PUBLIC LAW 99-514—OCT. 22, 1986
100 STAT. 2875
(5)(A) Paragraph (4) of section 1042(c) (defining qualified replacement property) is amended to read as follows: (4) QUALIFIED REPLACEMENT PROPERTY.—
(A) IN GENERAL.—The term 'qualified replacement property' means any security issued by a domestic operating corporation which— "(i) did not, for the taxable year preceding the tax'^,. able year in which such security was purchased, have ..i£i...; passive investment income (as defined in section 1362(d)(3)(D)) in excess of 25 percent of the gross receipts of such corporation for such preceding taxable year, and "(ii) is not the corporation which issued the qualified securities which such security is replacing or a member of the same controlled group of corporations (within the meaning of section 1563(a)(l)) as such corporation. For purposes of clause (i), income which is described in section 954(c)(3) shall not be treated as passive investment income. l! "(B) OPERATING CORPORATION,—For purposes of this paragraph— "(i) IN GENERAL.—The term 'operating corporation' means a corporation more than 50 percent of the assets ] of which were, at the time the security was purchsised or before the close of the placement period, used in the active conduct of the trade or business. ,,
"(ii) FINANCIAL INSTITUTIONS AND INSURANCE COMPA-
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NiES.—The term 'operating corporation' shall include— "(I) any financial institution described in section 581 or 593, and "(II) an insurance company subject to tax under subchapter L. "(Q
CONTROIXING
AND
CONTROLLED
CORPORATIONS
T R E A T E D A S 1 CORPORATION.—
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"(i) IN GENERAL.—For purposes of applying this paragraph, if— "(I) the corporation issuing the security owns stock representing control of 1 or more other corporations, "(II) 1 or more other corporations own stock representing control of the corporation issuing the security, or
"(III) both, then all such corporations shall be treated as 1 corporation. "(ii) (HoNTROL.—For purposes of clause (i), the term •^1 o» 'control' has the meaning given such term by section 304(c). In determining control, there shall be disregarded any qusdified replacement property of the
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taxpayer with respect to the section 1042 sale being tested. Ii "(D) SECURITY DEFINED.—For purposes of this paragraph, I the term 'security' has the meaning given such term by section 165(g)(2), except that such term shall not include any security issued by a government or political subdivision r thereof." (B) I f -
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