DISTRIBUTIONS PURSUANT TO ORDERS ENFORCING THE ANTITRUST LAWS TUESDAY, MAY 26, 1959 U.S. SENATE, COMMITTEE ON FINANCE, Washington, D.C. The committee met, pursuant to notice, at 10:15 a.m., in room 2221, New Senate Office Building, Senator Harry Flood Byrd (chairman) presiding. Present: Senators Byrd, Kerr, Frear, Long, Smathers, Douglas, Gore, Talmadge, McCarthy, Hartke, Williams, Carlson, Butler, Cotton, and Curtis. Also present: Elizabeth B. Springer, chief clerk, and Mr. Colin F. Stam, chief of staff of the Joint Committee on Internal Revenue Taxation. The CHAIRMAN. The committee will come to order. The hearing today is on Senate bill 200, relating to gain or loss on disposition of stock made pursuant to orders enforcing the antitrust laws. A copy of the bill, and reports thereon from the Departments of Treasury and Justice are hereby inserted in the record. (The bill and departmental reports follow :) [S. 200, 86th Cong., 1st sess.] 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 Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That subchapter O of chapter 1 of the Internal Revenue Code of 1954 (relating to gain or loss on disposition of property) is amended by adding at the end thereof the following new part: "PART IX-DISTRIBUTIONS PURSUANT TO ORDERS ENFORCING THE ANTITRUST LAWS "Sec. 1111. Distribution of stock pursuant to order enforcing the antitrust laws. "SEC. 1111. DISTRIBUTION OF STOCK PURSUANT TO ORDER ENFORCING THE ANTITRUST LAWS. "(a) EFFECT ON DISTRIBUTEES.— "(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, stock which, when distributed to the distributee, is divested stock (as defined in subsection (d)) then no gain or loss shall be recognized to (and no amount shall be includible in the income of) such shareholder on the receipt of such divested stock. "(2) NON PRO RATA DISTRIBUTION, ETC.-Paragraph (1) shall be applied without regard to the following: 1 "(A) whether or not the distribution is pro rata with respect to all of the shareholders of the distributing corporation, and "(B) whether or not the shareholder surrenders stock in the distributing corporation. "(3) DISTRIBUTIONS TO AVOID FEDERAL INCOME TAX.-Paragraph (1) shall not apply to any 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 (but 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). "(4) DISTRIBUTION INVOVING GIFT OR COMPENSATION.-] -In the case of a distribution to which paragraph (1) applies, but which— "(A) results in a gift, see section 2501, and following, or "(B) has the effect of the payment of compensation, see section 61 (a) (1). "(b) BASIS OF PROPERTY ACQUIRED IN DISTRIBUTIONS.-If, by reason of subsection (a), gain or loss is not recognized with respect to the receipt of divested stock, then, under regulations prescribed by the Secretary or his delegate— "(1) if the divested stock is received by a shareholder without the surrender by such shareholder of stock in the distributing corporation, 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 of the stock with respect to which the distribution was received between such stock and the divested stock received; or "(2) if the divested stock is received by a shareholder is exchange for stock in the distributing corporation, the basis of the divested stock shall, in the distributee's hands, be the same as the adjusted basis of the stock exchanged therefor. "(c) ALLOCATION OF EARNINGS AND PROFITS.— "(1) ALLOCATION IN CERTAIN CORPORATE SEPARATIONS.-In the case of a distribution or exchange under subsection (a) of stock in a controlled corporation, proper allocation with respect to the earnings and profits of the distributing corporation and the controlled corporation shall be made under regulations prescribed by the Secretary or his delegate. "(2) DEFINITION OF CONTROLLED CORPORATION. For purposes of paragraph (1), the term 'controlled corporation' means a corporation with respect to which at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock is owned by the distributing corporation. "(d) DEFINITION OF DIVESTED STOCK.-For purposes of this section, the term 'divested stock' means stock which is— "(1) the subject of a judgment, decree, or other order of a court or of a Commission or Board authorized to enforce compliance in a suit or other proceeding brought by the United States or such a Commission or Board under the Sherman Act (26 Stat. 209, 15 U.S.C. sec. 1-7, as amended) and the Clayton Act (38 Stat. 730, 15 U.S.C. sec. 12-27, as amended), and "(2) distributed by the distributing corporation pursuant to a judgment, decree, or order entered after June 1, 1958, in such suit or proceeding, if such judgment, decree, or order "(A) directs the distributing corporation to divest itself of such stock, "(B) specifies and itemizes the stock to be divested, "(C) recites