April 17, 1997 Joint Introductory Statement of Senators Roth
and Moynihan
Several recent news reports describe corporate acquisition transactions in which one corporation
distributes the stock of one (or more) of its subsidiaries to its shareholders (in a so-called
"spin-off") and, pursuant to a pre-arranged plan, either the distributed subsidiary or the old parent
corporation is acquired by another, unrelated corporation. Often, the corporation that is to be
acquired borrows or assumes a large amount of debt incurred prior to the spin-off, while the
proceeds of such indebtedness are retained by the other corporation.
For Federal income tax purposes, the initial distribution generally is
tax-free pursuant to section 355 of the Internal Revenue Code and the subsequent acquisition is
tax-free pursuant to one of the various reorganization provisions described in section 368. Such
positions are consistent with the holding in the case of Commissioner v. Mary Archer W.
Morris
Trust, 367 F.2d 794 (4th Cir. 1966) and published IRS rulings.
Congress did not intend that section 355 apply to insulate these transactions from tax. Section 355
was intended to permit tax-free restructurings of several businesses among existing shareholders,
with limitations to prevent the bail-out of corporate earnings and profits to the shareholders as
capital gains. The recent transactions that raise concerns have very little to do with individual
shareholder tax planning. Rather, they are pre-arranged structures designed to avoid corporate
level gain recognition. In essence, these transactions resemble sales.
Today's introduced legislation is intended to treat transactions occurring after April 16, 1997, the
general effective date of the bill, as sales at the corporate level.
A technical explanation of the legislation is provided below. This legislation affects complex
transactions and additional or alternative legislative changes also may be appropriate. For example,
it may be appropriate to amend or repeal present law section 355(d), and to treat certain asset
acquisitions as stock acquisitions. Written comments on the issues raised by this bill are
welcome.
- Description of Proposal
- Acquisitions of distributing or controlled corporations pursuant to
plan
The proposal would adopt additional restrictions under section 355. Under the proposal, if
pursuant to a plan or arrangement in existence on the date of distribution, either the controlled or
distributing corporation is acquired, gain would be recognized by the other corporation as of the
date of the distribution.
Whether a corporation is acquired would be determined under rules similar to those of present-law
section 355(d), except that acquisitions would not be restricted to "purchase" transactions. Thus,
an acquisition would occur if a person (or persons acting in concert) acquired more than 50 percent
of the vote or value of the stock of the controlled or distributing corporation pursuant to a plan or
arrangement. For example, assume a corporation ("P") distributes the stock of its wholly-owned
subsidiary ("S") to its shareholders. If, pursuant to a plan or arrangement, either P or S is
acquired, the proposal would apply to require gain recognition by the corporation not acquired. It
is anticipated that certain asset acquisitions would be treated as stock acquisitions.
Acquisitions occurring within the four-year period beginning two years before the date of
distribution would be presumed to have occurred pursuant to a plan or arrangement. Taxpayers
could avoid gain recognition by showing that an acquisition occurring during this four-year period
was unrelated to the distribution.
In the case of an acquisition of the controlled corporation, the amount of gain recognized by the
distributing corporation would be the amount of gain that the distributing corporation would have
recognized had the stock of the controlled corporation been sold for fair market value on the date of
distribution. In the case of an acquisition of the distributing corporation, the amount of gain
recognized by the controlled corporation would be the amount of net gain that the distributing
corporation would have recognized had it sold its assets for fair market value immediately after the
distribution. This gain would be treated as long-term capital gain. No adjustment to the basis of
the stock or assets of either corporation would be allowed by reason of the recognition of the
gain.
The proposal would not apply to a distribution pursuant to a title 11 or similar case.
The Treasury Department would be authorized to prescribe regulations as necessary to carry out the
purposes of the proposal, including regulations to provide for the application of the proposal in the
case of multiple distributions.
- Treatment of distributions within affiliated
groups
Except as provided in Treasury regulations, section 355 would not apply to a distribution of stock
of one member of an affiliated group of corporations filing a consolidated return to another
member. In the case of a distribution of stock within an affiliated group, the Secretary of the
Treasury would be instructed to provide appropriate rules for the treatment of the distribution,
including rules governing adjustments to the adjusted basis of the stock and the earnings and
profits of the members of the group.
- Effective Date
The proposal would be effective for distributions after April 16, 1997, unless the distribution is:
(1) made pursuant to a written agreement with an acquirer which was (subject to customary
conditions) binding on or before such date and at all times thereafter; (2) described in a ruling
request that identifies the acquirer and is submitted to the IRS on or before such date; (3) described
in a Securities and Exchange Commission ("SEC") filing made on or before such date, to the
extent such filing was required to be made on account of the distribution and identifies the acquirer;
or (4) described in a public announcement that identifies the acquirer on or before such date. The
exceptions for written agreements, IRS ruling requests, SEC filings, and public announcements
would not apply to distributions of stock within a consolidated group of corporations.
April 18, 1997 Joint Statement Providing Clarification of Recently
Introduced Section 355 Legislation (H.R. 1365 and S. 612)
Congressman Bill Archer, Chairman
Senator William V. Roth, Vice Chairman
Senator Daniel Patrick Moynihan
Yesterday we introduced legislation (H.R. 1365 and S. 612) that would amend section 355 to
change the treatment of a distribution of stock of a subsidiary by a parent corporation, where either
the parent corporation or the subsidiary is acquired pursuant to a prearranged plan that includes the
distribution (i.e., the so-called "Morris Trust" transactions). The bills also provide that
section 355
would not apply to distributions within a consolidated group of corporations.
The bills generally would be effective for distributions occurring after April 16, 1997, with
transitional exceptions for distributions made pursuant to, or described in, certain binding written
agreements, ruling requests filed with the IRS, SEC filings made on account of the distribution,
and public announcements. It is intended that the bills would not apply
to an intragroup
distribution of stock that is an integral part of a transaction that is made pursuant to, or is described
in, a binding written agreement, IRS ruling request, SEC filing made on account of the transaction,
or a public announcement on or before April 16, 1997. We recognize drafting changes to the bills
may be required to achieve this intended result.
We also invite further comment as to the proper applicability of section 355 with respect to
intragroup distributions.
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