T h e h a l l e n g e s in its operational, regulatory and strategic complexity, a taxfree spinoff is something of a threeheaded beast. Part i section 355distribution of stock and securities of a controlled. Our federal tax group considers ways to pass the inscrutable device prohibition in the section 355 rules. Under irc section 358, the tax basis of the lvnta shares before the exchange should equal the aggregate tax basis of the lvnta and the lexea shares after the exchange. New private letter ruling pilot program focus on spin.
Department of the treasury indicate that the government remains focused. What a spin off does not do a spin off is a great way to divide a corporation and get stock of the spun off corporation into. Section 355 provides that if certain requirements are met, a corporation may. Optimizing tax treatment in divestitures todays faculty features.
Tax considerations subject to certain requirements under section 355 of the internal revenue code, a parent company can distribute subsidiary. For a spinoff, the regulations state that every corporation that makes a distribution of a controlled corporations stock or securities, as described in sec. Treasury and irs issue new spinoff proposed treasury. Section 355 guidance imposes new minimum thresholds for. Proposed irs rules would limit section 355 distributions. Splitoff, which involves parent offering stock in a subsidiary in exchange for a specified number. Legislative history and rationale of section 351 in the absence of section 351, a person who transfers property to a corporation in exchange for a. Spinoffs, splitoffs, and splitups section 355 distributions, whether in connection with a divisive. The irs ruled that the splitdown qualified under section 355.
The regulations explain that the principal reason for this requirement is to ensure that the distribution is incident to readjustments of corporate structures required by. Structuring tax free type d business reorganizations. Distribution of stock and securities of a controlled corporations 26 cfr 1. Preserving taxfree treatment under section 355 herbert n. A successful section 355 spinoff allows a corporation distributing to distribute to its shareholders the. List the applicable internal revenue code sections and subsections upon which the tax treatment is based the splitoff is intended to be a taxfree exchange under irc sections and 355. The parties intend the splitoff to qualify as a distribution of hughes stock to gm stockholders with respect to which gain or loss is not recognized by gm, hughes or their respective stockholders pursuant to section 355 and. In this article on spin off vs split off, we discuss the key differences between the two, examples and reasons, tax consequences and more. Treasury and irs issue new spinoff proposed treasury regulations on device and active trade or business requirements on july 14, 2016, the treasury department and the irs issued proposed regulations under section 355 on spinoff transactions the. In a going private version of the structure, the splitoff could be done on a targeted basis to a discrete subset of parentco shareholders who seek to enter into a private jv with the financial sponsor.
If a set of statutory and judicial requirements are met, neither the distributing corporation nor its shareholders recognize gain or loss on the distribution. South tulsa pathology laboratory learned this lesson the hard way. Using taxfree section 355 split off in corporate division blog dw tax blog. Irc section 355 corporate spinoff transactions strafford. Finally, a new judicial trend will be considered and a. The proposed regulations provide that the section 355b. Despite the numerous and complex requirements associated with a valid section 355 1 spin off a qualifying distribution under section 355 is one of the most valuable tools available to a corporate tax practitioner. Added section 355 e and section 368a2h to the code. In general, these provisions turned off the application of the step transaction doctrine with respect to transactions following spinoffs for purposes of determining whether a distribution qualifies under section 355. Structuring tax free type d business reorganizations navigating irc 368a1d complexities and selecting the appropriate transaction.
Tax considerations subject to certain requirements under section 355 of the internal revenue code, a parent company can distribute subsidiary stock to shareholders without triggering gain at either the corporate or the shareholder level, making the spin off tax free for both the parent company and its shareholders. Section 355e imposes corporate level tax upon an otherwise taxfree spinoff distribution if pursuant to a plan or series of related transactions herein, plan. Bdistribution of stock and securities of a controlled corporation 26 cfr 1. Form 10 under section 12b or section 12g of the securities exchange act of 1934, as amended exchange act, for the shares to be registered and issued. Key issues when considering a spinoff in his regular column, frank aquila drafts a sample memo to a board identifying the. As a result, you will generally not recognize gain or loss for u. Provided a series of requirements are met, section 355 can be an excellent option for corporations and their shareholders who are looking to restructure by providing a vehicle to do so taxfree in a type of transaction that otherwise would have created a taxable event. The splitoff ts list the applicable internal revenue code sections and subsections upon which the tax treatment is based intended to qualify as a taxfree exchange under irc sections 355 and 368 a 1 d. Section 355 guidance imposes new minimum thresholds for business assets and provides safe harbors for controlunwind transactions. Proposed regulations under section 355 clarify device and. Section 355 transactions are often referred to generally as spinoffs, but can also be structured as splitups or splitoffs. The splitoff is intended to qualify as a taxfree exchange under irc sections 355 and 368a1d.
While financial viability is the key driving force behind splitoffs, it is also imperative that shareholders interest is taken care of. Thus, in light of the restrictive language in 355 b3, the holding company test does. The tax attributes of the controlled company should not be affected. Using taxfree section 355 splitoff in corporate division. A taxfree spinoff cannot be part of a shareholder plan to dispose of a controlling interest in either remainco or spinco, which can significantly restrict postspinoff. Section 355 provides a limited exception to the general requirement that. The splitoff resembles a redemption because the shareholders have relinquished stock of the distributing corporation. How not to do a section 355 spinoff by robert wood vol. Harwell this article examines the principal issues that can arise under section 355 of the internal revenue code in connection with various transactions and other developments following a spin off or other form of corporate separation. Assets of distributing and controlled is less than 10 percent or is attributable to a need to equalize values in a splitoff transaction.
Any increase could result in trigger of corporate level taxes under section 355e. The splitoff exchange offer is typically conducted following the sale of a portion of spinco to outside investors, whether to a sponsor or to the public in an ipo once established, the trading value of spincoshares is used to. Since 1986, it remains as one the few transactions that can successfully sidestep the reach of the repeal of the general utilities doctrine. It is not clear, but the likely purpose for eliminating the hook stock was to. But the gain result can also be obtained if the splitoff is pro rata and the shareholders who receive the splitco stock suffer a decline in stock ownership some other way. But a nonpro rata split off generally would not, because, consistent with the current egur lations, the proposed regulations provide that a distribution is ordinarily not considered a. Section 351 transactions and related issues chapter 3 page 1 tax planning for section 351 transactions by r. Regulations recently proposed by the internal revenue service and the u.
A splitoff involves the shareholders of the distributing corporation exchanging part. What if d shareholders have no basis in their d stock prior to spin off. Spinoff, that the spinoff will qualify as a reorganization within the meaning of sections 368a1d and 355 of the internal revenue code of 1986, as amended the code. Then the statute in its present form and the cases decided since the enactment of section 355 will be examined in detail. Section 355 b3b also provides that a corporations separate affiliated group is the affiliated group that would be determined under 1504a if such corporation were the common parent and 1504b did not apply.
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