[Congressional Record Volume 151, Number 89 (Wednesday, June 29, 2005)]
[Senate]
[Page S7616]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. LOTT (for himself and Mr. Baucus):
S. 1327. 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. LOTT. Mr. President, I rise today to introduce legislation
proposing a change to the Internal Revenue Code that has been endorsed
by both the Joint Committee on Taxation and the United States Treasury
Department. It is a simplification measure that has been passed by this
body on three separate occasions, and I am pleased to be joined by the
gentleman from Montana, Senator Baucus, the Ranking Democratic Member
on the Finance Committee, in introducing this common sense legislation
today. It is now time for Congress to act again and include this
meritorious provision in the next appropriate tax bill reported from
the Finance Committee.
Corporations and affiliated groups of corporations, for any number of
good reasons, find it appropriate and many times necessary to shed some
of their businesses. If the business is not being sold, the Internal
Revenue Code makes it possible to reorganize without having to
recognize gain on the transaction. A typical transaction is a spin-off
transaction performed per the terms of section 355 of the Internal
Revenue Code, where a parent corporation distributes the shares of its
subsidiary(s) to its shareholders who once had shares of just the
parent corporation now have shares of both the parent and the shares of
just the parent corporation now have shares of its subsidiary(s) to its
shareholders who once had shares of just the parent corporation now
have shares of both the parent and the subsidiary. As a matter of long-
standing tax policy, there is typically no tax exacted with these kinds
of divisions, nor should there be. Typically the business hasn't
changed what it is doing; it is simply being done under a separated
ownership structure and the shareholders have ownership in two
corporations instead of one, with no overall change in their holdings.
In order to be accorded tax-free treatment, section 355 requires the
corporation involved in the transaction to be engaged in an ``active
trade or business.'' Under the current regulations interpreting section
355 of the Internal Revenue Code, a much more rigorous test of ``active
trade or business'' is imposed if a holding company seeks to spin-off a
subsidiary than would be the case if the subsidiary were simply owned
directly by the parent corporation. It is a distinction without
substance and requires corporations, holding companies, to go through
major restructurings to satisfy the requirements of section 355. There
is absolutely no substantive policy rationale for such a result. The
distinction is inappropriate and has been identified as such by both
the staff of the Joint Committee on Taxation and the Treasury
Department in 1999 and 2000. This legislation addresses that anomaly
and treats both situations equally.
The cost of this provision is minimal, at about $8 million a year by
the last revenue estimate from the staff of the Joint Committee on
Taxation. This provision is a small but significant step toward
simplification of the tax code, and I urge my colleagues on the Finance
Committee and in this body to act on this change one more time, and
hopefully for the last time.
Mr. BAUCUS. Mr. President, virtually everyone supports tax
simplification. But for some reason, it is awfully hard to accomplish.
Today, I am pleased to join my friend and colleague from Mississippi,
Senator Lott, in introducing tax legislation that is non-controversial
and a clear tax simplification measure. Further, the bill we are filing
today has been supported in the past by the Joint Tax Committee and the
U.S. Treasury.
Normally, corporations are taxed on distributions of property to
shareholders as if sold at fair market value. However, section 355 of
the tax code provides corporations with the flexibility to distribute
one or more of their businesses to their shareholders, such as in a
spin-off, without triggering tax consequences if the transaction meets
important requirements. Through this exception in section 355,
corporations may make strategic business decisions without imposing tax
burdens on their shareholders, but only if both the distributing and
distributed businesses continue as an active trade or business. The
regulatory structure that has evolved over the years under section 355
has created very different ``active trade or business'' tests depending
on whether the distributing corporation operates as a holding company
or whether it holds the business assets directly. There is no rationale
to support that distinction.
Both the staff of the Joint Tax Committee and the Clinton Treasury
Department recommended that the rules be conformed as a tax
simplification measure. The Senate has passed legislation similar to
what we are proposing today on three occasions. And, on one of those
occasions, it passed the House as well in legislation that was later
vetoed for other reasons. I have heard of no opposition to this change,
which would simply apply a ``look through'' rule for the ``active trade
or business'' test on an affiliated group level, so that parent holding
companies could count the active businesses of its subsidiaries. And it
would eliminate hours of wasted time and resources in tax planning
activities that serve no function other than to try and conform
corporate ownership structures to satisfy the literal language of
current tax requirements.
Again, I should emphasize that this proposal does not bring wholesale
change to section 355. Spin-off requirements dealing with the
continuity of historical shareholder interest, continuity of business
enterprises, business purpose, and absence of any device to distribute
earnings and profits all remain. With a cost of less than $10 million a
year, this is an affordable step we can take now to simplify the
Internal Revenue Code.
I am pleased to join with Senator Lott in working for passage of this
important simplification bill, and I urge my colleagues on the Finance
Committee and in the Senate give our bill every consideration.
______