138
shall be treated as a dividend and included in gross
income.
‘‘(3) DISTRIBUTIONS OF STOCK OR OTHER EQ-
UITY OWNERSHIP.—If a taxpayer receives with re-
spect to its ownership interest in a business entity
stock or other ownership interests in such business
entity (as reorganized) or in another business entity
that is controlled by such business entity or is ac-
quiring or merging with such business entity, no
gain or loss shall be recognized on the distribution.
‘‘(b) BASIS IN BUSINESS DIVISIONS.—In the case of
a spin-off, split-off, or split-up of a business entity in
which a taxpayer has basis, the taxpayer’s basis in the
original business entity shall be allocated among the new
and surviving entities in accordance with the relative fair
market values of the taxpayer’s interests in those entities.
If interests in the entities are publicly traded, fair market
values shall be based on public trading prices. In other
cases, the Secretary shall accept any reasonable allocation
made by the taxpayer if the taxpayer notifies the Secretary
of the allocation in an attachment to its tax return for
the taxable year of the transaction.
‘‘(c) DISTRIBUTIONS CONSTITUTING RETURN
OF
BASIS.—
‘‘(1) COMPLETE LIQUIDATIONS.—
139
‘‘(A) IN GENERAL.—In the case of a dis-
tribution in complete liquidation of a business
entity, a taxpayer shall be treated as receiving
cash and assets of the entity in exchange for
the taxpayer’s equity in the business entity. In
such case, the taxpayer shall recognize gain to
the extent that the sum of the cash and fair
market value of assets received exceeds the tax-
payer’s basis in its interest in the business enti-
ty or shall recognize loss to the extent that the
basis exceeds the fair market value of cash and
assets received.
‘‘(B) DISTRIBUTION
OF
EQUITY
INTER-
ESTS.—In the case of a complete liquidation in
which at least 90 percent of the value of assets
and cash distributed to an equity holder is eq-
uity interests in other business entities con-
trolled by the distributing entity—
‘‘(i) subparagraph (A) shall not apply,
‘‘(ii) paragraph (3) of subsection (a)
shall apply,
‘‘(iii) the cash and fair market value
of assets other than equity interests in
controlled entities shall be applied to re-
duce the taxpayer’s basis in the distrib-
140
uting entity and gain will be recognized
only to the extent that the cash and such
fair market value exceeds the taxpayer’s
basis in the distributing entity, and
‘‘(iv) the taxpayer’s remaining basis
shall be allocated among the distributed
equity interests in controlled entities in ac-
cordance with the relative fair market val-
ues of such interests.
‘‘(C) DISTRIBUTION
OF
BUSINESS
PROP-
ERTY.—Under regulations prescribed by the
Secretary, rules similar to those that applied to
partnerships under the Internal Revenue Code
of 1986 shall apply in lieu of subparagraph (A)
to distributions that include property used in a
trade or business if such property is contributed
to a new business entity within 180 days of the
distribution.
‘‘(2) TRANSITION RULES.—See subsections (b)
and (d) of section 73 for transition rules relating to
partnerships and proprietorships.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) CERTAIN RULES OF APPLICATION.—
141
‘‘(A) PRINCIPLES APPLICABLE TO INTER-
NAL REVENUE CODE.—This section shall be ap-
plied without regard to—
‘‘(i) continuity of business interest,
‘‘(ii) continuity of ownership interest,
‘‘(iii) requirements of section 355 of
the Internal Revenue Code of 1986 for
spin-offs, split-offs and split-ups,
‘‘(iv) business purposes for a cor-
porate reorganization or restructuring (ex-
cept if the transaction is potentially abu-
sive), and
‘‘(v) except as provided in paragraph
(3), rules treating dividends as returns of
capital because of the absence of earnings
and profits.
‘‘(B) CONSTRUCTIVE RECEIPT.—If a tax-
payer is given the choice of receiving cash or an
equity interest in a business entity, the tax-
payer will be treated for purposes of this sec-
tion as if he received the cash and purchased
the equity interest.
‘‘(C) DEBT
VERSUS
EQUITY.—The prin-
ciples distinguishing debt and equity that ap-
plied prior to the adopt of the Simplified USA
142
Tax generally shall apply for purposes of apply-
ing this section. An investment in a business
entity shall not be considered debt unless—
‘‘(i) it is reflected in the books and
records of the business entity as debt, and
‘‘(ii) there is written evidence of the
investment that treats such investment as
indebtedness.
‘‘(2) CONTROL.—For purposes of this section,
‘control’ of a business entity means—
‘‘(A) ownership of more than 50% of the
voting power held by equity holders of such en-
tity, or
‘‘(B) ownership of rights to more than
50% of the periodic distributions that the busi-
ness entity may make to its equity holders and
50% of the distributions if the business entity
were liquidated.
‘‘(3) REGULATIONS.—
‘‘(A) SIGNIFICANT DOWNSIZING AND PAR-
TIAL LIQUIDATIONS.—The Secretary is author-
ized to issue regulations under which distribu-
tions resulting from a significant downsizing of
a business entity will be treated in part as re-
turn of equity holders’ capital.