Under current law, there is symmetry for shareholders of closely-held businesses. Neither a sale of stock, sale of assets, nor a liquidation will cause a double tax to apply. Under the Proposals, for such shareholders, the cost of selling or otherwise terminating the business will increase, possibly to a very great extent, depending upon the amount of appreciation accruing in the business over the years.

If the Proposals pass without modification, there would be symmetry once again: such transactions all would be subject to double taxation. The Proposals also would lead to another form of symmetry: shareholders of closely-held businesses would be treated without favorable distinction from the investor or speculator who sells stock and is taxed at capital gains rates (assuming a holding period of anything more than a mere six months). Supposed symmetry is achieved in this case because the investor's or speculator's sale is not an event permitting the corporation to step-up the basis of assets. (Nonetheless, gains on appreciated assets would be deferred and not subject to tax until recognized.)

However, we believe that Congress should make a distinction between the owner of a closely-held business and the investor or speculator in the stock of a closely-held company. The owner of the closely-held business who is the subject of our concern is the risk-taker, the life-long stimulator of local business, the job producer, and, in essence, the backbone of the American Economy. The taxes applicable to his termination of business may fall upon gains accruing over several decades. We do not believe that his situation should be correlated in Congressmen's minds and under the Internal Revenue Code with the investor or speculator in public securities. We believe that any dichotomy of treatment accorded today is based upon the merits as a matter of tax policy.

The Society believes that the Proposals' effort to mitigate the damage from extinguishing the General Utilities doctrine, as represented in Section 337, etc., is wholly inadequate.

The Proposals purport to provide relief, in a liquidation or liquidating sale, from double taxation of gains on "long-held" capital assets (those held for 5 years), owned by "small" businesses (those with stock valued at up to $1,000,000, with a phase-out of relief if values range from $1,000,000 to $2,000,000). The method chosen (Proposed Section 1060) is to permit shareholders generally to adjust the basis of their stock by the amount of gain subject to tax.

The Society believes that this relief provision is excessively restrictive, and will not adequately reach the fundamental issue that the Proposals impose a new level of taxation upon owners of closely-held businesses.

We recommend a series of alternative approaches to the Committee:

1.

Re-consideration of the imposition of double taxation on transactions presently subject to the single level of tax treatment accorded by Sections 337 and 338 and, in the case of liquidations, under Section 336.

2. Expansion of the relief provision which is now limited by the $1,000,000 description of "small" businesses; and expansion of description of the gains which will entitle the shareholder to a basis adjustment, now limited to gains on "long-held" capital assets.

We believe a study should be made to determine whether "small" businesses entitled to relief should be measured by the number of shareholders; the value of stock (in which case the values

should be higher than appears in the Proposals); the public or private nature of the corporation; or otherwise.

3.

Protection from double taxation of shareholders who formed

corporations by the transfer of appreciated property (at least to the

extent of the pre-transfer appreciation).

OTHER AREAS OF THE PROPOSALS

The Society supports many of the principles and specific provisions adopted by the Proposals. In general, we favor elective tax treatments, independence of the tax consequences to corporations and their shareholders, and adoption of a single rule limiting the availability of net operating loss and other carry forwards. Our specific and technical comments appear in the following section.

There is no question that the repeal of General Utilities would simplify the law, would reduce the need for collapsible corporation rules, would remove certain legal inconsistencies, etc.; however, we question whether achieving this legal consistency is worth the price of placing a new obstacle before would-be entrepreneurs and punishing those already in business with a new tax and an immediate and possibly substantial loss in the value of their businesses businesses that build the wealth from which jobs are created and from which taxes

the

can be paid.

III. ANALYSIS OF PROVISIONS

PROPOSED "SUBCHAPTER C REVISION ACT OF 1985"

The Subchapter C Revision Act of 1985 may be broken down into three major substantive areas:

A. Provisions affecting transfers of stock or assets in corporate

organizations and reorganizations,

B. Provisions affecting limitations on utilization of net operating losses following changes in ownership of the loss corporation, and

C. Provisions affecting recognition of gain on corporate distributions of

assets.

PROVISIONS AFFECTING TRANSFERS OF STOCK OR ASSETS
IN CORPORATE ORGANIZATIONS AND REORGANIZATIONS

The Proposal would restructure the method by which transfers of assets and stock affect shareholder and corporate recognition of gain or loss and basis. If the Proposal were enacted, the tax results to the corporation and the shareholders would be independent of each other. In the case of corporate transfers in a "Qualified Acquisition" (basically an acquisition within one year), a corporation could elect to revalue assets to fair market value upon payment of a tax on the gain. This provision would expand the elective nature of Section 338, as currently in effect, to all types of asset transfers. Shareholders would be permitted to defer gain on receipt of "Qualified Consideration"; but would recognize gain on receipt of non-qualified consideration.

The Society supports the proposed separation of shareholder and corporate tax consequences. Recent trends, especially in the area of Mutual Savings Bank

conversions, have linked corporate and shareholder consequences. Transactions have been held to be taxable at the corporate level based on application of the continuity of interest principle at the shareholders' level (Paulsen v. Commissioner, 716 F.2d 563 (9th Cir. 1983), rev'g. 78 T.C. 291 (1982)). The Society does not believe that corporations should effectively be precluded from structuring a tax-free reorganization.

Under this proposed provision, which we support, the entity would be able to structure a qualified transaction without regard to shareholder consequences.

Elective Tax Treatment of Qualified Acquisitions

The Society supports the expansion of elective cost basis treatment. Corporations would no longer be forced to resort to legal gymnastics to secure either a carryover basis or cost basis acquisition.

Corporations would be given a clear choice and clear methods for securing

a carryover basis or cost basis results.

Shareholder Treatment

Proposed Section 354 expands the types of transactions in which 354 will apply and focuses on the nature of the consideration (qualified and non-qualified) in the determination of gain recognition. The Proposal (354(b)) specifically permits "Creeping Acquisitions" which were

permitted under prior "B" reorganizations, but not under "C", "D" or "E" types. This has the laudable effect

of placing substance over form in qualifying acquisitions.