STATEMENT OF M. BERNARD AIDINOFF I am M. Bernard Aidinoff. I am a partner in the law firm of Sullivan & Cromwell, and I am a past Chairman of the Section of Taxation of the American Bar Association. I am pleased to be here to present my views on The Subchapter C Revision Act of 1985 and the report of the Staff of the Committee on Finance ("Final Report") containing the proposed Revision Act. I believe that these views are representative of the views of most of the members of the tax bar who participated with the Committee's staff in the detailed consideration of the Final Report. We join Mr. Calkins in applauding the manner in which the proposals contained in the Final Report have been formulated. The process should serve as a model for the development of legislation of this type: We are confident that all who took part in this effort believe that the final product was improved by the contributions of their colleagues. 1 Staff on the Senate Committee on Finance, "The Subchapter C Revision Act of 1985, A Final Report Prepared by the Staff," 99th Cong., 1st Sess., S. Print 99-47 May, 1985. We believe that a more cohesive and more rational regime for the taxation of corporate acquisitions is needed and we support the objectives of the proposals to achieve simplification, tax neutrality, elimination of tax motivated transactions, and increased compliance. Commentators previously have been hampered in their ability specifically to endorse the proposals described in the Preliminary Report2 by the absence of specific statutory language which would implement the proposals. Based on our study to date, we believe that the proposals set forth in the Final Report would generally accomplish the stated objectives. The proposals would replace an often illogical patchwork of rules with a coherent scheme that, when fully understood, should be much easier to understand and to apply in practice. We recognize, however, that with any new enactment, even one which on balance is simplifying, there will be a period of time when unfamiliarity with the new scheme will cause some to question whether simplicity has truly been achieved. Our " 2Staff of the Senate Committee on Finance, "The Reform and Simplification of the Income Taxation of Corporations, 98th Cong., 1st Sess., S. Print No. 98-95 (Sept. 22, 1983). personal belief is that this is not a serious cause for objection to the Final Report proposals. Subject to our comments elsewhere in this testimony, the Revision Act would be a considerable improvement over current law. Accordingly, we strongly urge that the staff report be introduced in bill form, and that this Committee conduct such additional hearings as may be necessary. As the legislative process moves forward, we stand ready to continue our advice and assistance to the Committee staff for further technical analysis and improvement. We point out that our endorsement of the basic principles of the proposals, and of the draft statute as generally achieving those principles, does not constitute approval of each and every provision of the draft statute. There remain, two fundamental issues which are described below. In addition, members of the American Bar Association Section of Taxation and others are currently reviewing the technical workings of the proposed statute. It is highly likely that, as the proposals are carefully considered, a number of suggestions will be advanced that will improve the legislation. Concerns with the proposals for taxation of corporate acquisitions appear to have narrowed and at this point appear to focus on but two fundamental issues: (1) the form of relief that should accompany taxing corporations on liquidating distributions; and (2) the substantial, and we believe unnecessary, complexity that will result from implementing a battery of so-called "consistency rules" to prevent one corporation from acquiring some assets from a target corporation with a tax basis equal to the purchase price while also acquiring other assets from the target corporation with a tax basis equal to the target corporation's basis. The grounds for our concerns with these aspects of the proposals are discussed in detail below. At this point, I wish to emphasize that failure adequately to resolve these issues runs a risk of jeopardizing broad-based support for the proposals as a whole. With that qualification, I can state that, as the proposals have become more generally understood, they have been generally well-received. The few broad issues and various technical questions which remain are appropriate to resolve in the course of the legislative process begun today. Chairman Packwood's announcement of these hear ings requested comments on several major issues which I will now address in the order in which they were presented in that announcement. Electivity of corporate-level taxation in qualified acquisitions. We support the proposal to allow the corporate parties to an acquisition explicitly to elect whether, at the corporate level, to treat the acquisition as a sale (a "cost-basis acquisition") or as a nonrecognition transaction akin to the current treatment of reorganizations (a "carryover-basis acquisition"), regardless of the nature of the consideration used to effect the acquisition. We believe that this proposal is sound for several reasons. First, the explicit election would be a simplification of the current system which in effect permits elective treatment through tinkering with the form of the transaction. For example, carryover-basis treatment can be avoided by poisoning the consideration with a prohibited amount of non-qualifying consideration ("boot"). Carryover-basis treatment at the corporate level can be obtained in an acquisition solely for cash as long as it is structured as a stock purchase. Statutory and judicial requirements that a quantum of stock be |