[Emphasis added.]

Section 356(b), in turn, provides that "the fair market value of such other property shall be treated as a distribution of property to which section 301 applies."

Petitioner concedes that, if AT&T had distributed the Pacific stock directly to its shareholders, the Pacific stock acquired in the merger would have been treated as "other property" under section 355(a)(3)(B), because the merger was a taxable transaction that took place within 5 years of the divestiture. 1986 U.S. Tax Ct. LEXIS 120">*134 Petitioner argues, however, that it was PacTel Group stock, not Pacific stock, which AT&T distributed 86 T.C. 745">*751 to its shareholders. Since this stock was acquired in what respondent concedes was a tax-free exchange, petitioner argues that none of such stock can be categorized as "other property."

Respondent contends that petitioner's position is overly simplistic and that the language of section 355(a)(3)(B) is sufficiently broad to permit an interpretation which will be more accommodating to what he views as the legislative purpose behind the section's enactment, namely to preclude not only direct distributions of purchased interests in an active business but also indirect distributions of such interests emanating from a holding company structure. By way of amplification of his position, respondent argues that (1) we should treat a portion of the PacTel Group common stock as having been acquired via the prior taxable acquisition of Pacific stock with the result that the "by reason of any transaction" provision of section 355(a)(3)(B) is satisfied, or (2) in view of the overall statutory framework of section 355, Pacific, as part of the PacTel Group, falls within the ambit of the1986 U.S. Tax Ct. LEXIS 120">*135 statutory phrase "controlled corporation" as that term is used in section 355(a)(3)(B). As a consequence, respondent concludes that such portion of PacTel stock as represents the fair market value of the Pacific stock (stipulated to be $ 0.39 per share of AT&T stock) constitutes "other property" and is taxable as a dividend.

A literal reading of section 355(a)(3)(B) appears to support petitioner's position. On its face, the statutory language is directed to the distribution "of stock of a controlled corporation, acquired by the distributing corporation by reason of any [taxable] transaction [occurring] within 5 years of the distribution of such stock." (Emphasis added.) As used in section 355(a)(1)(A), the term "controlled corporation" means a corporation which the distributing corporation "controls immediately before the distribution" within the meaning of section 368(c). Since AT&T did not own directly any stock of Pacific immediately before the distribution, and because the stock attribution rules of section 318 are not applicable to section 368(c), ² it follows that, 86 T.C. 745">*752 from a literal standpoint, Pacific was not a "controlled corporation" of AT&T for purposes1986 U.S. Tax Ct. LEXIS 120">*136 of section 355(a)(3)(B). ³ On this basis, petitioner would prevail.

We think it appropriate, however, not simply to adhere to the literal meaning of section 355(a)(3)(B). It can be argued -- as indeed respondent does herein -- that the words of that section are sufficiently ambiguous to permit a resort to legislative history, an aspect of this case to which we1986 U.S. Tax Ct. LEXIS 120">*137 now turn our attention.

The stock boot rule of section 355(a)(3)(B) made its first appearance in the Senate version of the Internal Revenue Code of 1954, H.R. 8300, 83d Cong., 2d Sess. (1954). Section 355(a)(3) in the amendments to the bill as reported by the Senate Finance Committee on page 122 (June 18, 1954) provided that --

stock of a controlled corporation acquired by the distributing corporation within 5 years of its distribution, in a transaction in which gain or loss was recognized in whole or in part, shall not be treated as stock of such controlled corporation, but as other property. [Emphasis added.]

In commenting on the addition of this section, the Senate Finance Committee stated that --

For purposes of determining the taxable nature of part of the exchange or distribution, stock in a controlled corporation acquired by purchase within 5 years of its distribution is treated as "other property." Thus, for example, if a corporation has held a minority stock interest in a corporation for 5 years or more prior to the distribution and within such 5-year period purchases control of such corporation only the stock so purchased will be considered "other property" 1986 U.S. Tax Ct. LEXIS 120">*138 * * * [S. Rept. 1622, 83d Cong., 2d Sess. 267-68 (1954). Emphasis added.]

