6. Treatment of certain corporate distributions (Sec. 6010(c) of the Bill, Sec. 1012 of the 1997 Act, and Secs. 355(e)(3)(A)(iv) and 358(c) of the Code)

Present Law

The 1997 Act (Sec. 1012(a)) requires a distributing corporation ("distributing") to recognize corporate level gain on the distribution of stock of a controlled corporation ("controlled") under section 355 of the Code if, pursuant to a plan or series of related transactions, one or more persons acquire a 50-percent or greater interest (defined as 50 percent or more of the voting power or value of the stock) of either the distributing or controlled corporation (Code Sec. 355(e)). Certain transactions are excepted from the definition of acquisition for this purpose, including, under section 355(e)(3)(A)(iv), the acquisition by a person of stock in a corporation if shareholders owning directly or indirectly stock possessing more than 50 percent of the voting power and more than 50 percent of the value of the stock in distributing or any controlled corporation before such acquisition own directly or indirectly stock possessing such vote and value in such distributing or controlled corporation after such acquisition.

In the case of a 50-percent or more acquisition of either the distributing corporation or the controlled corporation, the amount of gain recognized is the amount that the distributing corporation would have recognized had the stock of the controlled corporation been sold for fair market value on the date of the distribution. The Conference Report to the 1997 Act states that no adjustment to the basis of the stock or assets of either corporation is allowed by reason of the recognition of the gain.

The 1997 Act (Sec. 1012(b)(1)) also provides that, except as provided in regulations, section 355 shall not apply to the distribution of stock from one member of an affiliated group of corporations (as defined in section 1504(a)) to another member of such group (an intragroup spin off) if such distribution is part of a such a plan or series of related transactions pursuant to which one or more persons acquire stock representing a 50-percent or greater interest in a distributing or controlled corporation, determined after the application of the rules of section 355(e).

In addition, the 1997 Act (Sec. 1012(b)(2)) provides that in the case of any distribution of stock of one member of an affiliated group of corporations to another member under section 355, the Treasury Department has regulatory authority under section 358(g) to provide adjustments to the basis of any stock in a corporation which is a member of such group, to reflect appropriately the proper treatment of such distribution.

The 1997 Act (Sec. 1012(c)) also modified certain rules for determining control immediately after a distribution in the case of certain divisive transactions in which a controlled corporation is distributed and the transaction meets the requirements of section 355. in such cases, under section 351 and modified section 368(a)(2)(H) with respect to reorganizations under section 368(a)(1)(D), those shareholders receiving stock in the distributed corporation are treated as in control of the distributed corporation immediately after the distribution if they hold stock representing a greater than 50 percent interest in the vote and value of stock of the distributed corporation.

The effective date (Act section 1012(d)(1)) states that the forgoing provisions of the 1997 Act apply to distributions after April 16, 1997, pursuant to a plan (or series of related transactions) which involves an acquisition occurring after such date (unless certain transition provisions apply).

Explanation of Provision

Acquisition of a 50-percent or greater interest

The bill clarifies that the acquisitions described in Code section 355(e)(3)(A) are disregarded in determining whether there has been an acquisition of a 50-percent or greater interest in a corporation. However, other transactions that are part of a plan or series of related transactions could result in an acquisition of a 50-percent or greater interest.

In the case of acquisitions under section 355(e)(3)(A)(iv), the provision clarifies that the acquisition of stock in the distributing corporation or any controlled corporation is disregarded to the extent that the percentage of stock owned directly or indirectly in such corporation by each person owning stock in such corporation immediately before the acquisition does not decrease.

Example: Shareholder A owns 10 percent of the vote and value of the stock of corporation D (which owns all of corporation C). There are nine other equal shareholders of D. A also owns 100 percent of the vote and value of the stock of unrelated corporation P. D distributes C to all the shareholders of D. Thereafter, pursuant to a plan or series of related transactions, D (worth 100x) merges with corporation P (worth 900x). After the merger, each of the former shareholders of corporation D owns stock of the merged entity reflecting the vote and value attributable to that shareholder's respective 10 percent former stock ownership of D. Each of the former shareholders of D owns 1 percent of the stock of the merged corporation, except that shareholder A (who owned 100 percent of corporation P and 10 percent of corporation D before the merger) now owns 91 percent of the stock of the merged corporation. in determining whether a 50-percent or greater interest in D has been acquired, the interest of each of the continuing shareholders is disregarded only to the extent there has been no decrease in such shareholder's direct or indirect ownership. Thus, the 10 percent interest of A, and the 1 percent interest of each of the nine other former shareholder of D, is not counted. The remaining 81 percent ownership of the merged corporation, representing a decrease of nine percent in the interests of each of the nine former shareholders other than A, is counted in determining the extent of an acquisition. Therefore, a 50-percent or greater interest in D has been acquired.

