[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.
                                 ______