The Conference Committee modified this proposal, however, and explained the modification as follows --

in section 355(a)(3), the phrase "by reason of any transaction which occurs within 5 years of the distribution of such stock" has been inserted in lieu of the phrase "within 5 years of its distribution, in a transaction." The effect of this change is to make certain that, in addition to treating stock of a controlled corporation purchased directly by the distributing corporation as "other property," similar treatment will be given such stock if it is purchased within 5 years through the use of a controlled 86 T.C. 745">*753 corporation or of a corporation which, prior to a "downstairs merger," was in control of the distributing corporation. For example, if the parent corporation has held 80 percent of the stock of an active subsidiary corporation for more than 5 years but purchases the remaining 20 percent of such stock within the 5-year period, and distributes all of the stock, gain or loss will not be recognized nor will dividend treatment be accorded the stock distributed to the extent of 80 percent. 1986 U.S. Tax Ct. LEXIS 120">*139 The 20 percent of the stock will be treated as "other property" for purposes of section 356. Similarly, under the amendment made, where such parent causes another subsidiary to acquire the 20 percent of the stock and then itself acquires such stock in a liquidation in which no gain or loss is recognized to such parent under section 332, or where the subsidiary having held 80 percent of the stock of its subsidiary for more than 5 years, acquires the 20 percent of the stock which has been purchased by the parent within the 5-year period through a nontaxable "downstairs" merger of the parent into the subsidiary, and all of the stock is distributed, such 20 percent of the stock will in either case be treated as "other property." [H. Rept. 2543, 83d Cong., 2d Sess. 38 (1954). Emphasis added.]

Thus, the "by reason of any transaction" language was added to prevent a distributing corporation from avoiding taxation by acquiring additional controlled corporation stock via a purchase by a related entity coupled with some type of tax-free combination. The focus of section 355(c)(3)(B) both before and after the change remained the same; on the acquisition and distribution of stock1986 U.S. Tax Ct. LEXIS 120">*140 of the controlled corporation, not on the acquisition of stock of the underlying, active subsidiary which was not actually distributed.

This brings us to respondent's second argument, namely that the overall statutory framework of section 355 requires section 355(a)(3)(B) to be interpreted as focusing not merely on the stock of the controlled corporation being distributed, but on the actual operating subsidiary included in the spinoff. Respondent correctly points out that the statutory framework of section 355(b)(2)(A) "itself envisions situations where a holding company will be used as the distributing mechanism for an active subsidiary." It provides that a corporation will qualify as an "active business" if for the 5-year period ending on the date of distribution it has been --

engaged in the active conduct of a trade or business, or substantially all of its assets consist of stock and securities of a corporation controlled by 86 T.C. 745">*754 it (immediately after the distribution) which is so engaged, * * * [Emphasis added.]

Thus, section 355(b)(2)(A) allows the distributing corporation to "look through" the controlled corporation to its underlying active subsidiary in1986 U.S. Tax Ct. LEXIS 120">*141 order to satisfy the active business requirement. Similarly, to qualify as an active trade or business under section 355(b)(2)(D) during the 5 years prior to the distribution of stock, it must be established that --

control of a corporation which (at the time of acquisition of control) was conducting such trade or business --

(i) was not acquired directly (or through one or more corporations) by another corporation * * *

