June 27, 2018

Spin-Offs: IRS Audits Transaction Cost Treatment

This Ropes & Gray blog says that the IRS is auditing companies that engaged in spin-offs or split-offs with a view to determining whether they impermissibly deducted transaction costs. If you’ve done a Section 355 divisive reorg, this excerpt says that you may want to check out your tax returns to see if you’re likely to be a target:

On March 13, 2018, the IRS announced a new Large Business and International Division (“LB&I”) compliance campaign determined to impose tax adjustments on taxpayers who have deducted the costs associated with a tax-free spin-off, split-off or split-up under Section 355. In general, transaction costs to facilitate section 355 transactions must be capitalized.

The IRS will be examining tax returns of entities reporting section 355 transactions to determine if they attempted to currently deduct transaction expenses. Taxpayers who conducted section 355 transactions in the past few years may want to consider reviewing their return positions to determine if they may be a target of this campaign.

John Jenkins