‘‘(ii) NET ADJUSTED ASSET COST.—
For purposes of clause (i), the term ‘net
adjusted asset cost’ means—
‘‘(I) the aggregate bases of all of
the assets of the partnership other
than cash and cash items, reduced by
‘‘(II) the portion of the liabilities
of the partnership not allocable (on a
proportionate basis) to assets excluded
under subclause (I).
‘‘(C) EXCEPTION NOT TO APPLY TO 50-
PERCENT PARTNERS.—Subparagraph (B) shall
not apply in the case of any partner owning (di-
rectly or indirectly) more than 50 percent of the
capital or profits interests in the partnership at
any time during the 5-year period ending on the
date of the disposition.
‘‘(D) SPECIAL
RULES.—For purposes of
subparagraphs (B) and (C)—
‘‘(i) 
TREATMENT
OF
PREDE-
CESSORS.—Any reference to a partnership
or corporation shall be treated as including
a reference to any predecessor thereof.
‘‘(ii) PARTNERSHIP
NOT
IN
EXIST-
ENCE.—If any partnership was not in ex-
istence throughout the entire 5-year period
ending on the date of the disposition, only
the portion of such period during which
the partnership (or any predecessor) was
in existence shall be taken into account.
‘‘(E) 
OTHER
PASS-THRU
ENTITIES;
TIERED ENTITIES.—Rules similar to the rules
of the preceding provisions of this paragraph
shall also apply in the case of any pass-thru en-
tity other than a partnership and in the case of
tiered partnerships and other entities.
‘‘(c) COORDINATION WITH NONRECOGNITION PROVI-
SIONS; ETC.—
‘‘(1) COORDINATION
WITH
NONRECOGNITION
PROVISIONS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), any nonrecognition provision
shall apply for purposes of this section to a
transaction only in the case of—
‘‘(i) an exchange of stock in a domes-
tic corporation for other property the sale
of which would be subject to taxation
under this chapter, or
‘‘(ii) a distribution with respect to
which gain or loss would not be recognized
under section 336 if the sale of the distrib-
uted property by the distributee would be
subject to tax under this chapter.
‘‘(B) REGULATIONS.—The Secretary shall
prescribe regulations (which are necessary or
appropriate to prevent the avoidance of Federal
income taxes) providing—
‘‘(i) the extent to which nonrecogni-
tion provisions shall, and shall not, apply
for purposes of this section, and
‘‘(ii) the extent to which—
‘‘(I) transfers of property in a re-
organization, and
‘‘(II) changes in interests in, or
distributions from, a partnership,
trust, or estate,
shall be treated as sales of property at fair
market value.
‘‘(C) NONRECOGNITION
PROVISION.—For
purposes of this paragraph, the term ‘non-
recognition provision’ means any provision of
this title for not recognizing gain or loss.
‘‘(2) CERTAIN OTHER RULES MADE APPLICA-
BLE.—For purposes of this section, rules similar to
the rules of subsections (g) and (j) of section 897
shall apply.
‘‘(d) CERTAIN INTEREST TREATED AS STOCK.—For
purposes of this section—
‘‘(1) any option or other right to acquire stock
in a domestic corporation,
‘‘(2) the conversion feature of any debt instru-
ment issued by a domestic corporation, and
‘‘(3) to the extent provided in regulations, any
other interest in a domestic corporation other than
an interest solely as creditor,
shall be treated as stock in such corporation.
‘‘(e) TREATMENT
OF CERTAIN GAIN
AS
A DIVI-
DEND.—In the case of any gain which would be subject
to tax by reason of this section but for a treaty and which
results from any distribution in liquidation or redemption,
for purposes of this subtitle, such gain shall be treated
as a dividend to the extent of the earnings and profits
of the domestic corporation attributable to the stock.
Rules similar to the rules of section 1248(c) (determined
without regard to paragraph (2)(D) thereof) shall apply
for purposes of the preceding sentence.
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of this section, including—
‘‘(1) regulations coordinating the provisions of
this section with the provisions of section 897, and
‘‘(2) regulations aggregating stock held by a
group of persons acting together.’’
(b) WITHHOLDING OF TAX.—Subchapter A of chap-
ter 3 of such Code is amended by adding at the end the
following new section:
‘‘SEC. 1447. WITHHOLDING OF TAX ON CERTAIN STOCK
DISPOSITIONS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, in the case of any disposition of stock in
a domestic corporation by a foreign person who is a 10-
percent shareholder in such corporation, the withholding
agent shall deduct and withhold a tax equal to 10 percent
of the amount realized on the disposition.
‘‘(b) EXCEPTIONS.—
‘‘(1) STOCK WHICH IS NOT REGULARLY TRAD-
ED.—In the case of a disposition of stock which is
not regularly traded, a withholding agent shall not
be required to deduct and withhold any amount
under subsection (a) if—
‘‘(A) the transferor furnishes to such with-
holding agent an affidavit by such transferor
stating, under penalty of perjury, that section
899 does not apply to such disposition be-
cause—
‘‘(i) the transferor is not a foreign
person, or
‘‘(ii) the transferor is not a 10-percent
shareholder, and
‘‘(B) such withholding agent does not
know (or have reason to know) that such affida-
vit is not correct.
‘‘(2) STOCK WHICH IS REGULARLY TRADED.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), a withholding agent shall
not be required to deduct and withhold any
amount under subsection (a) with respect to
any disposition of regularly traded stock if such
withholding agent does not know (or have rea-
son to know) that section 899 applies to such
disposition.
‘‘(B) SPECIAL RULE WHERE SUBSTANTIAL
DISPOSITION.—If—
‘‘(i) there is a disposition of regularly
traded stock in a corporation, and
‘‘(ii) the amount of stock involved in
such disposition constitutes 1 percent or