From this legislative framework, respondent concludes that, since it is the activity of the underlying subsidiary that qualifies the spinoff as a tax-free section 355 distribution to begin with, it is only logical and consistent that for section 355(a)(3)(B) purposes, we must also focus on the underlying active subsidiary. Unfortunately for respondent, as we have already observed neither the words of section 355(a)(3)(B), nor its legislative history, support his conclusion. Furthermore, although respondent discusses at1986 U.S. Tax Ct. LEXIS 120">*142 great length the congressional purpose behind the passage of the "active business" provisions of section 355(b), his attempts to explain why we should interpret section 355(a)(3)(B) in a similar light, so that these two sections are read in "symmetry," with a focus on the active subsidiary, are far from convincing. Absent a clearer statement of legislative intent that we should look through the stock of the controlled corporation, we find it difficult to make the analytical jump respondent asks of us. Cf. Insilco Corp. v. Commissioner, 73 T.C. 589">73 T.C. 589, 73 T.C. 589">597-598 (1979), affd. without published opinion 659 F.2d 1059">659 F.2d 1059 (2d Cir. 1981), and cases cited therein. In fact, in light of the clear and detailed statutory scheme of section 355(b), the conspicuous absence of similar language in section 355(a)(3)(B) suggests that Congress was not only aware of the claimed "inconsistency," 86 T.C. 745">*755 but intended just such a result. ⁴ Moreover, we have not overlooked the interpretative implications of the fact that, both in operative text and examples, respondent's regulations under section 355 have been for some 30 years, and are anticipated1986 U.S. Tax Ct. LEXIS 120">*143 to continue to be, conspicuously silent in respect of transactions of the type involved herein. ⁵

However, our inquiry is not over. While it appears that both the plain meaning of section 355(a)(3)(B), as well as its legislative history, support petitioner's position, we also recognize that --

the courts have some leeway in interpreting a statute if the adoption of a literal or usual meaning of its words "would lead to absurd results * * * or would thwart the obvious purpose of the statute." See 380 U.S. at 571 (quoting Helvering v. Hammel, 311 U.S. 504">311 U.S. 504, 311 U.S. 504">510-511 (1941)).1986 U.S. Tax Ct. LEXIS 120">*144 [Knowlton v. Commissioner, 84 T.C. 160">84 T.C. 160, 84 T.C. 160">163 (1985) (quoting Commissioner v. Brown, 380 U.S. 563">380 U.S. 563 (1965)).]

Or, to put it another way, we should not adopt a construction which would reflect a conclusion that Congress had "[legislated] eccentrically." See J.C. Penney Co. v. Commissioner, 312 F.2d 65">312 F.2d 65, 312 F.2d 65">68 (2d Cir. 1962), affg. 37 T.C. 1013">37 T.C. 1013 (1962). We are satisfied that our reliance on the wording of the statute involved herein would not have any such deleterious consequences either in terms of section 355(a)(3)(B) specifically or section 355 generally.

To begin with, pursuant to the merger, AT&T issued 6,705,897 shares of its common stock, with a fair market value of $ 370,500,834, in exchange for the 19,159,707 publicly held shares of Pacific common stock, and paid $ 10,742,580 for the 179,043 publicly held shares of Pacific 6-percent voting preferred stock. Thus, over 97 percent of the consideration furnished by AT&T to acquire the Pacific stock consisted of newly issued shares of its own stock. Since the underlying purpose of section 355(a)(3)(B) is to prevent the1986 U.S. Tax Ct. LEXIS 120">*145 conversion of excess, liquid funds, such as cash and marketable securities, into additional controlled corporation stock that can then be distributed tax free in a spin off, we fail to see how respondent can argue that the spin 86 T.C. 745">*756 off of PacTel Group stock in any way frustrated the "obvious purpose of the statute."

Furthermore, by spinning off PacTel Group stock, AT&T did not bail out earnings and profits and thus undermine the general statutory purpose of section 355, because the Pacific stock acquired from the minority shareholders pursuant to the merger has remained in corporate solution and has never passed into the hands of AT&T's shareholders. Although respondent argues that this is merely a form over substance argument because the benefit of the purchased interest in the Pacific stock was transferred to PacTel Group, and thus was indirectly distributed to AT&T's shareholders, we note that --

A dividend does not confer an economic benefit on its recipient. The distribution leaves the shareholder no richer, since his directly owned assets increase only by the same amount that the beneficial ownership of those assets represented by his stock interest diminishes. 1986 U.S. Tax Ct. LEXIS 120">*146 A dividend therefore is included in gross income not because it affects the shareholder's net worth (which is increased even by undistributed corporate profits), but because the distributed property no longer is in corporate solution. [Kingson, "The Deep Structure of Taxation: Dividend Distributions," 85 Yale L. J. 861, 863-864 (1976). Emphasis supplied.]

