[Congressional Record Volume 147, Number 109 (Tuesday, July 31, 2001)]
[Senate]
[Pages S8477-S8478]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BREAUX:
  S. 1279. A bill to amend the Internal Revenue Code of 1986 to modify 
the active business definition under section 355; to the Committee on 
Finance.
  Mr. BREAUX. Mr. President, I rise today to introduce tax legislation 
which proposes only a small technical modification of current law, but, 
if enacted, would provide significant simplification of routine 
corporate reorganizations. The legation is identical to S. 773 which I 
introduced on April 13 of last year.
  This proposed 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.
  Past Treasury Departments have agreed, and I have no reason to 
believe the current Treasury Department will feel any differently, that 
this change would bring welcome simplification to section 355 of the 
Internal Revenue Code. Indeed, the Clinton Administration in its last 
budget submission to the Congress had proposed this change. The last 
scoring of this proposal showed no loss of revenue to the U.S. 
Government, and I am aware of no opposition to its enactment.
  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 statue true to Congress's original 
purpose.
  More specifically, section 355, and related provision 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 earning 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 ``look 
through'' 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 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 non-controlling, 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 non-business 
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 reasons, 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 had ever suggested one. The 
legislative history indicates Congress was concerned about non-
controlled subsidiaries, which is elsewhere adequately addressed, no 
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.
  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. 1279

       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 UNDER 
                   SECTION 355.

       (a) In General.--Section 355(b) of the Internal Revenue 
     Code of 1986 (defining active conduct of a trade or business) 
     is amended by adding at the end the following new paragraph:
       ``(3) Special rules relating to active business 
     requirement.--
       ``(A) In general.--For purposes of determining whether a 
     corporation meets the requirement of paragraph (2)(A), all 
     members of such corporation's separate affiliated group shall 
     be treated as one corporation. For purposes of the preceding 
     sentence, a corporation's separate affiliated group is the 
     affiliated group which would be determined under section 
     1504(a) if such corporation were the common parent and 
     section 1504(b) did not apply.
       ``(B) Control.--For purposes of paragraph (2)(D), all 
     distributee corporations which are members of the same 
     affiliated group (as defined in section 1504(a) without 
     regard to section 1504(b)) shall be treated as one 
     distributee corporation.''.
       (b) Conforming Amendments.--
       (1) Subparagraph (A) of section 355(b)(2) of the Internal 
     Revenue Code of 1986 is amended to read as follows:
       ``(A) it is engaged in the active conduct of a trade or 
     business,''.
       (2) Section 355(b)(2) of such Code is amended by striking 
     the last sentence.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to distributions after the date of the enactment of 
     this Act.
       (2) Transition rule.--The amendments made by this section 
     shall not apply to any distribution pursuant to a transaction 
     which is--
       (A) made pursuant to an agreement which was 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.
       (3) Election to have amendments apply.--Paragraph (2) shall 
     not apply if the distributing corporation elects not to have 
     such paragraph apply to distributions of such corporation. 
     Any such election, once made, shall be irrevocable.

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