the code of 1954 is preferable to the provisions that now prevail in the code of 1954.

Mr. DARRELL. We do think that and we would like to make this further remark, if we may: That is, when the statute that this committee passed was changed, there was a very short time for the present subchapter C to be drawn, once it was decided to change it. I think Mr. Gemmill can tell us better than anyone else. Perhaps later on he will. Maybe he will now.

Mr. GEMMILL. After it was decided to go back to the 1939 code we picked out maybe 14 or 15 items which were in the bill as passed, as adopted by this committee and passed by the House that could be fitted quickly within the time limits in the 1939 law. To that extent those changes were adopted at that time.

Now, what this group is suggesting is more along the line of the bill as the 1954 code was approved by this committee.

The CHAIRMAN. Mr. Gemmill, it has now become apparent that by merely superimposing those 14 changes on the code of 1939 we left much to be desired in proper relationship of the base of the 1939 code, even to these 14 changes, is that true?

Mr. GEMMILL. That is right. Most of those 14 were helpful but within the time limit everything could not be done and we have now had further time to study and see how those changes have worked in practice and now have further recommendations.

The CHAIRMAN. Of course the report thoroughly indicates that this group is of the opinion that further changes should be made in subchapter C in the interest of clarity and avoidance of unintended burden and hardships.

Mr. EBERHARTER. Mr. Chairman.

The CHAIRMAN. Mr. Eberharter.

Mr. EBERHARTER. Mr. Darrell, is the committee to understand that the report of your advisory group is a unanimous report?

Mr. DARRELL. It was approved by all members of our group without any reservations or qualifications. In that sense it is unanimous. In dealing with an area of this sort, where many possible answers are available, we have sought to find solutions that were generally acceptable and with these we all have gone along, although I must admit that had we made slightly different suggestions in different places, we probably would all have agreed to go along because things in this area are not all black and white.

Mr. EBERHARTER. That is right. So we could say that the report of the advisory group is unanimous ?

Mr. DARRELL. Yes, you can.

Mr. EBERHARTER. Insofar as specific recommendations are concerned, there may be slight differences of opinion.

Mr. DARRELL. That is correct.

Mr. EBERHARTER. Thank you.

The CHAIRMAN. It is not an important difference of opinion, is it? Mr. DARRELL. No.

The CHAIRMAN. Mr. Darrell, I wanted to ask you this additional question. Your group has presented to the subcommittee, and in turn to the full committee, a legislative proposal of some 99 pagesMr. DARRELL. Yes, sir.

The CHAIRMAN. Which carries out, as I understand, the recommendation of change in subchapter C that you are presenting to us today.

Mr. DARRELL. That is correct.

May I say that we do not by that in any sense intend to be presumptuous in presenting it to you in bill print form. We do this purely for convenience, that the people who ought to study this and give you their comments can better understand it and better by referring to numbered lines suggest what changes ought to be made. We think this should be helpful to the bar associations, accounting associations, and everyone concerned with this area.

The CHAIRMAN. I think so much of the fact that you have presented us with the legislative proposals carrying out your recommendations that I feel that greater publicity and accessibility can be had if they are introduced in bill form. I am not thoroughly conversant with it I have not had an opportunity to give detailed study yet to the form of the bill. As you say, it may not be perfect, but in the interest of giving it greater circulation and availability to groups that are par ticularly concerned with changes in this area of the code, the thought occurred to me that it might be advisable that one of us introduce it in the form of a bill, with the understanding, of course, that we are doing so merely for purposes of giving it publicity so that those who desire to do so may have full access to it. It is understood, of course, that effective dates will have to be worked out before the bil is introduced.

Pardon this delay and interruption. You may proceed.

Mr. MASON. Mr. Chairman, the understanding is that you would introduce it as a bill or a tentative bill in order to give it publicity but that that bill would then come before the full committee fo consideration?

The CHAIRMAN. Oh, yes, of course. It would be referred to the ful committee. It would not be to represent my own opinion. Certainl it would not be taken to represent the thinking of the committe because it would be only introduced for the purpose of accessibility Mr. MASON. On that basis, all right.

Mr. FORAND. Mr. Chairman, at this point, I think it advisable, view of the statement just made, that the proposed bill be inserted i our hearings to follow immediately the statement.

I ask unanimous consent that that be done.

The CHAIRMAN. Without objection, I think both the bill and th report itself should be in the hearings. If there is no objection, bot will be included at this point in the hearing.

