S. 200 would not relieve the Du Pont Co. or the General Motors Co. of any tax. It would not relieve Du Pont stockholders of the tax on any capital gain which might be realized when they disposed of the General Motors shares distributed to them or of the Du Pont stock which they now own. S. 200 would merely eliminate an additional tax penalty which could be imposed under existing law not only upon Du Pont stockholders, but upon shareholders of other corporations which may be the future targets of antitrust proceedings.

The bill is provided with safeguards against abuse. First, it applies only to compulsory distributions pursuant to orders enforcing the antitrust laws. Second, the bill provides that nonrecognition of gain or loss shall not apply to any transaction which has as a principal purpose the distribution of the earnings and profits of the distributing corporation or of the corporation whose stock is distributed. Third, the order must recite that divestment is necessary or appropriate to carry out the policies of the Sherman Act or Clayton Act, and that nonrecognition of gain is required to reach an equitable judgment.

Mr. Chairman, I would like to emphasize one other significant fact. I first introduced S. 200 nearly a year ago after a careful evaluation of its objectives. In the months intervening, there has not been a single adverse public comment which has come to my attention. And, in this connection every effort has been made by my office to afford this legislation the widest possible dissemination.

On the contrary, I received an outpouring of support, nationwide, including many favorable editorials in newspapers and magazines. As a part of these public expressions, I have been advised that Mr. Keith Funston, president of the New York Stock Exchange, Dean Edward Levi, University of Chicago Law School, and Dean Eugene Rostow of Yale University Law School are submitting statements testifying to the overriding public purpose that would be served by enactment of S. 200.

(The statements from Mr. Keith Funston, Dean Edward Levi and Dean Eugene Rostow are subsequently inserted in record.)

Senator FREAR. But the question we must decide is not whether my proposal is popular, but whether it is right. Our constituents include stockholders, rich and poor, and it would be a grave disservice to them if we do not move to correct this injustice.

There are Du Pont stockholders in every State of the Union, as well as the District of Columbia. There are more than 200,000 in all, of whom nearly 50,000 are employees of the Du Pont Co. who live and work in all parts of the Nation. Of these, the vast majority are men and women of modest means, who have acquired their stock a share at a time or a few shares at a time, and can ill afford to have their savings stripped away.

Beyond these 200,000 Du Pont stockholders, there are over 700,000 stockholders of General Motors Corp. whose savings may be seriously impaired without corrective legislation, because of the impact on stock values caused by divestiture, which I mentioned earlier. And the stockholders of both corporations, I remind you again, have committed no wrong under any law.

If a single innocent citizen were threatened with harm because of an unforeseen injustice in the application of the law, equity and jus

tice would demand that Congress correct the statute. Here, Mr. Chairman, we are concerned not with harm to a single individual but to nearly a million innocent persons throughout the length and breadth of the land, and our duty to act is clear and compelling.

May I add one final thought. In discussing the provisions of this legislation, both before and since its introduction, I have expressed to individual members of this committee and to other Members of Congress, generally, my firm conviction that the principle involved is thoroughly sound and in the best public interest. S. 200 is, I believe, carefully drawn so as to prevent any tax loophole. Technical and perfecting amendments, some of which I have discussed with committee members, may be thought desirable. Certainly, I will cooperate to effect any necessary change in S. 200 which will insure its better application consistent with the basic purpose of the bill.

In this connection, I have prepared an amendment which, briefly stated, makes the distributed stock of General Motors to Du Pont stockholders subject to ordinary income tax to the individual on the basis of the cost of this stock to the Du Pont Co.

Mr. Chairman, may I make the amendment so designated and a brief analysis thereof now a part of the record.

