On Sept. 14, 2015, the IRS issued Notice 2015-59 addressing IRC Section 355 spinoff transactions. Notice 2015-59 announced that certain spinoff transactions have been identified for further analysis based on the IRS’ concern that the transactions are not consistent with the intent of IRC Section 355. The transactions in question involve:
- Ownership by the distributing corporation or the controlled corporation of substantial investment assets in relation to the value of all of the corporation’s assets and the value of the assets of the active trade(s) or business(es) on which the distributing corporation or the controlled corporation relies to satisfy the requirements of Section 355(b)
- A significant difference between the distributing and controlled corporations’ percentage of assets constituting investment assets
- Ownership by the distributing corporation or the controlled corporation of a small amount of qualifying business assets in relation to all of its assets
- An election by the distributing corporation or the controlled corporation, but not both, to be a regulated investment company (RIC), within the meaning of IRC Section 851, or a real estate investment trust (REIT), within the meaning of IRC Section 856
Concurrent with the release of Notice 2015-59, the IRS released Revenue Procedure 2015-43 indicating that it generally will not provide private letter rulings on Section 355 transactions that have any of the following characteristics:
- The fair market value of the gross assets of the active trade or business is less than 5 percent of the total fair market value of the gross assets of the distributing or controlled corporation.
- Investment securities constitute two-thirds or more of the total fair market value of gross assets of the distributing or controlled corporation.
- Either the distributing or controlled corporation, but not both, become either an REIT or an RIC.
Although Revenue Procedure 2015-43 does not bar taxpayers from engaging in spinoff transactions in these circumstances, the new IRS ruling policy will increase the uncertainty level of those transactions.
The notice and revenue procedure are consistent with the IRS’ recent decision not to issue a private letter ruling on Yahoo Inc.’s proposed spinoff of its stock holdings in Alibaba Group Holding Ltd. Yahoo’s stake in Alibaba is valued at approximately $25 billion. To meet the active trade or business requirements for a Section 355 spinoff, Yahoo proposed the contribution of an existing trade or business with a small market value in comparison to the value of the Alibaba stock. According to Yahoo’s Securities and Exchange Commission filings, the IRS did not grant the requested ruling. At the same time, the IRS indicated that it had not concluded that the proposed spinoff transaction was taxable and therefore was not ruling adversely on the request. The company indicated it will continue with the spinoff in the absence of a private letter ruling based on the opinion of tax counsel.