[Congressional Record Volume 144, Number 67 (Friday, May 22, 1998)]
[Senate]
[Pages S5453-S5454]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ROTH (for himself, and Mr. Moynihan):
  S. 2122. A bill to amend the Internal Revenue Code of 1986 to provide 
that certain liquidating distributions of a regulated investment 
company or real estate investment trust which are allowable as a 
deduction shall be included in the gross income of a distributee; to 
the Committee on Finance.


                            tax legislation

  Mr. ROTH. Mr. President, in coordination with the Treasury 
Department, Senator Moynihan and I are introducing a bill today 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 House of Representatives by Congressman Archer.
  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.
  Mr. President, I ask unanimous consent that the text of the bill and 
a technical explanation be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2122

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

     SECTION 1. TREATMENT OF CERTAIN DEDUCTIBLE LIQUIDATING 
                   DISTRIBUTIONS OF REGULATED INVESTMENT COMPANIES 
                   AND REAL ESTATE INVESTMENT TRUSTS.

       (a) In General.--Section 332 of the Internal Revenue Code 
     of 1986 (relating to complete liquidations of subsidiaries) 
     is amended by adding at the end the following new subsection:
       ``(c) Deductible Liquidating Distributions of Regulated 
     Investment Companies and Real Estate Investment Trusts.--If a 
     corporation receives a distribution from a regulated 
     investment company or a real estate investment trust which is 
     considered under subsection (b) as being in complete 
     liquidation of such company or trust, then, notwithstanding 
     any other provision of this chapter, such corporation shall 
     recognize and treat as a dividend from such company or trust 
     an amount equal to the deduction for dividends paid allowable 
     to such company or trust by reason of such distribution.''.
       (b) Conforming Amendments.--
       (1) The material preceding paragraph (1) of section 332(b) 
     of such Code is amended by striking ``subsection (a)'' and 
     inserting ``this section''.
       (2) Paragraph (1) of section 334(b) of such Code is amended 
     by striking ``section 332(a)'' and inserting ``section 332''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to distributions after May 21, 1998.
                                  ____

  


                         Technical Explanation

       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

[[Page S5454]]

     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.
                                 ______