The CHAIRMAN. Without objection, it may be done. (The amendment and explanation referred to follow :)

AMENDMENT Intended to be proposed by Mr. Frear to the bill (S. 200) to amend the Internal Revenue Code of 1954 so as to provide for nonrecognition of gain or loss upon certain distributions of stock made pursuant to orders enforcing the antitrust laws, viz:

On page 2, strike out lines 4 through 11 and insert in lieu thereof the following:

"(1) GENERAL RULE.- -If a corporation (referred to in this section as the 'distributing corporation') distributes to a shareholder (with respect to its stock held by such shareholder), without the surrender by such shareholder of stock in such corporation, stock which, when distributed to the distributee, is divested stock (as defined in subsection (d)), the gain (if any) shall be recognized to such shareholder on the receipt of such divested stock, but only in an amount not in excess of the lesser of

"(A) the fair market value of such divested stock, or

"(B) the adjusted basis (in the hands of the distributing corporation immediately before the distribution) of such divested stock.

"For purposes of the preceding sentence, the adjusted basis of any divested stock shall be the average adjusted basis, determined under regulations prescribed by the Secretary or his delegate, of all divested stock distributed in the same distribution."

On page 2, strike out lines 12 through 19.

On page 2, line 20, strike out “(3)" and insert “(2)".

On page 3, line 5, strike out "(4)" and insert "(3)".

On page 3, beginning with line 12, strike out all through line 4, on page 4, and in lieu thereof insert the following:

"(b) BASIS.-If, by reason of subsection (a), any gain is not recognized with respect to the receipt of divested stock, then, under regulations prescribed by the Scretary or his delegate, the basis of such divested stock and of the stock with respect to which it is distributed shall, in the distributee's hands, be determined by allocating the adjusted basis (immediately before the distribution) of the stock with respect to which the distribution was received, increased by

"(1) the amount (if any) of the gain recognized under subsection (a) which was treated as a dividends, and

"(2) the amount (if any) of such gain which was treated as gain from the sale or exchange of property, between such stock and the divested stock received."

On page 4, line 7, strike out "or exchange".

BRIEF EXPLANATION OF DRAFT AMENDMENT TO S. 200

The draft amendment to S. 200 would revise S. 200 to provide for only partial nonrecognition of gain on certain distributions of stock made by a corporation to its shareholders pursuant to a court order enforcing the antitrust laws. The amendment would provide, in general, that gain would be recognized to the shareholders (and taxed as dividend income, assuming the corporation had sufficient earnings and profits) to the extent of the lesser of the fair market value of the stock distributed or the adjusted basis (to the distributing corporation) of such stock. This is the rule applicable under existing law to distributions of property (including stock in another corporation, where not distributed in pursuance of a nontaxable corporate reorganization or corporate division) by a corporation to a corporate shareholder.

The draft amendment would revise two provisions of S. 200: (1) The general rule contained in the proposed section 1111(a) (1) would be revised to provide for only partial nonrecognition treatment, as outlined above; and (2) the basic rules contained in the proposed section 1111(b) have been revised to take into account the fact that there is a partial recognition of gain.

A number of other deletions and technical changes would be made to S. 200. The following paragraphs summarize the provisions of the draft amendment, the changes and deletions from S. 200, and compare the draft amendment to the distribution rule applicable to dividends received by corporate shareholders.

1. DISTRIBUTION OF DIVESTED STOCK

S. 200, as revised by the draft amendment, would continue to apply only to a distribution by a corporation to a shareholder of "divested stock." Divested stock is defined in subsection (d), which would not be changed. In general, divested stock includes stock which is the subject of a court order under the Sherman Act or the Clayton Act, if that stock is distributed by the corporation pursuant to a court order, entered after June 1, 1958, which directs the corporation to divest itself of such stock, specifies and itemizes the stock to be divested, and recites that such divestment is necessary or appropriate to effectuate the policies of the Sherman Act or the Clayton Act. Moreover, no stock can be regarded as divested stock unless the order (or judgment or decree) recites that nonrecognition of gain pursuant to this section is required to reach an equitable judgment, decree, or order in the antitrust suit or proceeding.

