DISTRIBUTIONS ON CERTAIN PREFERRED STOCK TREATED AS EXTRAORDINARY DIVIDENDS.

SEC. 7206. DISTRIBUTIONS ON CERTAIN PREFERRED STOCK TREATED AS EXTRAORDINARY DIVIDENDS. (a) General Rule.—Section 1059 (relating to corporate shareholder’s basis in stock reduced by nontaxed portion of extraordinary dividends) is amended by striking subsection (f) and inserting the following: “(f) Treatment of Dividends on Certain Preferred Stock.— “(1) In general.—Any dividend with respect to disqualified preferred stock shall be treated as an extraordinary dividend to which paragraphs (1) and (2) of subsection (a) apply without regard to the period the taxpayer held the stock. “(2) Disqualified preferred stock.—For purposes of this subsection, the term ‘disqualified preferred stock’ means any stock which is preferred as to dividends if— “(A) when issued, such stock has a dividend rate which declines (or can reasonably be expected to decline) in the future, “(B) the issue price of such stock exceeds its liquidation rights or its stated redemption price, or “(C) such stock is otherwise structured— “(i) to avoid the other provisions of this section, and “(ii) to enable corporate shareholders to reduce tax through a combination of dividend received deductions and loss on the disposition of the stock. 103 STAT. 2337 “(g) Regulations.—The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this section, including regulations— “(1) providing for the application of this section in the case of stock dividends, stock splits, reorganizations, and other similar transactions and in the case of stock held by pass-thru entities, and “(2) providing that the rules of subsection (0 shall apply in the case of stock which is not preferred as to dividends in cases where stock is structured to avoid the purposes of this section.” (b) Effective Date.— (1) In general.—Except as provided in paragraph (2), the amendment made by subsection (a) shall apply to stock issued after July 10, 1989, in taxable years ending after such date. (2) Binding contract.—The amendment made by subsection (a) shall not apply to any stock issued pursuant to a written binding contract in effect on July 10, 1989, and at all times thereafter before the stock is issued.