that such divestment is necessary or appropriate to effectuate the policies of the Sherman Act or the Clayton Act, or both, and "(D) recites that nonrecognition of gain pursuant to section 1111 of the Internal Revenue Code of 1954 is required to reach an equitable judgment, decree, or order in such suit or proceeding. "(e) CROSS REFERENCE. "For determination of the period for which the taxpayer has held divested stock received in a distribution to which subsection (a) applies see section 1223(1)." SEC. 2. (a) Section 1223(1)(B) of such Code (relating to holding period of property) is amended by adding immediately before the word "applies" the following: "or section 1111." (b) The table of parts for subchapter O of chapter 1 of such Code is amended by adding at the end thereof the following: "Part IX. Distributions pursuant to orders enforcing the antitrust laws." SEC. 3. The amendments made by this Act shall apply only with respect to distributions of divested stock (as defined in section 1111 (d) of the Internal Revenue Code of 1954, as added by the first section of this Act) made after June 1, 1958. Hon. HARRY F. BYRD, Chairman, Committee on Finance, THE SECRETARY OF THE TREASURY, MY DEAR MR. CHAIRMAN: This is in response to a request for the views of this Department on S. 200, introduced by Mr. Frear, 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. S. 200 would permit a corporation to distribute "divested stock" to its shareholders without dividend or gain tax consequences to the recipients if the transaction does not have as one of its principal purposes the distribution of the earnings and profits of the distributing corporation or the corporation whose stock is distributed. Under the bill, ❝divested stock" would mean stock which is distributed pursuant to a judgment, decree, or order entered after June 1, 1958, in certain suits or proceedings to enforce the Sherman Act and the Clayton Act. The judgment, decree, or order must direct the divestment of the specific stock, must recite that the divestment is necessary or appropriate to effectuate the policies of the Sherman Act or Clayton Act, and must recite that nonrecognition of gain is required to reach an equitable judgment, decree, or order. The bill contains technical provisions for allocating basis of stock in the hands of recipient shareholders and also for allocating earnings and profits of the distributing corporation if there is a distribution or exchange of stock in a controlled corporation. It is true that the tax laws in at least three instances have been amended by Congress to provide for the nonrecognition of gain in the case of exchanges or distributions of property ordered or certified to be necessary by a Federal agency. In the interest of completeness, these laws which admittedly have persuasive force are summarized below. But, for the reasons hereafter stated, we do not believe that they should be regarded as controlling precedents in the present case. First, a provision for nonrecognition of gain or loss on exchanges or distributions in obedience to the orders of the Securities and Exchange Commission was added in 1938, now section 1081 of the 1954 code. This provision relates to an order of the Securities and Exchange Commission issued to effectuate the provisions of section 11(b) of the Public Utility Holding Company Act of 1935. The order must be one requiring or approving action which the Commission finds to be necessary or appropriate to the integration or simplification of the holding company system of which the transferor corporation is a member. Second, nonrecognition of gain or loss on the sale or exchange of property to effectuate policies of the Federal Communications Commission was permitted under section 1071 of the 1954 code but was recently limited by the Technical Amendments Act of 1958. The section originally provided that if the sale or exchange of property (including stock of a corporation) is certified by the Federal Communications Commission to be necessary or appropriate to effectuate the policies of the Commission with respect to the ownership and control of radio broadcasting stations, such sale or exchange shall, if the taxpayer so elects, be treated as a nontaxable involuntary conversion of such property. Section 1071, however, had been utilized in some instances to obtain deferral of tax on what in reality were voluntary transactions. The taxpayer would purchase broadcasting properties in excess of the maximum number permitted under Commission rules and then obtain certification from the Commission that the disposition of a facility was necessary to effectuate its policies. Accordingly, in September of 1956, the Federal Communications Commission announced that commencing on October 15, 1956, it would certify the