Thus, even assuming, arguendo, that the net worth of each shareholder increased as a result of the AT&T stock purchase, ⁶ the simple fact remains that this did not give rise to a taxable event because AT&T did not distribute the Pacific stock. A bailout, like a dividend, by definition requires a distribution out of corporate solution. This has not occurred.

1986 U.S. Tax Ct. LEXIS 120">*147 That the Pacific stock which was acquired in a taxable transaction remained in corporate solution is most significant. It has caused us to focus on some of the problems which would arise if respondent's approach were adopted herein. For example, how would a future distribution of Pacific stock be treated? Another problem which would 86 T.C. 745">*757 arise, if respondent's approach were adopted, involves the necessity of determining the value of the "tainted" stock transferred in the later nontaxable exchange and allocating that value to the shares of stock acquired in that exchange which then become the subject of a section 355 distribution -- a problem which we are not required to face herein because of the parties' agreement as to the value attributable to the purchased Pacific stock and allocable to the distributed PacTel stock. The problem is even more difficult when more than one class of stock of the controlled corporation is received by the distributing corporation in the nontaxable exchange. Beyond this, is a still further complication if respondent should carry his approach to its logical conclusion and, in a later case, should ask us to extend the view which he asks us to 1986 U.S. Tax Ct. LEXIS 120">*148 adopt herein to a purchase of stock of a subsidiary of a subsidiary of the controlled corporation within 5 years of a section 355 distribution. ⁷ Granted that the courts often deal with problems of allocation without specific legislative mandate, it does not necessarily follow that they should extend the interpretation of a statute to create such a problem.

The long and the short of the matter is that we see no thwarting of legislative purpose by confining section 355(a)(3)(B) to the situations which Congress obviously had in mind at the time of its enactment. In so concluding, we are constrained to observe that, if respondent feels that a transaction of the type involved herein represents an obvious attempt to bail out earnings and profits in violation of the purpose behind section 355, he is not without his remedy. He can challenge such a transaction as a "device" under section 355(a)(1)(B). ⁸ He has chosen not to do so in 1986 U.S. Tax Ct. LEXIS 120">*149 this case, because of the conceded business purposes involved in implementing the antitrust decree and FCC order, and we are satisfied that he should not be permitted to avoid this channel of attack by means of an overly broad construction of section 355(a)(3)(B). Thus, while we agree 86 T.C. 745">*758 with respondent that business purpose is irrelevant to the proper construction of section 355(a)(3)(B), we do not agree with his contentions, that "Congress, in enacting section 355, intended to put direct distributions of stock of existing corporations on a par with indirect distributions of such stock through the use of holding companies [and that] the 'by reason of any transaction' language was specifically added to section 355(a)(3)(B) to make it clear that the section was to be applied not only to direct purchase of stock by distributing corporations, but also to any conceivable indirect purchase of stock within five years of the distribution." (Respondent's brief, at 40. Emphasis added.)

1986 U.S. Tax Ct. LEXIS 120">*150 The absolutism of respondent's contentions is unacceptable. Essentially, respondent seeks to have us do what Congress might have done if the type of transaction involved herein had been brought to its attention. But it is not within the province of this Court thus to expand upon the handiwork of the legislature. Clark v. Commissioner, 86 T.C. 138">86 T.C. 138 (1986); see also Commissioner v. Stickney, 399 F.2d 828">399 F.2d 828, 399 F.2d 828">834 (6th Cir. 1968), affg. 46 T.C. 864">46 T.C. 864 (1966).

In view of the foregoing,

Decision will be entered for the petitioner.