Treasury regulatory authority

The bill also clarifies that the regulatory authority of the Treasury Department under section 358(c) applies to distributions after April 16, 1997, without regard to whether a distribution involves a plan (or series of related transactions) which involves an acquisition.
As stated in the Conference Report to the 1997 Act, with respect to the Treasury Department regulatory authority under section 358(c) as applied to intragroup spin-off transactions that are not part of a plan or series of related transactions that involve an acquisition of a 50-percent or greater interest under new section 355(f), it is expected that any Treasury regulations will be applied prospectively, except in cases to prevent abuse.

Section 351(c) and section 368(a)(2)(H) "control immediately after" requirement

In general, the 1997 Act modifications to the control immediately after requirement of Section 351(c) and section 368(a)(2)(H) were intended to minimize certain differences in the results of a transaction involving a contribution of assets to controlled corporation prior to a section 355 spin-off that could occur depending on whether the distributing or controlled corporation were acquired subsequent to the spin-off.

The bill clarifies that in the case of certain divisive transactions in which a corporation contributes assets to a controlled corporation and then distributes the stock of the controlled corporation in a transaction that meets the requirements of section 355 (or so much of section 356 as relates to section 355), solely for purposes of determining the tax treatment of the transfers of property to the controlled corporation by the distributing corporation, the fact that the shareholders of the distributing corporation dispose of part or all of the distributed stock shall not be taken into account for purposes of the control immediately after requirement of section 351(a) or 368(a)(1)(D). For purposes of determining the tax treatment of transfers of property to the controlled corporation by parties other than the distributing corporation, the disposition of part or all of the distributed stock continues to be taken into account, as under prior law, in determining whether the control immediately after requirement is satisfied.

Example 1: Distributing corporation D transfers appreciated business X to subsidiary C in exchange for 100 percent of C stock. D distributes its stock of C to D shareholders. As part of a plan or series of related transactions, C merges into unrelated acquiring corporation A, and the C shareholders receive 25 percent of the vote or value of A stock. If the requirements of section 355 are met with respect to the distribution, then the control immediately after requirement will be satisfied solely for purposes of determining the tax treatment of the transfers of property by D to C. Accordingly, the business X assets transferred to C and held by A after the merger will have a carryover basis from D. Section 355(e) will require D to recognize gain as if the C stock had been sold at fair market value.

Example 2: Distributing corporation D transfers appreciated business X to subsidiary C in exchange for 85 percent of C stock. Unrelated persons transfer appreciated assets to C in exchange for the remaining 15 percent of C stock. D distributes all its stock of C to D shareholders. As part of a plan or series of related transactions, C merges into acquiring corporation A; and the interests attributable to the D shareholders' receipt of C stock with respect to their D stock in the distribution represent 25 percent of the vote and value of A stock. If the requirements of section 355 are met with respect to the distribution, then the control immediately after requirement will be satisfied solely for purposes of determining the tax treatment of the transfers of property by D to C. Section 355(e) will require recognition of gain as if the C stock had been sold for fair market value. The business X assets transferred to C and held by A after the merger will have a carryover basis from D. The persons other than D who transferred assets to C for 15 percent of C stock will recognize gain on the appreciation in their assets transferred to C if the control immediately after requirement is not satisfied after taking into account any post-spin-off dispositions that would have been taken into account under prior law.

Example 3: The facts are the same as in example 2, except that the interests attributable to the D shareholders' receipt of C stock with respect to their D stock in the distribution represent 55 percent of the vote and value of A stock in the merger. If the requirements of section 355 are met with respect to the distribution, then the control immediately after requirement will be satisfied solely for purposes of determining the tax treatment of the transfers by D to C. The business X assets in C (and in A after the merger) will therefore have a carryover basis from D. Because the D shareholders retain more than 50 percent of the stock of A, section 355(e) will not apply. The persons other than D who transferred property for the 15 percent of C stock will recognize gain on the appreciation in their assets transferred to C if the control immediately after requirement is not satisfied after taking into account any post-spin-off dispositions that would have been taken into account under prior law.

Effective Date

The provision generally is effective for distributions after April 16, 1997.

