Amends the Internal Revenue Code to revise rules relating to the recognition of gain from distributions by corporations of stocks or securities in connection with certain leveraged transactions.
[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4187 Introduced in House (IH)]
109th CONGRESS
1st Session
H. R. 4187
To amend the Internal Revenue Code of 1986 to limit the recognition of
gain under section 355(e) of such Code to certain leveraged spin-merger
transactions.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
November 1, 2005
Mr. Cantor introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to limit the recognition of
gain under section 355(e) of such Code to certain leveraged spin-merger
transactions.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. AMENDMENT OF SECTION 355(E).
(a) In General.--Subsection (e) of section 355 of the Internal
Revenue Code of 1986 (relating to recognition of gain on certain
distributions of stock or securities in connection with acquisitions)
is amended to read as follows:
``(e) Recognition of Gain on Certain Distributions of Stock or
Securities in Connection With Certain Leveraged Spin-Merger
Transactions.--
``(1) In general.--If there is a distribution to which this
subsection applies, gain shall be recognized immediately prior
to the distribution to the extent of the lesser of--
``(A) the excess relative leverage at the time of
the distribution, and
``(B) the gain realized as a result of the
distribution.
``(2) Distributions to which subsection applies.--This
subsection shall apply to any distribution that would otherwise
qualify under subsection 355(a) if--
``(A) there is a prearranged change in control,
``(B) the change in control company is highly
leveraged immediately after the distribution
(determined without regard to any post-distribution
transactions), and
``(C) the change in control company has excess
relative leverage.
``(3) Definition of prearranged change in control.--
``(A) In general.--For purposes of this subsection,
a prearranged change in control shall be deemed to
occur if the distribution is part of a plan (or series
of related transactions) pursuant to which 1 or more
persons acquire directly or indirectly stock
representing a 50-percent or greater interest in the
distributing corporation or any controlled corporation.
``(B) Plan presumed to exist in certain cases.--If
1 or more persons acquire directly or indirectly stock
representing a 50-percent or greater interest in the
distributing corporation or any controlled corporation
during the 4-year period beginning on the date that is
2 years before the date of the distribution, such
acquisition shall be treated as pursuant to a plan
described in subparagraph (A) unless it is established
that the distribution and the acquisition are not
pursuant to a plan or series of related transactions.
``(C) Certain plans disregarded.--A plan or series
of related transactions shall not be treated as
described in subparagraph (A) if, immediately after the
completion of such plan or series of transactions, the
distributing corporation and all controlled
corporations are members of a single affiliated group
(as defined in section 1504 without regard to
subsection (b) thereof).
``(D) Certain acquisitions not taken into
account.--Except as provided in regulations, the
following acquisitions shall not be taken into account
in applying subparagraph (A):
``(i) The acquisition of stock in any
controlled corporation by the distributing
corporation.
``(ii) The acquisition by a person of stock
in any controlled corporation by reason of
holding stock or securities in the distributing
corporation.
``(iii) The acquisition by a person of
stock in any successor corporation of the
distributing corporation or any controlled
corporation by reason of holding stock or
securities of such distributing or controlled
corporation.
``(iv) The acquisition of stock in the
distributing corporation or any controlled
corporation 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.
This subparagraph shall not apply to any acquisition if
the stock held before the acquisition was acquired
pursuant to a plan (or series of related transactions)
described in subparagraph (A).
``(E) Asset acquisitions.--Except as provided in
regulations, for purposes of this subsection, if the
assets of the distributing corporation or any
controlled corporation are acquired by a successor
corporation in a transaction described in subparagraph
(A), (C) or (D) of section 368(a)(1) or any other
transaction specified in regulations by the Secretary,
the shareholders (immediately before the acquisition)
of the corporation acquiring such assets shall be
treated as acquiring stock in the corporation from
which the assets were acquired.
``(F) Definitions and special rules.--For purposes
of this subsection--
``(i) Change in control company.--The term
`change in control company' means, with respect
to any prearranged change in control, the
distributing or controlled corporation (or
both) that undergoes such change in control.
``(ii) 50-percent or greater interest.--The
term `50-percent or greater interest' has the
meaning given such term by subsection (d)(4).
