[Congressional Record Volume 144, Number 135 (Thursday, October 1, 1998)]
[Senate]
[Pages S11283-S11284]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BREAUX:
  S. 2538. A bill to amend the Internal Revenue Code of 1986 to modify 
the active business definition relating to distributions of stock and 
securities of controlled corporations; to the Committee on Finance.


          amendment to Internal Revenue Code Section 355(b)(2)

 Mr. BREAUX. Mr. President, today I introduce a bill that would 
make a technical change in the Internal Revenue Code. We often talk 
about the need to simplify the Tax Code. The change I propose today 
would do that.
  This change is small but very important. It would not alter the 
substance of current law in any way. It would, however, greatly 
simplify a common corporate transaction. This small technical change 
will alone save corporations millions of dollars in unnecessary 
expenses and economic costs that are incurred when they divide their 
businesses.
  The Treasury Department agrees that there is a technical problem with 
the drafting of the Tax Code. It also agrees that a legislative change 
like the bill I introduce today is the best way to correct it.
  Corporations, and affiliated groups of corporations, often find it 
advantageous, or even necessary, to separate two or more businesses. 
The division of AT&T from its local telephone companies is an example 
of such a transaction. The reasons for these corporate divisions are 
many, but probably chief among them is the ability of management to 
focus on one core business.
  At the end of the day, when a corporation divides, the stockholders 
simply have the stock of two corporations, instead of one. The Tax Code 
recognizes this is not an event that should trigger tax, as it includes 
corporate divisions among the tax-free reorganization provisions.
  One requirement the Tax Code imposes on corporate divisions is very 
awkwardly drafted, however. As a result, an affiliated group of 
corporations that wishes to divide must often engage in complex and 
burdensome preliminary reorganizations in order to accomplish what, for 
a single corporate entity, would be a rather simple and straightforward 
spinoff of a business to its shareholders. The small technical change I 
propose today would eliminate the need for these unnecessary 
transactions, while keeping the statute true to Congress' original 
purpose.
  More specifically, section 355 (and related provisions of the Code) 
permits a corporation or an affiliated group of corporations to divide 
on a tax-free basis into two or more separate entities with separate 
businesses. There are numerous requirements for tax-free treatment of a 
corporate division, or ``spinoff,'' including continuity of historical 
shareholder interest, continuity of the business enterprises, business 
purpose, and absence of any device to distribute earnings and profits. 
In addition, section 355 requires that each of the divided corporate 
entities be engaged in the active conduct of a trade or business. The 
proposed change would alter none of these substantive requirements of 
the Code.
  Section 355(b)(2)(A) currently provides an attribution or 
``lookthrough'' rule for groups of corporations that operate active 
businesses under a holding company, which is necessary because a 
holding company, by definition, is not itself engaged in an active 
business. This lookthrough rule inexplicably requires, however, that 
``substantially

[[Page S11284]]

all'' of the assets of the holding company consist of stock of active 
controlled subsidiaries. The practical effect of this language is to 
prevent holding companies from engaging in spinoffs if they own almost 
any other assets. This is in sharp contrast to corporations that 
operate businesses directly, which can own substantial assets unrelated 
to the business and still engage in tax-free spinoff transactions.
  In the real world, of course, holding companies may, for many sound 
business reasons, hold other assets, such as noncontrolling (less than 
80 percent) interests in subsidiaries, controlled subsidiaries that 
have been owned for less than five years (which are not considered 
``active businesses'' under section 355), or a host of nonbusiness 
assets. Such holding companies routinely undertake spinoff 
transactions, but because of the awkward language used in section 
355(b)(2)A), they must first undertake one or more (often a series of) 
preliminary reorganizations solely for the purpose of complying with 
this inexplicable language of the Code.
  Such preliminary reorganizations are at best costly, burdensome, and 
without any business purpose, and at worst, they seriously interfere 
with business operations. In a few cases, they may be so costly as to 
be prohibitive, and cause the company to abandon an otherwise sound 
business transaction that is clearly in the best interest of the 
corporation and the businesses it operates.
  There is no tax policy reason, tax advisors agree, to require the 
reorganization of a consolidated group that is clearly engaged in the 
active conduct of a trade or business, as a condition to a spinoff. Nor 
is there any reason to treat affiliated groups differently than single 
operating companies. Indeed, no one has ever suggested one. The 
legislative history indicates Congress was concerned about 
noncontrolled subsidiaries, which is elsewhere adequately addressed, 
not consolidated groups.
  For many purposes, the Tax Code treats affiliated groups as a single 
corporation. Therefore, the simple remedy I am proposing today for the 
problem created by the awkward language of section 355(b)(2)(A) is to 
apply the active business test to an affiliated group as if it were a 
single entity.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2538

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

     SECTION 1. MODIFICATION OF ACTIVE BUSINESS DEFINITION.

       (a) In General.--Section 355(b)(2) of the Internal Revenue 
     Code of 1986 (defining active conduct of a trade or business) 
     is amended by adding at the end the following: ``For purposes 
     of subparagraph (A), all corporations that are members of the 
     same affiliated group (as defined in section 1504(a)) shall 
     be treated as a single corporation.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions or transfers after the date of 
     the enactment of this Act.
                                 ______