disposal of radio broadcasting facilities only where the disposition is required because of a change in, or adoption of, a new policy of the Commission. Consistent with this policy, the Technical Amendments Act of 1958 amended section 1071 by restricting nonrecognition of gain or loss to the sale or exchange of property certified by the Federal Communications Commission to be "necessary or appropriate to effectuate a change in policy of, or adoption of a new policy by, the Commission." The third instance relates to distributions pursuant to the Bank Holding Company Act of 1956. Section 1101 of the 1954 code provides that under certain circumstances the distribution of nonbanking assets by a bank holding company may be made without recognition of gain if the Federal Reserve Board certifies that the distribution of property "is necessary or appropriate to effectuate section 4 of the Bank Holding Company Act of 1956." The nonrecognition of gain applies only to a corporation that would have been a bank holding company on May 15, 1955, if the Bank Holding Company Act of 1956 had been in effect on such date, and to distributions of property acquired by the bank holding company on or before May 15, 1955, or of property acquired in a tax-free distribution from another holding company under section 1101. In addition to the foregoing, taxable gain may be deferred in connection with certain involuntary conversions. For example, section 1033(b) provides that if property lying within an irrigation project is sold or otherwise disposed of in order to conform to the acreage limitation provisions of Federal reclamation laws, such sale or distribution shall be treated as an involuntary conversion and the gain accordingly not recognized. Other involuntary conversion provisions of less pertinence include property compulsorily or involuntarily converted as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof, and livestock destroyed by disease or sold on account of drought. S. 200 is more related in purpose to a bill introduced in the 85th Congress, H.R. 7628, which would have extended nonrocognition of gain in certain situations where a taxpayer is required under the antitrust laws to sell or dispose of property and subsequently reinvest the proceeds in similar property. H.R. 7628 was reported out by the Ways and Means Committee in August of 1957, with 10 members of the committee dissenting. (See H. Rept. 1269, 85th Cong., 1st sess.) The Treasury Department opposed H.R. 7628, stating in its report to the chairman of the Ways and Means Committee: "The revenue effect of H.R. 7628 is difficult to predict in advance but might be large in some years. Special tax relief measures, especially those involving large potential revenue losses, are objectionable in the absence of overriding considerations of general public policy. The Treasury Department is not aware of any general policy considerations which would justify this special tax relief. However, the Department of Justice is in a better position than this Department to comment on this bill as it relates to antitrust policy. The retroactive feature of this bill is also undesirable. We understand that relief would be provided in several important cases under the retroactive coverage of the bill. "Under the circumstances the Treasury Department is opposed to the enactment of H.R. 7628." The Department of Justice also opposed the bill, concluding in its report to the chairman of the Ways and Means Committee that from the standpoint of antitrust law enforcement, the Department of Justice was opposed to the enactment of the bill. The reports of the Departments of Treasury and Justice are included in the dissenting views of House Report No. 1269. The Department recognizes that there may be cases where a taxpayer has acquired property in the past for legitimate business purposes under circumstances which did not appear to involve any violation of antitrust laws. Subsequently, by reason of developments in technology and business relationships, it may be necessary to require that the taxpayer divest himself of such property to assure effective enforcement of the laws against restraint of trade. The Department recognizes that in such a case a strong argument can be made for tax relief especially where tax consequences of a divestiture may create adverse economic consequences for innocent parties. On the other hand, such equitable considerations would not exist in favor of a taxpayer who could or should anticipate a divestiture decree at the time of acquisition of the property. Enactment of special tax relief for dispositions of divested property would require strict limitations, which might be difficult to devise or enforce, to prevent taxpayers from acquiring prohibited property with a view to a subsequent |
