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

The 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.

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