89TH CONGRESS 2d Session } SENATE { REPORT No. 1723 INCOME TAX TREATMENT OF CERTAIN DISTRIBUTIONS PURSUANT TO BANK HOLDING COMPANY ACT OF 1956 OCTOBER 13, 1966.-Ordered to be printed Mr. LONG of Louisiana, from the Committee on Finance, submitted the following REPORT To accompany H.R. 11257] The Committee on Finance, to which was referred the bill (H.R. 11257) relating to the income tax treatment of certain distributions pursuant to the Bank Holding Company Act of 1956, as amended, having considered the same, reports favorably thereon with an amendment and recommends that the bill (as amended) do pass. I. SUMMARY Your committee has accepted the House provision without change but has added an amendment relating to a different tax matter. The provision in the House-passed bill which your committee has accepted without change is concerned with corporations which became bank holding companies as a result of the 1966 amendments to the Bank Holding Company Act of 1956. The 1966 amendments removed an exemption provided by prior law and, as a result, one or more companies will become a bank holding company without any action on its part. As a result of being classified as a bank holding company, such a corporation will have to dispose of either the banking or the nonbanking interests. This bill provides in these cases that the corporation may make a distribution of either one of these two categories of interests without the shareholders having to pay tax upon the stock or other property received so long as all distributions in kind are made on a pro rata basis to all shareholders. Your committee bas added an amendment to the bill to solve a problem faced by companies which provide mortgage insurance. They are subject to State regulation, and are almost uniformly required to place half of their earned premiums in contingency reserves for 15 years to provide protection to policyholders from losses which might result from adverse economic conditions. The committee amends the Internal Revenue Code of 1954 to provide a special deduction for additions to an extraordinary loss reserve for amounts which State law or regulations require a mortgage guaranty insurance company to add to such a reserve, but not in excess of 50 percent of earned premiums. However, the committee amendment provides that the special deduction is allowable only if the tax benefit obtained from the deduction of additions to the reserve is invested in a special issue of noninterest bearing tax and loss bonds. The tax and loss bonds may be used for payment of income taxes which will be due when the reserve is returned to income, or the bonds may be redeemed in the event of extraordinary losses during the period of the reserve. The Treasury Department has indicated that it has no objection to the House-passed provision of the bill. With respect to the amendment made by your committee, the Treasury recommends that it be adopted by the Congress. II. DISTRIBUTIONS PURSUANT TO BANK HOLDING COMPANY ACT Reasons for the provision. In 1956, Congress passed legislation placing certain corporations referred to as bank holding companies under the control of the Federal Reserve Board. In general, these were organizations controlling two or more banks. Under the legislation, a bank holding company was prohibited from engaging in any business other than banking. As a result, organizations which in 1956 controlled two or more banks and at the same time owned interests in other businesses generally were required to dispose of either their banking or their nonbanking interests. Corporations classified as bank holding companies under the Bank Holding Company Act of 1956 usually disposed of either their banking or their nonbanking interests by distributing one or the other of these classes of interests to their shareholders. Since Congress was requiring these corporations to distribute one of these classes of interests, in 1956 it provided generally that these stock distributions, to the extent they were made with respect to property acquired before May 15, 1955, could be made without tax consequences to the shareholders receiving the distributed stock. In the absence of the special tax provisions enacted in 1956, the stock distributions would have been treated as ordinary income (dividends) to the shareholders receiving them. The 1956 act contained certain exceptions to the requirement that dispositions of either banking or nonbanking interests had to be made in the case of companies holding interests in two or more banks. One of these exceptions provided that a company was not to be considered a bank holding company if it was registered prior to May 15, 1955, under the Investment Company Act of 1940 (or was an affiliate of such a company) unless the company or its affiliate directly owned 25 percent or more of the voting shares of each of two or more banks. This exception permitted companies of this type to own indirectly a 25 percent, or larger, interest in two or more banks. This year (Public Law 89-485; H.R. 7371) Congress repealed this exception with the result that any company falling within this category now must divest itself of either its banking or nonbanking interests where its indirect ownership equals or exceeds 25 percent. It was stated that this exemption initially was granted because it was |