``(iii) Distributions in title 11 or
similar case.--Paragraph (1) shall not apply to
any distribution made in a title 11 or similar
case (as defined in section 368(a)(3)).
``(iv) Aggregation and attribution rules.--
``(I) Aggregation.--The rules of
paragraph (7)(A) of subsection (d)
shall apply.
``(II) Attribution.--Section
318(a)(2) shall apply in determining
whether a person holds stock or
securities in any corporation. Except
as provided in regulations, section
318(a)(2)(C) shall be applied without
regard to the phrase `50 percent or
more in value' for purposes of the
preceding sentence.
``(v) Successors and predecessors.--Any
reference to a controlled corporation or a
distributing corporation shall include a
reference to any predecessor or successor of
such corporation.
``(4) Definition of highly leveraged.--For purposes of this
subsection--
``(A) In general.--A change in control company
shall be considered to be highly leveraged for purpose
of this subsection if its ratio of debt to equity
exceeds 2 to 1.
``(B) Ratio of debt to equity.--The term `ratio of
debt to equity' means the ratio which the total
indebtedness of the company bears to the value of the
company's equity.
``(C) When to measure ratio of debt to equity.--The
ratio of debt to equity of the distributing and
controlled corporations shall be measured immediately
following the distribution, but prior to any
transactions occurring after the distribution involving
the distributing or controlled corporations.
``(D) Indebtedness.--Indebtedness--
``(i) shall not include indebtedness
between corporations that are members of an
affiliated group immediately after the
distribution,
``(ii) shall not include any liabilities
described in section 357(c)(3),
``(iii) shall be computed with reference to
the adjusted issue price (as defined in section
1272(a)(4)), and
``(iv) shall include stock described in
section 1504(a)(4).
``(E) Value of company's equity.--The value of the
company's equity shall be based on the fair market
value of all the company's equity immediately after the
distribution excluding the value of any equity
described subparagraph (D)(iv).
``(F) Affiliated groups.--In any case in which the
issuing corporation of any indebtedness is a member of
an affiliated group (within the meaning of section
1504(a)) which includes the distributing or controlled
corporation, the calculation of the debt to equity
ratio for purposes of this subsection shall be
determined, pursuant to regulations prescribed by the
Secretary, by treating all the members of the
affiliated group in the aggregate as the issuing
corporation of such indebtedness.
``(G) Special rules for banks, lending or finance
companies.--With respect to any corporation which is a
bank (as defined in section 581) or primarily engaged
in a lending or finance business, in determining the
debt to equity ratio of such corporation (or of the
affiliated group of which such corporation is a member)
for purposes of this subsection, the total indebtedness
of such corporation shall be reduced by an amount equal
to the total indebtedness owed to such corporation
which arises out of the banking business of such
corporation, or out of the lending or finance business
of such corporation, as the case may be.
``(H) Outside leverage test.--If ratio of debt to
equity of the change in control company equals or
exceeds 6 to 1 and paragraph (2)(A) is met with respect
to a distribution, then--
``(i) the requirements of subparagraphs (B)
and (C) of paragraph (2) shall be treated as
met with respect to such distribution and
``(ii) the gain realized as a result of the
distribution shall be recognized
notwithstanding paragraph (1).
``(5) Definition of excess relative leverage.--For purposes
of this subsection--
``(A) In general.--The term `excess relative
leverage' means the excess, if any, of--
``(i) the actual indebtedness of the change
in control company, over
``(ii) the maximum permitted indebtedness
of the change in control company.
``(B) Maximum permitted indebtedness.--The maximum
permitted indebtedness of a change in control company
equals the greater of--
``(i) the amount of indebtedness that would
result in the change in control company having
a debt to equity ratio of 2.0, and
``(ii)(I) if the change in control company
is the controlled company in the distribution,
the amount of indebtedness that would result in
the controlled corporation having a debt to
equity ratio that equals the sum of the debt to
equity ratio of the distributing corporation
plus 0.25, or
``(II) if the change in control company is
the distributing company in the distribution,
the amount of indebtedness that would result in
the distributing corporation having a debt to
equity ratio that equals the sum the debt to
equity ratio of the controlled corporation plus
0.25.
