May 9, 2017
Spin-Offs: IRS Issues Guidance on “North-South” Issues
This Debevoise memo notes that the IRS recently issued a Revenue Ruling addressing issues associated with “North-South” transactions – which are often part of corporate restructurings undertaken by companies preparing for a spin-off or similar transaction. North-South transactions involve separate transfers of assets from a parent to a subsidiary and from a subsidiary to a parent in order to move assets associated with the businesses to the appropriate entities.
If treated separately, these transfers generally qualify for favorable tax treatment, but if combined, the tax consequences can be significant – even threatening the viability of the spin-off. Unfortunately, these issues have created great uncertainty in recent years, and that’s been compounded by the IRS’s unwillingness to address North-South issues. This excerpt explains:
Historically, the IRS issue to taxpayers private letter rulings confirming that in certain situations, IRS would not integrate North-South transactions. However, in January 2013, the IRS announced that it would no longer issue rulings on North-South issues. Taxpayers wishing to restructure corporate groups have faced great uncertainty as a result. The Ruling removes the “no-rule” policy and and signals that taxpayers may again obtain rulings on North-South issues.
The memo notes that the Revenue Ruling sheds some light on when the IRS will respect the independence of transaction steps in a spin-off, but doesn’t provide clear guideposts. The really important takeaway from the issuance of the Ruling may be that the IRS is back in the game – and will once again provide rulings in this important area for transaction planners.
– John Jenkins