RECOGNITION OF GAIN BY DISTRIBUTING CORPORATION IN CERTAIN SECTION 355 TRANSACTIONS.

SEC. 11321. RECOGNITION OF GAIN BY DISTRIBUTING CORPORATION IN CERTAIN SECTION 355 TRANSACTIONS. (a) General Rule.— Section 355 (relating to distribution of stock and securities of a controlled corporation) is amended by striking subsection (c) and inserting the following new subsections: “(c) Taxability of Corporation on Distribution.— “(1) In general.— Except as provided in paragraph (2), no gain or loss shall be recognized to a corporation on any distribution to which this section (or so much of section 366 as relates to this section) applies and which is not in pursuance of a plan of reorganization. “(2) Distribution of appreciated property.— “(A) In general.— If— “(i) in a distribution referred to in paragraph (1), the corporation distributes property other than qualified property, and “(ii) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value. “(B) Qualified property.— For purposes of subparagraph (A), the term ‘qualified property’ means any stock or securities in the controlled corporation. “(C) Treatment of liabilities.— If any property distributed in the distribution referred to in paragraph (I) is subject to a liability or the shareholder assumes a liability of the distributing corporation in connection with the distribution, then, for purposes of subparagraph (A), the fair market value of such property shall be treated as not less than the amount of such liability. “(3) Coordination with sections 311 and 336(a).— Sections 311 and 336(a) shall not apply to any distribution referred to in paragraph (1). “(d) Recognition of Gain on Certain Distributions of Stock or Securities in Controlled Corporation.— 104 STAT. 1388–461 “(1) In general.— In the case of a disqualified distribution, any stock or securities in the controlled corporation shall not be treated as qualified property for purposes of subsection (c)(2) of this section or section 361(c)(2). “(2) Disqualified distribution.— For purposes of this subsection, the term ‘disqualified distribution’ means any distribution to which this section (or so much of section 356 as relates to this section) applies if, immediately after the distribution— “(A) any person holds disqualified stock in the distributing corporation which constitutes a 50-percent or greater interest in such corporation, or “(B) any person holds disqualified stock in the controlled corporation (or, if stock of more than 1 controlled corporation is distributed, in any controlled corporation) which constitutes a 50-percent or greater interest in such corporation. “(3) Disqualified stock.— For purposes of this subsection, the term ‘disqualified stock’ means— “(A) any stock in the distributing corporation acquired by purchase after October 9, 1990, and during the 5-year period ending on the date of the distribution, and “(B) any stock in any controlled corporation— “(i) acquired by purchase after October 9, 1990, and during the 5-year period ending on the date of the distribution, or “(ii) received in the distribution to the extent attributable to distributions on— “(I) stock described in subparagraph (A), or “(II) any securities in the distributing corporation acquired by purchase after October 9, 1990, and during the 5-year period ending on the date of the distribution. “(4) 50-percent or greater interest.— For purposes of this subsection, the term ‘50-percent or greater interest’ means stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock. “(5) Purchase.— For purposes of this subsection— “(A) In general.— Except as otherwise provided in this paragraph, the term ‘purchase’ means any acquisition but only if— “(i) the basis of the property acquired in the hands of the acquirer is not determined (I) in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or (II) under section 1014(a), and “(ii) the property is not acquired in an exchange to which section 351, 354, 355, or 356 applies. “(B) Certain section 351 exchanges treated as purchases.— The term ‘purchase’ includes any acquisition of property in an exchange to which section 351 applies to the extent such property is acquired in exchange for— “(i) any cash or cash item, “(ii) any marketable stock or security, or “(iii) any debt of the transferor. “(C) Carryover basis transactions.— If— 104 STAT. 1388–462 “(i) any person acquires property from another person who acquired such property by purchase (as determined under this paragraph with regard to this subparagraph), and “(ii) the adjusted basis of such property in the hands of such acquirer is determined in whole or in part by reference to the adjusted basis of such property in the hands of such other person, such acquirer shall be treated as having acquired such property by purchase on the date it was so acquired by such other person. “(6) Special rule where substantial diminution of risk.— “(A) In general.— If this paragraph applies to any stock or securities for any period, the running of any 5-year period set forth in subparagraph (A) or (B) of paragraph (3) (whichever applies) shall be suspended during such period. “(B) Property to which suspension applies.— This paragraph applies to any stock or securities for any period during which the holder’s risk of loss with respect to such stock or securities, or with respect to any portion of the activities of the corporation, is (directly or indirectly) substantially diminished by— “(i) an option, “(ii) a short sale, “(iii) any special class of stock, or “(iv) any other device or transaction. “(7) Aggregation rules.— “(A) In general.— For purposes of this subsection, a person and all persons related to such person (within the meaning of 267(b) or 707(b)(D) shall be treated as one person. “(B) Persons acting pursuant to plans or arrangements.— If two or more persons act pursuant to a plan or arrangement with respect to acquisitions of stock or securities in the distributing corporation or controlled corporation, such persons shall be treated as one person for purposes of this subsection. “(8) Attribution from entities.— “(A) In general.— Paragraph (2) of section 318(a) shall apply in determining whether a person holds stock or securities in any corporation (determined by substituting ‘10 percent’ for ‘50 percent’ in subparagraph (C) of such paragraph (2) and by treating any reference to stock as including a reference to securities). “(B) Deemed purchase rule.— If— “(i) any person acquires by purchase an interest in any entity, and “(ii) such person is treated under subparagraph (A) as holding any stock or securities by reason of holding such interest, such stock or securities shall be treated as acquired by purchase by such person on the later of the date of the purchase of the interest in such entity or the date such stock or securities are acquired by purchase by such entity. “(9) Regulations.— The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including— 104 STAT. 1388–463 “(A) regulations to prevent the avoidance of the purposes of this subsection through the use of related persons, intermediaries, pass-thru entities, options, or other arrangements, and “(B) regulations modifying the definition of the term ‘purchase.” (b) Technical Amendment.— Subsection (c) of section 361 is amended by adding at the end thereof the following new paragraph: “(5) Cross Reference.— “For provision providing for recognition of gain in certain distributions, see section 355(d).” (c) Effective Date.— (1) In general.— Except as otherwise provided in this subsection, the amendments made by this section shall apply to distributions after October 9, 1990. (2) Binding contract exception.— The amendments made by this section shall not apply to any distribution pursuant to a written binding contract in effect on October 9, 1990, and at all times thereafter before such distribution. (3) Transitional rules.— For purposes of subparagraphs (A) and (B) of section 355(d)(3) of the Internal Revenue Code of 1986 (as amended by subsection (a)), an acquisition shall be treated as occurring on or before October 9, 1990, if— (A) such acquisition is pursuant to a written binding contract in effect on October 9, 1990, and at all times thereafter before such acquisition, (B) such acquisition is pursuant to a transaction which was described in documents filed with the Securities and Exchange Commission on or before October 9, 1990, or (C) such acquisition is pursuant to a transaction— (i) the material terms of which were described in a written public announcement on or before October 9, 1990, (ii) which was the subject of a prior filing with the Securities and Exchange Commission, and (iii) which is the subject of a subsequent filing with the Securities and Exchange Commission before January 1, 1991.