Guidance on Tax-Free Spinoffs

| 5/18/2017

Two recent IRS publications suggest that taxpayers seeking to restructure with a tax-free spinoff may start to see more published guidance on what qualifies for tax-free treatment under IRC Section 355.

First, in Revenue Procedure 2017-38, the IRS announced it would provide private letter rulings on whether IRC Section 355 or IRC Section 361 applies to a corporation’s distribution of a controlled corporation’s stock or securities in exchange for, and in retirement of, any putative debt of the distributing corporation if that debt is issued in anticipation of the distribution. The IRS previously had indicated it would not issue rulings in this area.

Second, in Revenue Ruling 2017-9, scheduled to be published in the Internal Revenue Bulletin on May 22, 2017, the IRS will provide guidance on two specific north-south transaction items:

The first situation addressed in the ruling is a typical north-south transaction. In the transaction, Parent owns 100 percent of a holding company subsidiary, which in turn owns 100 percent of the stock of another subsidiary that actively has operated a business for more than five years. The holding company has no other business activity. Parent desires to transfer a different active trade or business it has owned and operated for more than five years to the holding company in exchange for holding company stock in order to meet the active trade or business requirement of Section 355, with the holding company distributing the stock of its original business subsidiary to Parent immediately afterward in an IRC Section 355 tax-free spinoff. The IRS holds that in this fact pattern, the taxpayer would qualify for tax-free treatment.

In the second situation addressed in the ruling, a controlled corporation distributed cash and property to a distributing corporation, and the distributing corporation contributed other property to the controlled corporation in a typical pre-spinoff restructuring. Immediately after the pre-spinoff restructuring, the stock of the controlled corporation is distributed in a Section 355 spinoff. The ruling holds that the distribution of cash from controlled corporation to distributing corporation is treated as boot and not as a dividend.

Additionally, the ruling removes north-south Section 355 transactions from the no-rule list.

The guidance from the IRS is welcome news for businesses planning for spinoffs.

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Howard Wagner
Partner, Washington National Tax