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Proposed Regulations Under Section 355 Clarify Device and Active Trade or Business Requirements for Spin-offs

By Richard M. Corn & Janicelynn Asamoto Park
July 28, 2016
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The U.S. Internal Revenue Service (IRS) and the Department of the Treasury (“Treasury”) have published proposed regulations that would modify the device and active trade or business requirements for tax-free spin-offs under section 355 of the Code in three important respects.

First, the proposed regulations clarify the “device” test and its relationship to the “business purpose” requirement. Second, the proposed regulations would prohibit a tax-free spin-off if (1) two-thirds or more of the assets of the distributing corporation or the controlled corporation consist of nonbusiness assets and (2) the percentage of the distributing corporation’s nonbusiness assets differs significantly from those of controlled, under three specified tests. Third, the proposed regulations would require that the assets constituting an active trade or business must represent at least 5% of the total assets of the distributing corporation and the distributed corporation in order for the spin-off to be tax-free. Thus, the proposed regulations would effectively repeal the so-called “hot dog stand” rule, under which a de minimis active trade or business could support a spin-off of a relatively much larger collection of passive assets.

If promulgated as proposed, the proposed regulations will affect distributing corporations and their shareholders and security holders in spin-offs, split-offs, and split-ups that occur on or after final regulations are published.

For more on this topic, please see our client alert here.

Photo of Richard M. Corn Richard M. Corn

Richard M. Corn is a partner in the Tax Department. He focuses his practice on corporate tax structuring and planning for a wide variety of transactions.

Richard advises both U.S. and international clients, including multinational financial institutions, private equity funds, hedge funds, asset…

Richard M. Corn is a partner in the Tax Department. He focuses his practice on corporate tax structuring and planning for a wide variety of transactions.

Richard advises both U.S. and international clients, including multinational financial institutions, private equity funds, hedge funds, asset managers and joint ventures. He has particular experience in the financial services and sports sectors. He also works with individuals and tax-exempt and not-for-profit organizations on their tax matters.

Read more about Richard M. CornEmail
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Janicelynn Asamoto Park

Janicelynn Asamoto Park is an associate in the Tax Department.

Read more about Janicelynn Asamoto ParkEmail
  • Posted in:
    Tax
  • Blog:
    Tax Talks
  • Organization:
    Proskauer Rose LLP
  • Article: View Original Source

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