Close
Close

IRS issues proposed regulations on device and active trade or business requirements under Section 355

RFP
Tax Hot Topics: Device requirements Section 355The IRS issued proposed regulations (REG-134016-15) that provide guidance under Treas. Reg. Secs. 1.355-2 and -9 to address concerns regarding the spinoff of too many nonbusiness assets relative to business assets, as well as when the active trade or business is too small compared with the other assets being spun off.

A spinoff may not be a device for the distribution of earnings and profits. Existing regulations provide several device and nondevice factors. The proposed regulations would modify the “use of assets device factor” to provide some bright-line rules when the amount of nonbusiness assets is evidence of a device.

The proposed regulations would modify the business purpose device factor to provide that to overcome evidence of a device due to nonbusiness assets, then the company must prove an exigent need to invest or otherwise have such nonbusiness assets. The proposed regulations also add a per se device standard whereby if certain thresholds of nonbusiness assets are present, there will be a per se finding of a device (i.e., a bad spinoff) regardless of other factors. The per se device standard does not apply to split-offs.

Finally, the proposed regulations would add rules for determining the minimum size of an active trade or business to require that the active trade or business for both the distributing corporation and the controlled corporation is at least 5% of the total assets on each side.

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.