Influential Congressmen from both parties have introduced legislation that would prevent companies from duplicating the structure that saved Seagram Co. about $1.5 billion in federal taxes on DuPont Co.'s recent repurchase of most of Seagram's giant position in its stock.

The bills are sponsored by Bob Packwood (R-Ore.) and Pat Moynihan (D-NY) in the Senate, and Bill Archer (R-Tex.) and Sam Gibbons (D-Fla.) in the House of Representatives; they also have the support of the Clinton administration.

In the DuPont transaction, the company redeemed virtually all of Seagram's 24% stake for $8.8 billion--$53 per share in cash and $3 worth of warrants. The warrants, which would enable Seagram to reconstruct its entire original position in DuPont, were issued with expiration dates in 1997, '98 and '99. They have strike prices reasonably far out of the money, but not wildly so; DuPont shares would have to appreciate about 14% per year for the warrants to reach their exercise prices.

Current IRS rules lay out strict guidelines for determining whether stock redemptions should be treated as sales (with any profits thus accorded capital gains treatment) or as dividends. One of the tests is whether an investor's stock ownership materially changes as a result of the transaction; for purposes of this test, any options or warrants are treated as exercised even if they're not currently in the money.

Under that test, Seagram's ownership of DuPont was not reduced, so the correct treatment of the payment was as a dividend. And, like any corporation that owns more than 20% of another, Seagram was entitled to the 80% dividends-received deduction.

Moreover, since the payment constituted an extraordinary dividend, Seagram technically reduced its tax basis in its DuPont stake by the amount of the DRD--from roughly $3 billion to negative $3 billion. Taxes on that negative basis can be deferred until the stock is sold.

Under the new legislation, such distributions to corporate shareholders through non-pro rata redemptions and partial liquidations, which are otherwise eligible for the DRD, would simply be treated as a sale of the stock redeemed.

But some tax experts cried foul last week. "There's no tax policy rationale behind this--it's just money-raising," said Mark Shifke, a partner at Davis Polk & Wardwell.

Although Seagram's maneuver might seem like an obvious abuse, tax experts don't necessarily see it that way. They note that the current rules were specifically designed to force individuals to account for large payments as dividends rather than capital gains--because of their higher tax rate on the former.

The bill wouldn't change the treatment of such redemptions for individuals.