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Section 355 Transactions Attacked in Bill Introduced by Archer, Roth

Thursday, April 17, 1997

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House Ways and Means Committee Chairman Bill Archer, R-Texas, and Senate Finance Committee Chairman William Roth, R-Del., introduced a bill attacking certain tax-free corporate spin-offs April 17, 1997.

The Treasury Department has endorsed the proposal, congressional sources said.

Under the proposal, if pursuant to a plan or arrangement in existence on the date of distribution, either the controlled or distributing corporation is acquired, gain would be recognized by the other corporation as of the date of distribution.

The new proposal goes further than the proposal in President Clinton’s budget request by requiring the distributing corporation to recognize the unrealized gain in its assets, if it is acquired pursuant to a covered plan or arrangement. The President’s proposal only would have required the distributing corporation to retroactively recognize the gain on the value of stock of the controlled corporation that was distributed.

Some transition relief is granted as part of the bill, but it generally applies to transactions beginning on April 16, 1997.

Roth, Lubick Discuss Acceptable Revenue Raisers: Roth and Acting Treasury Assistant Secretary (Tax Policy) Donald Lubick April 17 discussed which types of revenue-raising proposals would be acceptable as part of a budget bill.

The litmus test for determining whether a revenue-raising proposal "will pass muster" is whether it "negatively affects jobs," Roth said in his opening remarks at the Senate Finance Committee hearing.

The reason that the administration chose to attack the specific provisions that are in its budget is because they generally are a "misuse of code provisions in a way that was not intended" by Congress, Lubick said.

Is the administration’s proposal to create a tax credit to encourage businesses to hire welfare recipients an example of corporate welfare, Roth asked at the hearing. The administration is not suggesting that all incentives be removed from the tax code, but that tax professionals have applied some tax code provisions in a way that produces unintended results, Lubick said.

The two also discussed the merits of reforming the current tax system. Roth highlighted the proposal to reduce the dividends-received deduction to 50 percent and asked, "How many times should we tax the same income?"

A problem exists in the way capital is taxed, and the solution can come only in the context of corporate integration, Lubick said. "Ideally, we should have corporate tax reform," but that will have to wait for another day. The dividends-received deduction proposal was included in the budget because "this is an area where there is a lot of arbitrage," Lubick explained.

Democrats Praise Clinton Effort: Sen. Kent Conrad, D-N.D., and Sen. Richard Bryan, D-Nev., praised the steps taken by the Clinton Administration to balance the budget.

Conrad defended the majority of President Clinton’s revenue-raising proposals because ultimately they will help stimulate growth by placing downward pressure on interest rates.

Conrad’s support was not unconditional. The proposal to limit net operating loss carrybacks to one year and extend carryforwards to 20 years would cause problems for farmers, Conrad said. Is a "one-year carryback appropriate?" he asked. Lubick responded that the proposed regime produces a more accurate matching of income over time.

The proposed repeal of 12 months of the 18-month extension of the Section 29 tax credit for biomass and coal facilities would "change the rules in the middle of the game," Conrad said.

The proposal to repeal the percentage depletion provisions for non-fuel mineral extracted from federal lands could cause mining operation to move offshore, Sen. Frank Murkowski, R-Alaska, said. Why is the administration "hellbent on moving the mining industry offshore?" he asked.

Lubick responded that the percentage depletion provisions were put in place to help offset the acquisition costs when property is acquired for a mining operation. In the case of federal lands, there are no acquisition costs, so the miners should not be entitled to the percentage depletion allowance.

Murkowski also objected to the proposal denying the foreign tax credit for income from oil and gas operations when the foreign entity does not impose an income tax.

Later, Murkowski asked about the proposal to replace the export sales source rules with an activity-based rule, which he said also would encourage companies to move jobs overseas. "Our economic analysis does not show that will happen," Lubick responded.

Sen. Carol Moseley-Braun, D-Ill., also commented on the export sales rule proposal. Treasury’s current economic analysis is inconsistent with a 1993 study performed by the Department, she said.

Moseley-Braun also questioned the retroactive effective date of the proposal to require gain recognition for certain extraordinary dividends. Lubick responded that retroactive effective dates generally are bad, but in this case Treasury proposed a May 3, 1995, effective date because of the abusive nature of the transaction.

Stock Option Bill Introduced: Sens. Carl Levin, D-Mich., and John McCain, R-Ariz., introduced a bill, S.576, to close a corporate tax loophole by requiring companies to treat expenses for corporate stock options in the same manner for book and tax purposes.

"Our bill is aimed at stopping the double standard where companies are treating stock option pay as an expense when claiming a tax benefit from Uncle Sam, but not when reporting company earnings to investors and the public," Levin said in an April 15 press release.

"If companies choose not to fully disclose how much they’re compensating their executives, they certainly shouldn’t be able to claim a tax benefit for it," said McCain.

The bill also would carve out an exception for stock option plans that benefit average workers. To qualify, substantially all full-time employees in a company would have to be eligible to receive company stock options. A similar bill was introduced last year and opposition over its failure to provide an exception for stock option plans available to many workers generated opposition, an aide explained.

The Congressional Budget Office estimated the proposed change would raise as much as $933 million over ten years. The fact that the bill is a revenue raiser could make it more attractive to legislators who are trying to craft a budget bill that cuts taxes and balances the budget by the year 2002.

The bill also would affect the research tax credit by limiting the amount a company could claim based on stock option wages.

Roth Offers Pension Relief For Women: Roth and Sen. Judd Gregg, R-N.H., introduced a bill that expands the availability of spousal IRAs, allows for special contributions to 401(k) plans, and allows for higher contribution limits for parents joining pension plans late in life.

"I consider the WISE Bill one of the beginning steps toward creating an environment where Americans can work for self-reliance and secure a future," Roth said.