STATEMENT OF WILLIAM D. ANDREWS, ELI GOLDSTON PROFESSOR OF LAW, HARVARD UNIVERSITY, CAMBRIDGE, MA Professor ANDREWS. Thank you, Mr. Chairman. My name is William Andrews. I am a teacher at the Harvard Law School, where I have taught Federal income taxation in general and taxation of corporate transactions in particular for over 20 years. I have also had the privilege of serving as the reporter on the American Law Institute study of this subject, and most recently working with the staff working group on the preparation of the present report. I am here on my own behalf, not that of any of those groups, to affirm that I think this is a splendid proposal. I could differ-reasonable men may differ-on some details of the implementation of the proposal; and I guess I should say that I think there are problems in subchapter C with which the proposal does not deal. But the main thing is that, within the area in which the proposal would take effect, it represents a sound, fundamental, simplifying restatement of principles governing an important area of the tax law. The staff is to be commended, and I hope the committee will proceed to support and advance this legislation. Now, what that subject is is the direct application of the income tax law to merger and acquisition transactions. And I think in evaluating the proposals one has to start by saying that the existing law on this subject is an immensely intricate and complicated outcome of a long process of more or less ad hoc response and counterresponse. A lot of the structure of the subject is still defined by very early judicial decisions, some of which were unusually harsh, like imposing a dividend tax of seven-eighths of the value of the General Motors Co. on the stockholders of that company when it was moved from New Jersey to Delaware. Other judicial decisions have been excessively lenient, like those permitting a sale of corporate assets to be exempt from corporate tax if it is preceded by a corporate liquidation. Many of those decisions were excessively formal, and have made the tax result of transactions excessively dependent upon the means by which they were carried out. Now, the legislative responses to those decisions include the reorganization provisions, which represent a general and healthy response to some of the early harsh decisions. Those have been subject sometimes to excessively narrow construction and have themselves become excessively form-directed in their application. The other general kind of legislative response I would mention, in a quick summary, is the kind of piecemeal response to the general utilities rule which we have seen in recent years. And finally, in describing the present state of the law, one would have to talk about the effects on practice. It is exceedingly difficult to know just what can and cannot be done in this area under existing law, and how to do it. The result has been the emergence of an elite corps of highly skillful practitioners, and I should say the emergence of some prestigious law school courses for the education of those practitioners. Many of those practitioners, of course, are present in this room right now. But I don't think that makes it a good result. The law sometimes produces wrong results; it often produces too much contortion and distortion. And by contortion I mean fitting corporate transactions into peculiar shapes to achieve tax results that may or may not be justified. And by distortion I mean the inducing of transactions which might not occur at all but for these tax rules. Among other things, I think it makes it hard for this committee and the Congress to legislate accurately, or for the Government to administer these provisions accurately. Now, what this staff proposal represents, I think, is a thoroughgoing reappraisal and restatement of this whole area of the law in terms of reflecting a direct examination of what ought to be allowed and not allowed, and an accurate and sound formulation of policy together with provisions which will make it easier for people to deal accurately with those rules and policies both in practice and on the Government side. I guess my time is up. Thank you very much. Senator CHAFEE. Thank you very much, Professor Andrews. [Professor Andrews' written testimony follows:] STATEMENT BY WILLIAM D. ANDREWS before the COMMITTEE ON FINANCE with respect to THE SUBCHAPTER C REVISION ACT OF 1985 SEPTEMBER 30, 1985 Mr. Chairman and Members of the Committee: My name is William D. Andrews. I am the Eli Goldston Professor of Law at Harvard University where I have specialized in Federal Income Taxation, and particularly the income tax treatment of corporations and shareholders, for more than twenty years. I also served as the General Reporter for Subchapter C in the American Law Institute's Federal Income Tax Project, from 1974 to 1982. While both these employments are quite relevant to the subject of this hearing, my appearance today is solely on my own and not on behalf of either the Harvard Law School or the American Law Institute. The American Law Institute (ALI) has adopted proposals for revision of the statutes governing the tax treatment of corporate acquisitions and dispositions and has published a lengthy report, in May, 1982, explaining, illustrating and commenting upon those proposals and the problems to which they are addressed. American Law Institute, Federal Income Tax Project, Subchapter C, Froposals on Corporate Acquisitions and Dispositions, and Reporter's Study on Distributions, May 1982. As Reporter for that project I was deeply involved in the formulation of those proposals and was chiefly responsible for preparation of the report. I do not represent the ALI in my appearance today because the AL1 has no procedure for taking positions on tax legislation beyond the publication of its own proposals, but my opinions are informed by lengthy immersion in the ALI work. In its study of Subchapter C Revision the Committee Staff was directed to examine the ALI proposais, among others, and has done so with great care and critical understanding. Some of the Staff's proposals are in close agreement with those of the ALI, and others are closely related in purpose and effect. The General Tax Treatment of Corporate Acquisitions Both the Subchapter C Revision Act and the ALI proposals call for rather fundamental revisions in our thinking about the taxation of corporate acquisitions. The two sets of proposals differ in detail, but the important thing about them is that they affirm common general themes. In particular they both exhibit and rest upon two major general themes: (1) elimination of the distinction between reorganization and nonreorganization acquisitions, and (2) reversal of the rule in the General Utilities case. 1. Elimination_of_the_distinction between reorganization and nonreorganization acquisitions. Current tax law applicable to corporate acquisitions is dominated by a categorical distinction between reorganization and nonreorganization transactions, reorganizations being governed, at both corporate and shareholder levels, by a whole separate set of rules that have no application to nonreorganization acquisitions. The operative rules governing reorganization acquisitions are themselves quite sensible, but the reorganization definition, on which their application depends, is senselessly complicated. The definition is partly statutory, containing quite different technical requirements for different forms of acquisition transactions - stock exchanges, informal asset acquisitions, statutory mergers, subsidiary acquisitions, reverse subsidiary acquisitions, and so on. Spread over all these disparate statutory requirements are some extrastatutory prerequisites set forth in judicial decisions and regulations, some of which seem to proceed from and foster an erroneous impression that reorganization characterization and treatment are a departure from some norm, to be permitted only on a strictly guarded basis. The Subchapter C Revision Act would clear away this morass by eliminating the distinction between reorganization and purchase acquisitions as a controlling categorical dichotomy. Many of the operative rules governing the taxation of corporations in reorganizations would be preserved, but their application would be controlled by explicit elections, rather than compliance with the reorganization definition. |