(The information referred to follows:)

[SUBCHAPTER C ADVISORY GROUP PROPOSED AMENDMENTS]

December 24, 1957

Received by the Subcommittee on Internal Revenue Taxation, and transmitted the Committee on Ways and Means, House of Representatives, from the A visory Group on Subchapter C of the Internal Revenue Code of 1954

A BILL To amend certain provisions of the Internal Revenue Code of 1954 with resp to corporate distributions and adjustments

Be it enacted by the Senate and House of Representatives of the Unit States of America in Congress assembled, That wherever in this Act an amer ment is expressed in terms of an amendment to or repeal of a section or oth provision, the reference shall be considered to be made to a provision of t Internal Revenue Code of 1954.

SEC. 2. DISTRIBUTIONS OF PROPERTY-AMENDMENTS OF SECTION 301. (a) AMOUNT DISTRIBUTED.-Section 301 (b) (1) is amended to read as follows:

"(1) GENERAL RULE.-For purposes of this section, the amount of any distribution shall be

"(A) DISTRIBUTEES IN GENERAL.-The amount of money received, plus the fair market value of the other property received, unless subparagraph (B) is applicable to the distribution.

"(B) CERTAIN CORPORATE DISTRIBUTEES.—If the shareholder is a corporation, the amount of money received, plus whichever of the following is the lesser:

"(i) the fair market value of the other property received; or "(ii) the adjusted basis (in the hands of the distributing corporation immediately before the distribution) of the other property received, increased in the amount of gain to the distributing corporation which is recognized on the distribution.

If an obligation of the distributing corporation is received, the principal amount of the obligation shall be treated, for the purpose of clause (ii), as the adjusted basis of such property.

Subparagraph (A), and not subparagraph (B), shall apply in the case of the distribution of any stock, or rights to acquire stock, of the distributing corporation if such distribution is treated, under section 305 (b), as a distribution of property to which this section applies. Subparagraph (A), and not subparagraph (B), shall apply in the case of any distribution received by a foreign corporation not engaged in trade or business within the United States. Subparagraph (A) shall apply to a distribution received from a foreign corporation, unless a dividend from that foreign corporation at the time of the distribution would qualify for a dividends received deduction under section 245, in which case subparagraph (B) shall apply to the distribution."

(b) BASIS OF PROPERTY RECEIVED.-Section 301 (d) is amended to read as follows:

“(d) BASIS.—The basis of any property received in a distribution to which subsection (a) applies shall be the amount determined under subsection (b) (1) as the amount of the distribution to the shareholder on account of the receipt of such property (without reduction for liabilities referred to in subsection (b) (2)).”

SEC. 3. DISTRIBUTIONS IN REDEMPTION OF STOCK-AMENDMENT OF SECTION 302.

Section 302 is amended to read as follows:

“SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.

"(a) GENERAL RULE.-If a corporation redeems its stock (within the meaning of section 317 (b)), and if paragraph (1), (2), (3), (4), or (5) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.

"(b) REDEMPTIONS TREATED AS EXCHANGES.—

"(1) REDEMPTION NOT EQUIVALENT TO DIVIDENDS.—

"(A) IN GENERAL.-Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.

"(B) DEFICIT COMPANIES.-The fact that the corporation has no earnings and profits, or that the amount distributed on the redemption exceeds the earnings and profits of the corporation, shall not require the application of this paragraph.

"(2) SUBSTANTIALLY DISPROPORTIONATE REDEMPTION OF STOCK.

"(A) IN GENERAL.-Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.

"(B) LIMITATION.-This paragraph shall not apply if immediately after the redemption the shareholder owns stock possessing 50 percent or more of the total combined voting power of all classes of stock entitled to vote.

"(C) DEFINITIONS.-For purposes of this paragraph, the distribution is substantially disproportionate if—

20675-58-pt. 3-3

"(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time,

is less than 80 percent of—

"(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time.

For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder's ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence.

"(D) PARTNERSHIPS.-For the purpose of determining the application of this paragraph in the case of redemption of stock owned by a partnership, the redemption shall be treated in the case of each partner as though immediately prior to the redemption the partnership had distributed to its partners all the stock of the corporation owned by it (other than stock constructively owned by it by reason of the application of section 318 (a) (3) (A)), and the stock redeemed had been redeemed in the hands of the partners.

"(E) DETERMINATION OF RATIOS.-For purposes of this paragraph, if there is more than one class of voting stock the determination of voting stock ratios shall be made by reference to the combined voting power of all classes of stock entitled to vote; and if there is more than one class of common stock the determination of common stock ratios shall be made by reference to fair market value.

"(F) TIME FOR TESTING APPLICATION OF SUBSECTION.-The determination of whether this paragraph shall apply to a distribution shall be made as of the time the corporation acquires the stock from the shareholder without regard to the time when the property is received by the shareholder from the corporation in exchange for such stock. “(3) TERMINATION OF SHAREHOLDER'S INTEREST.-Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.

