NOT TO APPLY TO DISTRIBUTIONS INVOLVING DISQUALIFIED INVESTMENT COMPANIES.

SEC. 507. SECTION 355 NOT TO APPLY TO DISTRIBUTIONS INVOLVING DISQUALIFIED INVESTMENT COMPANIES. (a) In General.—120 STAT. 359 Section 355 (relating to distributions of stock and securities of a controlled corporation) is amended by adding at the end the following new subsection: “(g) Section Not to Apply to Distributions Involving Disqualified Investment Corporations.—“(1) In general.—This section (and so much of section 356 as relates to this section) shall not apply to any distribution which is part of a transaction if—“(A) either the distributing corporation or controlled corporation is, immediately after the transaction, a disqualified investment corporation, and “(B) any person holds, immediately after the transaction, a 50-percent or greater interest in any disqualified investment corporation, but only if such person did not hold such an interest in such corporation immediately before the transaction. “(2) Disqualified investment corporation.—For purposes of this subsection—“(A) In general.—The term ‘disqualified investment corporation’ means any distributing or controlled corporation if the fair market value of the investment assets of the corporation is—“(i) in the case of distributions after the end of the 1-year period beginning on the date of the enactment of this subsection, ⅔ or more of the fair market value of all assets of the corporation, and “(ii) in the case of distributions during such 1-year period, ¾ or more of the fair market value of all assets of the corporation. “(B) Investment assets.—“(i) In general.—Except as otherwise provided in this subparagraph, the term ‘investment assets’ means—“(I) cash, “(II) any stock or securities in a corporation, “(III) any interest in a partnership, “(IV) any debt instrument or other evidence of indebtedness, “(V) any option, forward or futures contract, notional principal contract, or derivative, “(VI) foreign currency, or “(VII) any similar asset. “(ii) Exception for assets used in active conduct of certain financial trades or businesses.—Such term shall not include any asset which is held for use in the active and regular conduct of—“(I) a lending or finance business (within the meaning of section 954(h)(4)), “(II) a banking business through a bank (as defined in section 581), a domestic building and loan association (within the meaning of section 7701(a)(19)), or any similar institution specified by the Secretary, or “(III) an insurance business if the conduct of the business is licensed, authorized, or regulated by an applicable insurance regulatory body. 120 STAT. 360This clause shall only apply with respect to any business if substantially all of the income of the business is derived from persons who are not related (within the meaning of section 267(b) or 707(b)(1)) to the person conducting the business. “(iii) Exception for securities marked to market.—Such term shall not include any security (as defined in section 475(c)(2)) which is held by a dealer in securities and to which section 475(a) applies. “(iv) Stock or securities in a 20-percent controlled entity.—“(I) In general.—Such term shall not include any stock and securities in, or any asset described in subclause (IV) or (V) of clause (i) issued by, a corporation which is a 20-percent controlled entity with respect to the distributing or controlled corporation. “(II) Look-thru rule.—The distributing or controlled corporation shall, for purposes of applying this subsection, be treated as owning its ratable share of the assets of any 20-percent controlled entity. “(III) 20-percent controlled entity.—For purposes of this clause, the term ‘20-percent controlled entity’ means, with respect to any distributing or controlled corporation, any corporation with respect to which the distributing or controlled corporation owns directly or indirectly stock meeting the requirements of section 1504(a)(2), except that such section shall be applied by substituting ‘20 percent’ for ‘80 percent’ and without regard to stock described in section 1504(a)(4). “(v) Interests in certain partnerships.—“(I) In general.—Such term shall not include any interest in a partnership, or any debt instrument or other evidence of indebtedness, issued by the partnership, if 1 or more of the trades or businesses of the partnership are (or, without regard to the 5-year requirement under subsection (b)(2)(B), would be) taken into account by the distributing or controlled corporation, as the case may be, in determining whether the requirements of subsection (b) are met with respect to the distribution. “(II) Look-thru rule.—The distributing or controlled corporation shall, for purposes of applying this subsection, be treated as owning its ratable share of the assets of any partnership described in subclause (I). “(3) 50-percent or greater interest.—For purposes of this subsection—“(A) In general.—The term ‘50-percent or greater interest’ has the meaning given such term by subsection (d)(4). “(B) Attribution rules.—The rules of section 318 shall apply for purposes of determining ownership of stock for purposes of this paragraph. 120 STAT. 361“(4) Transaction.—For purposes of this subsection, the term ‘transaction’ includes a series of transactions. “(5) Regulations.—The Secretary shall prescribe such regulations as may be necessary to carry out, or prevent the avoidance of, the purposes of this subsection, including regulations—“(A) to carry out, or prevent the avoidance of, the purposes of this subsection in cases involving—“(i) the use of related persons, intermediaries, pass-thru entities, options, or other arrangements, and “(ii) the treatment of assets unrelated to the trade or business of a corporation as investment assets if, prior to the distribution, investment assets were used to acquire such unrelated assets, “(B) which in appropriate cases exclude from the application of this subsection a distribution which does not have the character of a redemption which would be treated as a sale or exchange under section 302, and “(C) which modify the application of the attribution rules applied for purposes of this subsection.”. (b) Effective Dates.—(1) In general.—The amendments made by this section shall apply to distributions after the date of the enactment of this Act. (2) Transition rule.—The amendments made by this section shall not apply to any distribution pursuant to a transaction which is—(A) made pursuant to an agreement which was binding on such date of enactment 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.