July 21, 2016
Spinoffs: IRS Changes Course With “Active Trade or Business Requirement” Proposal
Here’s news via this summary of this memo (also see these memos in our “Spinoffs” Practice Area):
On July 14, 2016, the IRS and Treasury Department released proposed regulations regarding tax-free spinoffs by a parent corporation (the “distributing corporation”) of stock in a subsidiary corporation (the “controlled corporation”) in which the distributing corporation or the controlled corporation owns significant nonbusiness assets compared to its other assets. Under a previous IRS policy, a private ruling would not be issued if the assets comprising the active trade or business of the distributing corporation or the controlled corporation were less than 5% of such corporation’s total assets. The IRS later abandoned the unfavorable ruling policy and liberalized certain technical aspects of the active trade or business requirement for tax-free treatment.
In a course reversal, the new rules, if finalized, would implement the prior ruling policy in regulations. Accordingly, even a significant active business would no longer satisfy the active trade or business requirement if the business did not constitute at least 5% of the value of the corporation. The proposed regulations would also make tax-free treatment more difficult to achieve by adding a new per se “device” rule that would trump the longstanding weighing of facts and circumstances if the relative percentages of nonbusiness assets of the distributing corporation and the controlled corporation exceed certain ratios.