7. Certain preferred stock treated as "boot"--statute of limitations (Sec. 6010(e)(2) of the Bill, Sec. 1014 of the 1997 Act, and Sec. 354(a) of the Code)

Present Law

Under the 1997 Act, certain preferred stock received in otherwise tax-free transactions is treated as "other property." Exchanges of stock in certain recapitalizations of family-owned corporations are excepted from this rule. A family-owned corporation is defined as any corporation if at least 50 percent of the total voting power and value of the stock of such corporation is owned by the same family for five years preceding the recapitalization. in addition, a recapitalization does not qualify for the exception if the same family does not own 50 percent of the total voting power and value of the stock throughout the three-year period following the recapitalization.

Explanation of Provision

The bill provides that the statutory period for the assessment of any deficiency attributable to a corporation failing to be a family-owned corporation shall not expire before the expiration of three years after the date the Secretary of the Treasury is notified by the corporation (in such manner as the Secretary may prescribe) of such failure, and such deficiency may be assessed before the expiration of such three-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

Effective Date

The provision applies to transactions after June 8, 1997.

8. Certain preferred stock treated as "boot"--treatment of transferor (Sec. 6010(e)(1) of the Bill, Sec. 1014 of the 1997 Act, and Sec. 351(g) of the Code)

Present Law

The 1997 Act amended section 351 of the Code to provide that in the case of a person who transfers property to a controlled corporation and receives nonqualified preferred stock, section 351(b) will apply to such person. Section 351(b) provides that if section 351(a) of the Code would apply to an exchange but for the fact that there is received, in addition to stock permitted to be received under section 351(a), other property or money, then gain but no loss to such recipient shall be recognized. The Conference Report to the 1997 Act states that if nonqualified preferred stock is received, gain but not loss shall be recognized.

Explanation of Provision

The bill clarifies that section 351(b) applies to a transferor who transfers property in a section 351 exchange and receives nonqualified preferred stock in addition to stock that is not treated as "other property" under that section. Thus, if a transferor received only nonqualified preferred stock but the transaction in the aggregate otherwise qualified as a section 351 exchange, such a transferor would recognize loss and the basis of the nonqualified preferred stock and of the property in the hands of the transferee corporation would reflect the transaction in the same manner as if that particular transferor had received solely "other property" of any other type. As under the 1997 Act, the nonqualified preferred stock continues to be treated as stock received by a transferor for purposes of qualification of a transaction under section 351(a), unless and until regulations may provide otherwise.

Effective Date

The provision applies to transactions after June 8, 1997.

9. Application of section 304 to certain international transactions (Sec. 6010(d) of the Bill, Sec. 1013 of the 1997 Act, and Sec. 304 of the Code)

Present Law

Under section 304, if one corporation purchases stock of a related corporation, the transaction generally is recharacterized as a redemption. Under section 304(a), as amended by the 1997 Act, to the extent that a section 304 transaction is treated as a distribution under section 301, the transferor and the acquiring corporation are treated as if (1) the transferor had transferred the stock involved in the transaction to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which section 351(a) applies, and (2) the acquiring corporation had then redeemed the stock it is treated as having issued. in the case of a section 304 transaction, both the amount which is a dividend and the source of such dividend is determined as if the property were distributed by the acquiring corporation to the extent of its earnings and profits and then by the issuing corporation to the extent of its earnings and profits (Sec. 304(b)(2)). Section 304(b)(5), as added by the 1997 Act, provides special rules that apply if the acquiring corporation in a section 304 transaction is a foreign corporation. Under section 304(b)(5), the earnings and profits of the acquiring corporation that are taken into account are limited to the portion of such earnings and profits that (1) is attributable to stock of such acquiring corporation held by a corporation or individual who is the transferor (or a person related thereto) and who is a U.S. shareholder (within the meaning of section 951(b)) of such corporation and (2) was accumulated during periods in which such stock was owned by such person while such acquiring corporation was a controlled foreign corporation. For purposes of this rule, except as otherwise provided by the Secretary of the Treasury, the rules of section 1248(d) (relating to certain exclusions from earnings and profits) apply. The Secretary is to prescribe regulations as appropriate, including regulations determining the earnings and profits that are attributable to particular stock of the acquiring corporation.

For foreign tax credit purposes, under section 902, a U.S. corporation that receives a dividend from a foreign corporation in which it owns at least 10 percent of the voting stock is treated as if it had paid the foreign income taxes paid by the foreign corporation which are attributable to such dividend. The Internal Revenue Service issued rulings providing that a domestic corporation that is a transferor in a section 304 transaction may compute foreign taxes deemed paid under section 902 on the dividends from both a foreign acquiring corporation and a foreign issuing corporation. Rev. Rul. 92-86, 1992-2 C.B. 199; Rev. Rul. 91-5, 1991-1 C.B. 114. Both rulings involve section 304 transactions in which both the domestic transferor and the foreign acquiring corporation are wholly owned by a domestic parent corporation.

