stock in one corporation (the "subsidiary") owned by another corporation (the "parent") is attributed to the parent's shareholders in proportion to the shareholders' ownership in the parent. However, under section 318, the stock of a subsidiary corporation is considered as owned by a shareholder of the parent corporation only if the shareholder owns 50 percent or more in value of the stock of the parent corpora

tion.

Similarly, under section 544, an individual is considered as owning stock owned directly or indirectly by his brothers and sisters, spouse, ancestors, and lineal decendants; however, under section 318, an individual is treated as owning only the stock owned directly or indirectly by his spouse, children, grandchildren, and parents.

The Act adopted the attribution rules of section 318 primarily because it was thought inappropriate to attribute one partner's stock in a corporation to another partner in the same partnership. However, in adopting the attribution rules of section 318, the Act inadvertently permitted exemption from the at risk rules where the stock ownership of the corporation warranted application of the risk rules (e.g., where the corporation was a personal holding company but did not meet the section 318 attribution rules).

The bill would provide generally that, in determining whether five or fewer individuals own 50 percent or more of stock of a corporation under the at risk rules, the rules of section 544 which relate to attribution of stock ownership are to be applied. section 544 relating to attribution of stock ownership from one partner to another would not be applied."

However, those rules of

Notwithstanding the statement, noted above, in the recent Committee Print prepared by the staff of the Joint Committee on Taxation recommending the

change in the stock ownership rules for closely held corporations provided under Section 102 (a) (1) (A) of the Technical Corrections Act of 1979, such a change from the Section 318 attribution rules to the Section 544 attribution rules for privately held (closely held) corporations would be contrary of the intent of the Congress, under the provisions of the Revenue Act of 1978, for it is clear that the House and Senate conferees wished to preserve the competitive position of privately held corporations which engage in legitimate leasing activities.

This change in attribution rules, without

other adjustments, would result in the elimination from this market of privately held corporations which engage in legitimate leasing activities, including equipment leasing.

It is clear that the House and Senate conferees for the Revenue Act of

1978 intended to provide for fair and equitable operation of the at-risk rules to insure that legitimate leasing activities, and particularly equipment leasing activities, would not be eliminated through extension of the at-risk limitations. More specifically, the Congress recognized inherent economic distinctions between legitimate leasing activities, such as equipment leasing, on the one hand and tax abuse situations on the other. In this regard, it is the nature of the leasing activities rather than ownership which should be determinative for tax purposes.

As noted above, the Congress recognized that the effect of subjecting privately held leasing firms to the at-risk limitations, while not subjecting similarly situated publicly held firms to the same limitations, would be to shift important commercial advantages to publicly held firms with the result that privately held firms would be excluded from this market.

Based on the points, authorities, developments and considerations

set forth above, it is clear, pursuant to the legislative history of the Revenue Act of 1978, that the House and Senate conferees, and the Congress as a whole, did not intend to subject legitimate leasing activities of privately held companies, with particular reference to equipment leasing, to the at-risk limitations.

CONCLUSION

It is Cargill Leasing's position that as a closely held corporation

actively engaged in the regular conduct of the business of leasing and selling

equipment which is Section 1245 property, the at risk rules of Section 465 of the

- 1954 IRC should not apply to any of its operations nor to the operations of any similarly situated leasing corporation.

GENERAL ELECTRIC CO., Fairfield, Conn., November 16, 1979.

Hon. HARRY F. BYRD, Jr.,

Committee on Finance,

Dirksen Office Building, Washington, D.C.

DEAR SENATOR BYRD: I am writing to request that the Committee on Finance include in the Technical Corrections Act of 1979 (H.R. 2797) a much needed amendment to the Internal Revenue Code relating to deductions for contribution to foreign pension plans.

Plans maintained outside of the United States primarily for the benefit of nonresident alien employees are exempt from all of the requirements of Title I of ERISA. The Conference Report on ERISA suggests that exemption of such plans from the qualification requirements added to the Internal Revenue Code by Title II of ERISA was unnecessary, because the plans "would have no need to seek tax deferral qualification." H.R. Rep. 93–1280, p. 291, 1974-3 CB 452. However, this is not the case. The Internal Revenue Service has ruled in LTR-7904042 that contributions by a U.S. employer to a foreign trust maintained under such a plan are not deductible under Code section 404(a)(4) unless the plan meets all of the requirements of the Code for qualified plans, including those added by Title II of ERISA. The ruling also held that since the plan is a defined benefit plan and not an individual account plan (funds in the trust are unallocated), no deduction is allowable under Code section 404(a)(5)—the section applicable to nonqualified plans—even when amounts are distributed to the participants. The result is that the employer is never allowed a deduction for his contributions to the plan.

These constraints on the allowability of business expense deductions for contributions to foreign plans primarily benefiting nonresident aliens are clearly unreasonable and we do not believe that Congress intended to impose them.

We respectfully request that this technical legislative oversight be corrected by amending Code section 404(a)(4) retroactively to allow a deduction for contributions by a U.S. employer to a foreign situs stock bonus, pension or profit sharing trust which is part of a plan maintained outside of the United States primarily for nonresident aliens and under which the contributions cannot revert to the employer prior to satisfaction of all liabilities under the plan. A draft of a legislative amendment to make this technical correction is attached.

The consideration of this matter by the Subcommittee on Taxation and Debt Management Generally will be much appreciated.

Very truly yours,

P. S. WELCH

Manager, Tax Accounting Operation.

Attachment.

SEC.-. TRUSTS CREATED OR ORGANIZED OUTSIDE THE UNITED STATES

(a) General rule.-Section 404(a)(4) of the Internal Revenue Code of 1954 (relating to deductions for contributions of an employer to trusts created or organized outside the United States) is amended to read as follows:

"(4) Trusts created or organized outside the United States.—

Contributions to a stock bonus, pension, or profit-sharing trust by an employer which is a resident, or corporation, or other entity of the United States shall be deductible under the preceding paragraphs if—

(i) the trust would qualify for exemption under section 501(a) except for the fact that it is a trust created or organized outside the United States; or

(ii) such trust is part of a plan maintained outside the United States primarily for the benefit of persons substantially all of whom are nonresident aliens, and, under the law of a foreign country or under the governing instrument of the plan, it is impossible, at any time prior to the satisfaction of the claims of the participants and beneficiaries of the plan, for any part of the contributions made in any taxable year or any income therefrom to revert (within the taxable year or any subsequent taxable year) to the employer or any person which is a member of a controlled group with (within the meaning of section 414(b)) or under common control with (within the meaning of section 414(c)) the employer. (b) Effective date.—The amendment made by this section shall apply to taxable years ending after August 31, 1974.