Under S. 200, as revised by the draft amendment, the shareholders' gain (if any) on the receipt of divested stock is limited to the lesser of (i) the fair market value of such stock or (ii) its tax basis in the hands of the distributing corporation. To the extent that the shareholder's gain does not exceed the lesser of the fair market value of the stock received or its tax basis to the distributing corporation, it will be taxed under the rules of existing law. These rules are applicable to all shareholders of the corporation, whether they are individuals or other corporations. These rules can be illustrated by the following example: Assume a shareholder (corporate or individual) received divested stock (from a corporation having earnings and profits) having a fair market value of $100 and an adjusted basis to the distributing corporation of $20. The shareholder's gain, to the extent of $20, will be taxed. Accordingly, $20 will be taxed as an ordinary dividend, subject to the $50 dividend exclusion and the 4 percent dividend credit, if the shareholder is an individual and, if the shareholder is a corporation entitled to the intercorporate dividends received deduction, 85 percent of the $20 will be allowed as a deduction under section 243.

For purposes of these rules, it is provided by the draft amendment that the adjusted basis of any divested stock received by any shareholder (corporate or individual) shall be the average adjusted basis, determined under regulations, of all divested stock distributed in the same distribution. Accordingly, if the distributing corporation has acquired the divested stock (which it distributes in the same distribution) at different prices the adjusted basis of all such stock shall be averaged, so that the amount of gain taken into account in the case of every shareholder of the distributing corporation will be determined by reference to the same amount. This rule differs from the rule of existing law applicable to corporate shareholders-under existing law the identifiable bases of the shares distributed to any corporate shareholder (provided the specific shares may be traced to the specific corporate shareholder) are used to determine the amount of the distribution which is taken into account.

Under the draft amendment the distribution of divested stock by the corporation must take the form of a distribution without the surrender by the shareholders of any stock in the distributing corporation. (In this respect, the proposed amendment is like the so-called "spin off" rule of section 112(b) (11) of the 1939 Code and embraces one of the distribution methods permitted under section 355 of the 1954 Code.) The draft amendment differs in this respect from S. 200, which permitted the distribution to be made either in this form or to be made in exchange for part or all of the shareholder's stock in the distributing corporation (whether or not pro rata). The draft amendment does not permit exchanges since they are not permitted by the rules of existing law applicable to distributions to corporate shareholders (except to a very limited extent, in the case of stock redemptions essentially equivalent to a dividend).

2. DISTRIBUTIONS TO AVOID FEDERAL INCOME TAX

The draft amendment does not affect the provision of S. 200 relating to distributions to avoid Federal income tax. Accordingly, nonrecognition treatment under S. 200, as revised by the proposed amendment, would be denied in the case of any distribution which is a part of a transaction one of the principal purposes of which is the distribution of the earnings and profits of the distributing corporation or of the corporation whose stock is distributed, or both. (However, the mere fact that either corporation has accumulated earnings and profits shall not be construed to mean that one of the principal purposes of the transaction is the distribution of the earnings and profits of either corporation, or both.)

3. BASIS

The draft amendment would revise the basis provision of S. 200 (proposed section 1111 (b) in two principal respects: (i) In determining the amount of basis to be allocated between the divested stock received and the stock with respect to which it was received, the draft amendment would add an amount equal to the gain recognized to the taxpayer under the revised rules and treated either as a dividend (assuming there were sufficient earnings and profits) or as gain from the sale or exchange of property (assuming that the amount of the dividend exceeded the earnings and profits of the corporation and also exceeded the shareholder's basis for his stock with respect to which the distribution was made); and (ii) the rules for determination of basis in the case of an exchange have been eliminated in view of the elimination of exchanges as a type of qualifying distribution (discussed under (1) above).

