Page:United States Statutes at Large Volume 100 Part 3.djvu/445

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2253

"(7) EXCEPTION WHERE STOCK HELD DURING ENTIRE EXISTENCE

OF CORPORATION.—Subsection (a) shall not apply to any extraordinary dividend with respect to any share of stock of a corporation if— "(A) such stock was held by the taxpayer during the entire period such corporation (and any precedessor corporation) was in existence, ii! "(B) except as provided in regulations, the only earnings and profits of such corporation were earnings and profits •' i accumulated by such corporation (or any predecessor corporation) during such period, and "(C) the application of this paragraph to such dividend is not inconsistent with the purposes of this section." (e) CERTAIN LIQUIDATIONS AND REDEMPTIONS TREATED As EXTRAORDINARY DIVIDENDS; QUALIFYING DIVIDENDS NOT TREATED AS EXTRAORDINARY DIVIDENDS; SPECIAL RULE FOR PREFERRED DIVI-

DENDS.—Section 1059 (relating to extraordinary dividends) is amended by redesignating subsection (e) as subsection (f) and by adding after subsection (d) the following new subsection: "(e) SPECIAL RULES FOR CERTAIN DISTRIBUTIONS.— "(1) TREATMENT OF PARTIAL LIQUIDATIONS AND NON-PRO RATA

REDEMPTIONS.—Except as otherwise provided in regulations, in the case of any redemption of stock which is— "(A) part of a partial liquidation (within the meaning of section 302(e)) of the redeeming corporation, or "(B) not pro rata as to all shareholders, any amount treated as a dividend under section 301 with respect to such redemption shall be treated as an extraordinary dividend for purposes of this section (without regard to the holding period of the stock). "(2) QUALIFYING DIVIDENDS.—Except as provided in regulations, the term 'extraordinary dividend' shall not include any qualifying dividend (within the meaning of section 243(b)(l)).

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"(3) QUALIFIED PREFERRED DIVIDENDS.—

"(A) IN GENERAL.—A qualified preferred dividend shall be treated as an extraordinary dividend— "(i) only if the actual rate of return of the taxpayer on the stock with respect to which such dividend was paid exceeds 15 percent, or "(ii) if clause (i) does not apply, and the taxpayer disposes of such stock before the taxpayer has held such stock for more than 5 years, only to the extent the actual rate of return exceeds the stated rate of return.

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"(B) RATE OF RETURN.—For purposes of subparagraph

(A)-

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"(i) ACTUAL RATE OF RETURN.—The actual rate of return shall be the rate of return for the period for which the taxpayer held the stock, determined— "(I) by only taking into account dividends during such period, and "(II) by using the lesser of the adjusted basis of the taxpayer in such stock or the liquidation preference of such stock. "(ii) STATED RATE OF RETURN.—The stated rate of return shall be the annual rate of the qualified preferred dividend payable with respect to any share of

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