Explanation of Provision

Under the provision, in the case of a section 304 transaction in which the acquiring corporation or the issuing corporation is a foreign corporation, the Secretary of the Treasury is to prescribe regulations providing rules to prevent the multiple inclusion of an item of income and to provide appropriate basis adjustments, including rules modifying the application of sections 959 and 961 in the case of a section 304 transaction. It is expected that such regulations will provide for an exclusion from income for distributions from earnings and profits of the acquiring corporation and the issuing corporation that represent previously taxed income under subpart F. It further is expected that such regulations will provide for appropriate adjustments to the basis of stock held by the corporation treated as receiving the distribution or by the corporation that had the prior inclusion with respect to the previously taxed income. No inference is intended regarding the treatment of previously taxed income in a section 304 transaction under present law. The 1997 Act amendments to section 304, including the modifications under this provision, are not intended to change the foreign tax credit results reached in Rev. Rul. 92-86 and 91-5.

The provision also eliminates the cross-reference to the rules of section 1248(d) for purposes of determining the earnings and profits to be taken into account under section 304(b)(5).

Effective Date

The provision generally is effective for distributions or acquisitions after June 8, 1997.

10. Establish IRS continuous levy and improve debt collection (Sec. 6010(f) of the bill, Secs. 1024, 1025, and 1026 of the 1997 Act, and Secs. 6331 and 6334 of the Code)

Present Law

If any person is liable for any internal revenue tax and does not pay it within 10 days after notice and demand by the IRS, the IRS may then collect the tax by levy upon all property and rights to property belonging to the person, unless there is an explicit statutory restriction on doing so. A levy is the seizure of the person's property or rights to property. A levy on salary and wages is continuous from the date it is first made until the date it is fully paid or becomes unenforceable.

The 1997 Act provides that a continuous levy is also applicable to non-means tested recurring Federal payments and specified wage replacement payments.

Explanation of Provision

The provision clarifies that the IRS must approve the use of a continuous levy before it may take effect.

Effective Date

The provision is effective for levies issued after the date of enactment of the 1997 Act (August 5, 1997).

11. Clarification regarding aviation gasoline excise tax (Sec. 6010(g) of the Bill, Sec. 1031 of the 1997 Act, and Sec. 6421 of the Code)

Present Law

Before enactment of the 1997 Act, aviation gasoline was subject to a 19.3-cents-per-gallon tax rate, with 15 cents per gallon being deposited in the Airport and Airway Trust Fund and 4.3 cents per gallon being retained in the General Fund. The 1997 Act extended the 15-cents-per gallon rate for 10 years, through September 30, 2007, and expanded deposits to the Trust Fund to include revenues from the 4.3-cents-per-gallon rate. The tax does not apply to fuel used in flight segments outside the United States or to flight segments from the United States to foreign countries.

Explanation of Provision

The bill clarifies the application of the gasoline tax refund provisions to aviation gasoline used in flight segments outside the United States and to flight segments from the United States to foreign countries.

Effective Date

The provision is effective as if included in the 1997 Act.

12. Clarification of requirement that registered fuel terminals offer dyed fuel (Sec. 6010(h) of the Bill, Sec. 1032 of the 1997 Act and Sec. 4101 of the Code)

Present Law

The 1997 Act provides that fuel terminals are eligible to register to handle non-tax-paid diesel fuel and kerosene only if the terminal operator offers both undyed (taxable) and dyed (nontaxable) fuel.

Explanation of Provision

The bill clarifies that the Code requires terminals eligible to handle non-tax-paid diesel to offer dyed diesel fuel and terminals eligible to handle non-tax-paid kerosene (including diesel fuel #1 and kerosene-type aviation fuel) to offer dyed kerosene. The bill does not require that a terminal offer for sale kerosene as a condition of receiving diesel fuel on a non-tax-paid basis. Similarly, the proposal does not require terminals that sell only kerosene to offer diesel fuel as a condition of receiving non-tax-paid kerosene.

Effective Date

The provision is effective as if included in the 1997 Act.

