having a debt to equity ratio that equals 
the sum of the debt to equity ratio of the 
distributing corporation plus 0.25, or 
‘‘(II) if the change in control company 
is the distributing company in the distribu-
tion, the amount of indebtedness that 
would result in the distributing corporation 
having a debt to equity ratio that equals 
the sum the debt to equity ratio of the con-
trolled corporation plus 0.25. 
To the extent the distribution involves more 
than one controlled corporation, the debt to eq-
uity ratio of the controlled corporation for pur-
poses of the preceding sentence shall be deter-
mined by calculating aggregate indebtedness 
and equity value of all the controlled corpora-
tions. 
‘‘(6) GAIN REALIZED AS RESULT OF DISTRIBU-
TION.—For purposes of this subsection, the term 
‘gain realized as a result of the distribution’ means 
the excess (if any) of— 
‘‘(A) the value of the controlled corpora-
tion’s stock distributed pursuant to the dis-
tribution, over
‘‘(B) the distributing corporation’s tax 
basis in the controlled corporation’s stock dis-
tributed pursuant to the distribution. 
‘‘(7) CROSS-REFERENCE TO SECTION 362 RE-
GARDING BASIS STEP-UP IN CONNECTION WITH DIS-
TRIBUTIONS
TO
WHICH
THIS
SUBSECTION
AP-
PLIES.—To the extent gain is recognized pursuant 
to this subsection, there shall be a corresponding 
basis step-up in the assets of the change in control 
company with excess relative leverage under section 
362(f). 
‘‘(8) COORDINATION WITH SUBSECTION (d).— 
This subsection shall not apply to any distribution to 
which subsection (d) applies. 
‘‘(9) CERTAIN
CAPITAL
CONTRIBUTIONS
NOT 
TAKEN INTO ACCOUNT.— 
‘‘(A) IN GENERAL.—Any equity capital re-
ceived by a change in control company at the 
time of or prior to a distribution that is part of 
a plan a principal purpose of which is to avoid 
or reduce the gain that would otherwise be rec-
ognized pursuant to this subsection shall not be 
taken into account for purposes of calculating 
the debt to equity ratio and excess relative le-
verage of such change in control company.
‘‘(B) CERTAIN CONTRIBUTIONS PRESUMED 
TO BE PART OF PLAN.—For purposes of sub-
paragraph (A), any capital contribution received 
by the change in control company during the 12 
month period ending on the date of the dis-
tribution shall be treated as pursuant to a plan 
described in subparagraph unless it is estab-
lished that none of the principal purposes of the 
capital contribution was to avoid or reduce the 
gain that would otherwise have to be recognized 
pursuant to this subsection. 
‘‘(10) STATUTE OF LIMITATIONS.—If there is a 
distribution to which paragraph (1) applies— 
‘‘(A) the statutory period for the assess-
ment of any deficiency attributable to any part 
of the gain recognized under this subsection by 
reason of such distribution shall not expire be-
fore the expiration of 3 years from the date the 
Secretary is notified by the taxpayer (in such 
manner as the Secretary may by regulations 
prescribe) that such distribution occurred, and 
‘‘(B) such deficiency may be assessed be-
fore the expiration of such 3-year period not-
withstanding the provisions of any other law or
rule of law which would otherwise prevent such 
assessment. 
‘‘(11) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary to carry 
out the purposes of this subsection, including regula-
tions— 
‘‘(A) preventing taxpayers from circum-
venting the purpose of this subsection through 
distributions of multiple controlled corporations, 
the use of unaffiliated companies, capital con-
tributions prior to the distribution, or the use 
of strategies that attempt to distort the debt to 
equity ratio calculations in a manner incon-
sistent with the purpose of this subsection, in-
cluding, for example, transitory changes in cap-
ital structure entered into for the principal pur-
pose of avoiding application of the debt to eq-
uity ratio calculations which have effects incon-
sistent with the purposes of section 355(e), 
‘‘(B) providing for the application of this 
subsection where there is more than 1 con-
trolled corporation, and 
‘‘(C) providing for the application of rules 
similar to the rules of subsection (d)(6) where
appropriate for the purposes of paragraph 
(3)(A).’’. 
(b) CONFORMING AMENDMENT.—Subsection (f) of 
section 362 of such Code is amended to read as follows: 
‘‘(f) BASIS OF ASSETS IN CONNECTION WITH DIS-
TRIBUTION TO WHICH SECTION 355(e) APPLIES.—In the 
case of a distribution to which section 355(e) applies, the 
basis of the assets of the change in control company (as 
defined in such section) and members of its affiliated 
group (other than stock in any member of the acquired 
group) shall be increased by the amount of the gain recog-
nized pursuant to section 355(e)(1) and such increase 
shall be allocated among such assets in a manner that re-
flects the relative amounts by which the fair market values 
of such assets exceed their respective adjusted bases. The 
Secretary shall prescribe regulations providing for cor-
responding adjustments in the basis of stock of members 
of the members of the affiliate group which includes the 
change in control company.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall to— 
(1) any distribution completed after the date of 
the enactment of this Act, and 
(2) any distribution completed on or before 
such date to the extent any transaction completed on
or after such date results in a prearranged change 
in control (as defined in section 355(e) of the Inter-
nal Revenue Code of 1986, as amended by this sec-
tion). 
Æ