IRS issues final predecessor/successor regs

Tax Hot Topics newsletter The IRS released final regulations (TD 9888) on Dec. 18, 2019, providing rules on determining if a corporation is a predecessor or successor of a distributing or controlled corporation for spin-offs that are subject to Section 355(e).

The final regulations largely adopt proposed and temporary regulations issued in 2016 with some modifications. They are effective for spin-offs occurring after Dec. 15, 2019. For spin-offs occurring on or prior, the temporary regulations under Treas. Reg. Sec. 1.355-8T are applicable.

Section 355(e) imposes corporate-level gain on the distribution of stock of a controlled corporation by a distributing corporation if such distribution is part of a plan whereby one or more persons obtains control of either corporation (control measured as greater than 50% of either vote or value). The statute and regulations thereunder provide guidance on what constitutes a plan, certain safe harbors, treatment of certain instruments such as options or warrants for control purposes, etc. One such statutory provision codified in Section 355(e)(4)(D) states that the rules applicable to a distributing or controlled corporation applies to a predecessor or successor of such corporation.

Proposed and temporary regulations published in 2016 contained provisions to determine if a corporation was a “potential predecessor” of a distributing or controlled corporation, and if so, whether it was a “Predecessor of Distributing” (POD) that then triggered the provisions under Section 355(e). The final regulations mostly follow the previously issued guidance with a couple of broad modifications. In general, they streamline the process of identifying potential predecessors and PODs to asset transfers where gain is not recognized in whole or in part where there is either a Section 381 transaction or, immediately after plan completion, the potential predecessor is part of the same expanded affiliated group as the distributing corporation. The latter prong therefore addresses predecessor transactions that involve Section 351 asset transfers as well as other Section 381 transactions already covered by the first prong.

The final regulations also provide guidance on determination of such gain when Section 355(e) is triggered.

Greg Fairbanks
Managing Director
Washington National Tax Office
T +1 202 521 1503

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