13. Clarification of treatment of prepaid telephone cards (Sec. 6010(i) of the Bill, Sec. 1034 of the 1997 Act, and Sec. 4251 of the Code)

Present Law

A 3-percent excise tax is imposed on amounts paid for local and toll (long-distance) telephone service and teletypewriter exchange service. The tax is collected by the provider of the service from the consumer. in the case of so-called "prepaid telephone cards", the tax is treated as paid when the card is transferred by any telecommunications carrier to any person who is not a telecommunications carrier.

A "prepaid telephone card" is defined as any card or other similar arrangement which permits its holder to obtain communications services and pay for such services in advance.

Explanation of Provision

The bill inserts the word "any" prior to "other similar arrangement" to clarify that payment to a telecommunications carrier from a third party such as a joint venture credit card company is treated as payment made by the holder of the credit card to obtain communication services and the tax is treated as paid in a manner similar to that applied to prepaid telephone cards. The tax applies to payments if the rights to telephone service for which payments are made can be used in whole or in part for telephone service that, if purchased directly, would be subject to the 3-percent excise tax on telephone service. Also, the tax applies without regard to whether telephone service ultimately is provided pursuant to the transferred rights.

Effective Date

The provision is effective as if included in the 1997 Act.

14. Modify UBIT rules applicable to second-tier subsidiaries (Sec. 6010(j) of the bill, Sec. 1041 of the 1997 Act, and Sec. 512(b)(13) of the Code)

Present Law

In general, interest, rents, royalties and annuities are excluded from the unrelated business income ("UBI") of tax-exempt organizations. However, section 512(b)(13) treats otherwise excluded rent, royalty, annuity, and interest income as UBI if such income is received from a taxable or tax-exempt subsidiary that is controlled by the parent tax-exempt organization.

Under the provision, interest, rent, annuity, or royalty payments made by a controlled entity to a tax-exempt organization are subject to the unrelated business income tax to the extent the payment reduces the net unrelated income (or increases any net unrelated loss) of the controlled entity. in this regard, section 512(b)(13)(B)(i)(I) cross references a non-existent Code section.

The provision generally applies to taxable years beginning after the date of enactment. However, the provision does not apply to payments made during the first two taxable years beginning on or after the date of enactment if such payments are made pursuant to a binding written contract in effect as of June 8, 1997, and at all times thereafter before such payment.

Explanation of Provision

The bill clarifies that rent, royalty, annuity, and interest income that would otherwise be excluded from UBI is included in UBI under section 512(b)(13) if such income is received or accrued from a taxable or tax-exempt subsidiary that is controlled by the parent tax-exempt organization. The bill further clarifies that the provision does not apply to any payment received or accrued during the first two taxable years beginning on or after the date of enactment if such payment is received or accrued pursuant to a binding written contract in effect on June 8, 1997, and at all times thereafter before such payment (but not pursuant to any contract provision that permits optional accelerated payments).

Effective Date

The provision is effective as of August 5, 1997, the date of enactment of the 1997 Act.

15. Application of foreign tax credit holding period rule to RICs (Sec. 6010(k) of the bill, Sec. 1053 of the 1997 Act, and Secs. 853 and 901 of the Code)

Present Law

Section 901(k), as added by the 1997 Act, generally imposes a holding period requirement for claiming foreign tax credits with respect to dividends. Under section 901(k), foreign tax credits with respect to a dividend from a foreign corporation or a regulated investment company (a "RIC") are disallowed if the shareholder has not held the stock for more than 15 days in the case of common stock or more than 45 days in the case of preferred stock. This disallowance applies both to foreign tax credits for foreign withholding taxes that are paid on the dividend where the dividend-paying stock is not held for the required period and to indirect foreign tax credits for taxes paid by a lower-tier foreign corporation or a RIC where any of the stock in the required chain of ownership is not held for the required period. Foreign taxes for which credits are disallowed under section 901(k) may be deducted.

Under section 853, a RIC may elect to flow through to its shareholders the foreign tax credits for foreign taxes paid by the RIC. Under this election, the RIC is not entitled to a deduction or credit for foreign taxes paid; the shareholders of an electing RIC are treated as having paid their proportionate shares of the foreign taxes paid by the RIC. Accordingly, foreign tax credits are claimed at the shareholder level and not at the RIC level.

Explanation of Provision

Under the provision, the flow-through election of section 853 does not apply to any foreign taxes paid by the RIC for which a credit is disallowed under section 901(k) because the RIC did not satisfy the applicable holding period. Accordingly, such taxes are deductible at the RIC level. The election of section 853 applies only to foreign taxes with respect to which the RIC has satisfied any applicable holding period requirement.

Effective Date

The provision is effective for dividends paid or accrued more than 30 days after the date of enactment of the 1997 Act.