IRS eases no-rule policy for certain significant issues in spinoffs

The IRS has changed the list of issues it will not address in private letter rulings to remove two items related to the distributions of stock of controlled corporations under Section 355.

Rev. Proc. 2016-45 updated the most recent annual “no rule list” in Rev. Proc. 2016-3, which describes the tax areas in which the IRS won’t issue letter rulings or determination letters. The two no-rule items that have been removed from the list and can be now addressed are significant legal areas relating to:
  1. The requirement under Treas. Reg. Sec. 1.355-2(b) that a distribution be carried out for a corporate business purpose (the corporate business purpose requirement)
  2. The requirement under Section 355(a)(1)(B) and Treas. Reg. Sec. 1.355-2(d) that a transaction not be used principally as a device for the distribution of earnings and profits of the distributing corporation, the controlled corporation or both (the device requirement)

The two issues were originally added to the no-rule list in 2003 (Rev. Proc. 2003-48). Rev. Proc. 2016-45 indicates that the IRS has determined there are a number of unresolved legal issues pertaining to the corporate business purpose and device requirements that can be relevant to determine the tax consequences of a distribution. Further, the IRS will issue a letter ruling regarding the corporate business purpose and device requirements, provided the issue is a legal issue and not inherently factual in nature.

Contact Andy Cordonnier
Partner, Washington National Tax Office
T +1 202 521 1502

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