CERTAIN PREFERRED STOCK TREATED AS BOOT.

SEC. 1014. CERTAIN PREFERRED STOCK TREATED AS BOOT. (a) Section 351.—Section 351 (relating to transfer to corporation controlled by transferor) is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection: “(g) Nonqualified Preferred Stock Not Treated as Stock.— “(1) In general.—In the case of a person who transfers property to a corporation and receives nonqualified preferred stock— “(A) subsection (a) shall not apply to such transferor, “(B) subsection (b) shall apply to such transferor, and “(C) such nonqualified preferred stock shall be treated as other property for purposes of applying subsection (b). “(2) Nonqualified preferred stock.—For purposes of paragraph (1)— “(A) In general.—The term ‘nonqualified preferred stock’ means preferred stock if— “(i) the holder of such stock has the right to require the issuer or a related person to redeem or purchase the stock, “(ii) the issuer or a related person is required to redeem or purchase such stock, “(iii) the issuer or a related person has the right to redeem or purchase the stock and, as of the issue date, it is more likely than not that such right will be exercised, or “(iv) the dividend rate on such stock varies in whole or in part (directly or indirectly) with reference to interest rates, commodity prices, or other similar indices. “(B) Limitations.—Clauses (i), (ii), and (iii) of subparagraph (A) shall apply only if the right or obligation referred to therein may be exercised within the 20-year period beginning on the issue date of such stock and such right or obligation is not subject to a contingency which, as of the issue date, makes remote the likelihood of the redemption or purchase. “(C) Exceptions for certain rights or obligations.— “(i) In general.—A right or obligation shall not be treated as described in clause (i), (ii), or (iii) of subparagraph (A) if— “(I) it may be exercised only upon the death, disability, or mental incompetency of the holder, or111 STAT. 920 “(II) in the case of a right or obligation to redeem or purchase stock transferred in connection with the performance of services for the issuer or a related person (and which represents reasonable compensation), it may be exercised only upon the holder’s separation from service from the issuer or a related person. “(ii) Exception.—Clause (i)(I) shall not apply if the stock relinquished in the exchange, or the stock acquired in the exchange is in— “(I) a corporation if any class of stock in such corporation or a related party is readily tradable on an established securities market or otherwise, or “(II) any other corporation if such exchange is part of a transaction or series of transactions in which such corporation is to become a corporation described in subclause (I). “(3) Definitions.—For purposes of this subsection— “(A) Preferred stock.—The term ‘preferred stock’ means stock which is limited and preferred as to dividends and does not participate in corporate growth to any significant extent. “(B) Related person.—A person shall be treated as related to another person if they bear a relationship to such other person described in section 267(b) or 707(b). “(4) Regulations.—The Secretary may prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and sections 354(a)(2)(C), 355(a)(3)(1), and 356(e). The Secretary may also prescribe regulations, consistent with the treatment under this subsection and such sections, for the treatment of nonqualified preferred stock under other provisions of this title.”. (b) Section 354.—Paragraph (2) of section 354(a) (relating to exchanges of stock and securities in certain reorganizations) is amended by adding at the end the following new subparagraph: “(C) Nonqualified preferred stock.— “(i) In general.—Nonqualified preferred stock (as defined in section 351(g)(2)) received in exchange for stock other than nonqualified preferred stock (as so defined) shall not be treated as stock or securities. “(ii) Recapitalizations of family-owned corporations.— “(I) In general.—Clause (i) shall not apply in the case of a recapitalization under section 368(a)(1)(E) of a family-owned corporation. “(II) Family-owned corporation.—For purposes of this clause, except as provided in regulations, the term ‘family-owned corporation’ means any corporation which is described in clause (i) of section 447(d)(2)(C) throughout the 8-year period beginning on the date which is 5 years before the date of the recapitalization. For purposes of the preceding sentence, stock shall not be treated as owned by a family member during any period described in section 355(d)(6)(B).”.111 STAT. 921 (c) Section 355.—Paragraph (3) of section 355(a) is amended by adding at the end the following new subparagraph: “(D) Nonqualified preferred stock.—Nonqualified preferred stock (as defined in section 351(g)(2)) received in a distribution with respect to stock other than nonqualified preferred stock (as so defined) shall not be treated as stock or securities.”. (d) Section 356.—Section 356 is amended by redesignating subsections (e) and (f) as subsections (f) and (g), respectively, and by inserting after subsection (d) the following new subsection: “(e) Nonqualified Preferred Stock Treated as Other Property.—For purposes of this section— “(1) In general.—Except as provided in paragraph (2), the term ‘other property’ includes nonqualified preferred stock (as defined in section 351(g)(2)). “(2) Exception.—The term ‘other property’ does not include nonqualified preferred stock (as so defined) to the extent that, under section 354 or 355, such preferred stock would be permitted to be received without the recognition of gain.”. (e) Conforming Amendments.— (1) Subparagraph (B) of section 354(a)(2) and subparagraph (C) of section 355(a)(3)(C) are each amended by inserting “(including nonqualified preferred stock, as defined in section 351(g)(2))”after “stock”. (2) Subparagraph (A) of section 354(a)(3) and subparagraph (A) of section 355(a)(4) are each amended by inserting “nonqualified preferred stock and” after “including”. (3) Section 1036 is amended by redesignating subsection (b) as subsection (c) and by inserting after subsection (a) the following new subsection: “(b) Nonqualified Preferred Stock Not Treated as Stock.—For purposes of this section, nonqualified preferred stock (as defined in section 351(g)(2)) shall be treated as property other than stock.”. (f) Effective Date.— (1) In general.—The amendments made by this section shall apply to transactions after June 8, 1997. (2) Transition rule.—The amendments made by this section shall not apply to any transaction after June 8, 1997, if such transaction is— (A) made pursuant to a written agreement which was binding on such date and at all times thereafter, (B) described in a ruling request submitted to the Internal Revenue Service on or before such date, or (C) described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required solely by reason of the transaction.