To amend the Internal Revenue Code of 1986 to provide nonrecognition treatment for certain transfers by common trust funds to regulated investment companies.

SECTION 1. NONRECOGNITION TREATMENT FOR CERTAIN TRANSFERS BY COMMON 
              TRUST FUNDS TO REGULATED INVESTMENT COMPANIES.

    (a) General Rule.--Section 584 of the Internal Revenue Code of 1986 
(relating to common trust funds) is amended by redesignating subsection 
(h) as subsection (i) and by inserting after subsection (g) the 
following new subsection:
    ``(h) Nonrecognition Treatment for Certain Transfers to Regulated 
Investment Companies.--
            ``(1) In general.--If--
                    ``(A) pursuant to a single plan, a common trust 
                fund transfers substantially all of its assets to one 
                or more regulated investment companies in exchange 
                solely for stock in the company or companies to which 
                such assets are so transferred, and
                    ``(B) such stock is distributed by such common 
                trust fund to participants in such common trust fund in 
                exchange solely for their interests in such common 
                trust fund,
        no gain or loss shall be recognized by such common trust fund 
        by reason of such transfer or distribution, and no gain or loss 
        shall be recognized by any participant in such common trust 
        fund by reason of such exchange.
            ``(2) Basis rules.--
                    ``(A) Regulated investment company.--The basis of 
                any asset received by a regulated investment company in 
                a transfer referred to in paragraph (1)(A) shall be the 
                same as it would be in the hands of the common trust 
                fund.
                    ``(B) Participants.--The basis of the stock which 
                is received in an exchange referred to in paragraph 
                (1)(B) shall be the same as that of the property 
                exchanged. If stock in more than one regulated 
                investment company is received in such exchange, the 
                basis determined under the preceding sentence shall be 
                allocated among the stock in each such company on the 
                basis of respective fair market values.
            ``(3) Treatment of assumptions of liability.--
                    ``(A) In general.--In determining whether the 
                transfer referred to in paragraph (1)(A) is in exchange 
                solely for stock in one or more regulated investment 
                companies, the assumption by any such company of a 
                liability of the common trust fund, and the fact that 
                any property transferred by the common trust fund is 
                subject to a liability, shall be disregarded.
                    ``(B) Special rule where assumed liabilities exceed 
                basis.--
                            ``(i) In general.--If in any transfer 
                        referred to in paragraph (1)(A) the assumed 
                        liabilities exceed the aggregate adjusted bases 
                        (in the hands of the common trust fund) of the 
                        assets transferred to the regulated investment 
                        company or companies--
                                    ``(I) notwithstanding paragraph 
                                (1), gain shall be recognized to the 
                                common trust fund on such transfer in 
                                an amount equal to such excess,
                                    ``(II) the basis of the assets 
                                received by the regulated investment 
                                company or companies in such transfer 
                                shall be increased by the amount so 
                                recognized, and
                                    ``(III) any adjustment to the basis 
                                of a participant's interest in the 
                                common trust fund as a result of the 
                                gain so recognized shall be treated as 
                                occurring immediately before the 
                                exchange referred to in paragraph 
                                (1)(B).
                        If the transfer referred to in paragraph (1)(A) 
                        is to two or more regulated investment 
                        companies the basis increase under subclause 
                        (II) shall be allocated among such companies on 
                        the basis of the respective fair market values 
                        of the assets received by each of such 
                        companies.
                            ``(ii) Assumed liabilities.--For purposes 
                        of clause (i), the term `assumed liabilities' 
                        means the aggregate of--
                                    ``(I) any liability of the common 
                                trust fund assumed by any regulated 
                                investment company in connection with 
                                the transfer referred to in paragraph 
                                (1)(A), and
                                    ``(II) any liability to which 
                                property so transferred is subject.
            ``(4) Common trust fund must meet diversification rules.--
        This subsection shall not apply to any common trust fund which 
        would not meet the requirements of section 368(a)(2)(F)(ii) if 
        it were a corporation. For purposes of the preceding sentence, 
        Government securities shall not be treated as securities of an 
        issuer in applying the 25-percent and 50-percent test and such 
        securities shall not be excluded for purposes of determining 
        total assets under clause (iv) of section 368(a)(2)(F).''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to transfers after the date of the enactment of this Act.

Summary: Amends the Internal Revenue Code to provide for the nonrecognition of gain or loss for the transfer of common trust fund assets to regulated investment companies in exchange for stock when the stock is distributed to participants of the common trust fund in exchange for their interest in such fund.