regardless of when the plan of liquidation was adopted.
  No inference is intended regarding the treatment of such transactions 
under present law.

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