Accordingly, the draft amendment continues the rule contained in S. 200 providing for the allocation of basis where the distribution is made without the surrender of stock but adds to the amount to be allocated an amount equal to the shareholder's additional investment (i.e., tax cost) in the stock. The rule contained in the draft amendment applies to all distributions of divested stock with respect to which any gain is not recognized by reason of the proposed new section and applies whether the shareholder is a corporation or an individual. This basis rule (as revised by the draft amendment) differs from the rule of existing law applicable to corporate shareholders. Under existing law the amount of a distribution to a corporate shareholder is the lesser of the fair market value or the adjusted basis (in the hands of the distributing corporation) of the property distributed and, in the event that the adjusted basis of the property is the lesser, the corporate shareholder takes over the property at the same basis it had to the distributing corporation and does not reduce the basis of his stock in the distributing corporation (except to the extent that the amount of the distribution exceeds the distributing corporation's earnings and profits). The following example illustrates the basis allocation which would be made under S. 200 (as revised by the draft amendment): Assume that the distributing corporation, X, has earnings and profits sufficient to cover the distribution and that it distributes stock of corporation Y having a fair market value of $100 and an adjusted basis to it of $10. Assume that shareholder A (individual or corporate) receiving the Y stock has a basis for his stock in the distributing corporation, X, of $65 and that the fair market value of the stock of the distributing corporation X immediately after the distribution is $200. The amount of gain recognized to A and taxed as a dividend will be $10 (subject, of course, to the dividends received exclusion, credit, and deduction).

The amount of A's basis for his X stock, $65, increased by $10 (the amount of gain recognized and treated as a dividend), or $75, will be allocated between A's

X stock and the Y stock in proportion to their fair market values immediately after the distribution, so that A's basis for his X stock will be 200/300 × $75, or $50, and A's basis for his Y stock will be 100/300 X $75, or $25.

4. ALLOCATION OF EARNINGS AND PROFITS

The draft amendment does not affect the provisions of S. 200 relating to the allocation of earnings and profits. Accordingly, S. 200, as revised, continues to provide for the allocation of the earnings and profits where the distributing corporation owns the corporation whose stock is divested by 80 percent or more.

5. EFFECTIVE DATE

The draft amendment does not affect the effective date provisions of S. 200. As noted under (1) above, the term "divested stock" is defined as including only stock which is distributed pursuant to an order entered after June 1, 1958. In addition, it is provided by S. 200 that the new section shall apply only with respect to distributions of divested stock made after June 1, 1958. Accordingly, if a court order, entered after June 1, 1958, is issued nunc pro tunc affirming distributions made prior to June 1, 1958, such distributions cannot qualify under this section.

The CHAIRMAN. Thank you, Senator Frear.

Are there any questions by any member of the committee?

(No response.)

The CHAIRMAN. The next witness is the Honorable David A. Lindsay, Assistant to the Secretary of the Treasury.

Senator KERR. Mr. Chairman, you have put the statement of Mr. Lindsay into the record?

The CHAIRMAN. Yes.

Senator KERR. And a letter from the Justice Department addressed to the committee.

The CHAIRMAN. Yes.

Senator KERR. Will the author of the Justice Department's letter be here?

The CHAIRMAN. The author of the Justice Department's letter is here now.

Senator KERR. Fine.

The CHAIRMAN. We will now hear from the Honorable David A. Lindsay, Assistant to the Secretary, U.S. Treasury Department.

STATEMENT OF HON. DAVID A. LINDSAY, ASSISTANT TO THE SECRE TARY, U.S. TREASURY DEPARTMENT; ACCOMPANIED BY JAY W. GLASMANN, ASSISTANT GENERAL COUNSEL; AND FRANCIS A. LAVELLE, LEGAL ADVISORY STAFF

Mr. LINDSAY. I have on my right Mr. Jay W. Glasmann, Assistant General Counsel of the Treasury, and on my left Mr. Francis A. Lavelle, of the legal advisory staff of the Treasury.

The Treasury Department appreciates the invitation to appear before this committee. We have been asked to testify on S. 200, a bill to amend the Internal Revenue Code of 1954 so as to provide for nonrecognition of gain or loss upon certain distributions of stock made pursuant to orders enforcing the antitrust laws.

The bill seeks to alleviate the impact of the income tax burden otherwise imposed on the recipients of stock distributed pursuant to court order in suits to enforce the Sherman Act or the Clayton Act.