"(4) STOCK ISSUED BY RAILROAD CORPORATIONS IN CERTAIN REORGANIZATIONS.-Subsection (a) shall apply if the redemption is of stock issued by a railroad corporation (as defined in section 77 (m) of the Bankruptcy Act, as amended) pursuant to a plan of reorganization under section 77 of the Bankruptcy Act.

"(5) PREFERRED STOCK.-Subsection (a) shall apply if the redemption is"(A) a redemption of stock which is limited and preferred as to dividends, and

"(B) the shareholder owns less than one percent of the voting stock of the corporation and less than one percent of the common stock of the corporation immediately after the redemption.

“(6) APPLICATION OF PARAGRAPHS.-In determining whether a redemption meets the requirements of paragraph (1), the fact that such redemption fails to meet the requirements of paragraph (2), (3), (4), or (5) shall not be taken into account, and the rules of section 318 (a) shall not be applicable but the relationships described therein may be taken into account along with all other facts and circumstances. If a redemption meets the requirements of paragraph (3) and also the requirements of paragraph (1), (2), (4), or (5), then so much of subsection (c) (2) as would (but for this sentence) apply in respect of the acquisition of an interest in the corporation within the 10-year period beginning on the date of the distribution shall not apply. "(7) SERIES OF TRANSACTIONS.-Where pursuant to a plan there is a series of redemptions, or redemptions and acquisitions by shareholders of stock whether previously issued or unissued), this subsection shall not apply with respect to any redemption in such series unless it would have applied to such redemption if all such redemptions and acquisitions had occurred simul taneously.

"(c) CONSTRUCTIVE OWNERSHIP OF STOCK.—

"(1) IN GENERAL.-Except as provided in paragraph (6) of subsection (b) in paragraphs (2) and (3) of this subsection and in paragraph (1) (A) of subsection (e), section 318 (a) shall apply in determining the ownership of stock for purposes of this section.

"(2) FOR DETERMINING TERMINATION OF INTEREST.

a family), except section 318 (a) (1) (A) (i) (relating to attribution between spouses), shall apply if—

"(A) In the case of a distribution described in subsection (b) (3), no part of section 318 (a) (1) (relating to attribution between members of

"(i) immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor,

"(ii) the distributee does not acquire any such interest (other than in the manner described in subparagraph (C)) within 10 years from the date of such distribution, and

"(iii) the distributee, at such time and in such manner as the Secretary or his delegate by regulations prescribes, files an agreement to notify the Secretary or his delegate of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph.

If the distributee acquires such an interest in the corporation (other than in the manner described in subparagraph (C)) within 10 years from the date of the distribution, then the periods of limitation provided in sections 6501 and 6502 on the making of an assessment and the collection by levy or a proceeding in court shall, with respect to any deficiency (including interest and additions to the tax) resulting from such acquisition, include one year immediately following the date on which the distributee (in accordance with regulations prescribed by the Secretary or his delegate) notifies the Secretary or his delegate of such acquisition; and such assessment and collection may be made notwithstanding any provision of law or rule of law which otherwise would prevent such assessment and collection.

"(B) Subparagraph (A) of this paragraph shall not apply if

"(i) any portion of the stock redeemed was acquired, directly or indirectly, within the 10-year period ending on the date of the distribution by the distributee from a person the ownership of whose stock would (at the time of distribution) be attributable to the distributee under section 318 (a), or

"(ii) any person owns (at the time of the distribution) stock the ownership of which is attributable to the distributee under section 318 (a) and such person acquired any stock in the corporation, directly or indirectly, from the distributee within the 10-year period ending on the date of the distribution, unless such stock so acquired from the distributee is redeemed in the same transaction. The preceding sentence shall not apply if the acquisition (or, in the case of clause (ii), the disposition) by the distributee did not have as one of its principal purposes the avoidance of Federal income tax. "(C) Clause (ii) of subparagraph (A) of this paragraph shall not apply to the acquisition of stock in the corporation

"(i) by bequest or inheritance, or

"(ii) by enforcement of rights as a creditor.

An acquisition of stock shall not be considered to be in the enforcement of rights as a creditor if the default in payment of the obligation could reasonably be anticipated at the time of the distribution in redemption of stock, or at the time of creation of such creditor relationship, whichever is later.

"(D) For purposes of subparagraphs (A) and (C), the term 'corporation' shall include the distributing corporation, a corporation which controls the distributing corporation, a corporation which is controlled by the distributing corporation, or a corporation which acquires the assets of any such corporation in a transaction to which section 381 (a) applies. For purposes of this subparagraph, control means the ownership of 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 number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends); and such control shall be determined with the application of section 318 (a).