To the extent the distribution involves more than one
controlled corporation, the debt to equity ratio of the
controlled corporation for purposes of the preceding
sentence shall be determined by calculating aggregate
indebtedness and equity value of all the controlled
corporations.
``(6) Gain realized as result of distribution.--For
purposes of this subsection, the term `gain realized as a
result of the distribution' means the excess (if any) of--
``(A) the value of the controlled corporation's
stock distributed pursuant to the distribution, over
``(B) the distributing corporation's tax basis in
the controlled corporation's stock distributed pursuant
to the distribution.
``(7) Cross-reference to section 362 regarding basis step-
up in connection with distributions to which this subsection
applies.--To the extent gain is recognized pursuant to this
subsection, there shall be a corresponding basis step-up in the
assets of the change in control company with excess relative
leverage under section 362(f).
``(8) Coordination with subsection (d).--This subsection
shall not apply to any distribution to which subsection (d)
applies.
``(9) Certain capital contributions not taken into
account.--
``(A) In general.--Any equity capital received by a
change in control company at the time of or prior to a
distribution that is part of a plan a principal purpose
of which is to avoid or reduce the gain that would
otherwise be recognized pursuant to this subsection
shall not be taken into account for purposes of
calculating the debt to equity ratio and excess
relative leverage of such change in control company.
``(B) Certain contributions presumed to be part of
plan.--For purposes of subparagraph (A), any capital
contribution received by the change in control company
during the 12 month period ending on the date of the
distribution shall be treated as pursuant to a plan
described in subparagraph unless it is established that
none of the principal purposes of the capital
contribution was to avoid or reduce the gain that would
otherwise have to be recognized pursuant to this
subsection.
``(10) Statute of limitations.--If there is a distribution
to which paragraph (1) applies--
``(A) the statutory period for the assessment of
any deficiency attributable to any part of the gain
recognized under this subsection by reason of such
distribution shall not expire before the expiration of
3 years from the date the Secretary is notified by the
taxpayer (in such manner as the Secretary may by
regulations prescribe) that such distribution occurred,
and
``(B) such deficiency may be assessed before the
expiration of such 3-year period notwithstanding the
provisions of any other law or rule of law which would
otherwise prevent such assessment.
``(11) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this subsection, including regulations--
``(A) preventing taxpayers from circumventing the
purpose of this subsection through distributions of
multiple controlled corporations, the use of
unaffiliated companies, capital contributions prior to
the distribution, or the use of strategies that attempt
to distort the debt to equity ratio calculations in a
manner inconsistent with the purpose of this
subsection, including, for example, transitory changes
in capital structure entered into for the principal
purpose of avoiding application of the debt to equity
ratio calculations which have effects inconsistent with
the purposes of section 355(e),
``(B) providing for the application of this
subsection where there is more than 1 controlled
corporation, and
``(C) providing for the application of rules
similar to the rules of subsection (d)(6) where
appropriate for the purposes of paragraph (3)(A).''.
(b) Conforming Amendment.--Subsection (f) of section 362 of such
Code is amended to read as follows:
``(f) Basis of Assets in Connection With Distribution to Which
Section 355(e) Applies.--In the case of a distribution to which section
355(e) applies, the basis of the assets of the change in control
company (as defined in such section) and members of its affiliated
group (other than stock in any member of the acquired group) shall be
increased by the amount of the gain recognized pursuant to section
355(e)(1) and such increase shall be allocated among such assets in a
manner that reflects the relative amounts by which the fair market
values of such assets exceed their respective adjusted bases. The
Secretary shall prescribe regulations providing for corresponding
adjustments in the basis of stock of members of the members of the
affiliate group which includes the change in control company.''.
(c) Effective Date.--The amendments made by this section shall to--
(1) any distribution completed after the date of the
enactment of this Act, and
(2) any distribution completed on or before such date to
the extent any transaction completed on or after such date
results in a prearranged change in control (as defined in
section 355(e) of the Internal Revenue Code of 1986, as amended
by this section).
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
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