IRS to Keep Ruling on Section 355 Transactions After Pilot Program Ends


The 18-month pilot program created by Rev. Proc. 2017-52, whereby the Internal Revenue Service (IRS) resumed ruling on the general tax consequences of tax-free spinoffs under Section 355, is scheduled to end on March 21, 2019. The pilot program has been significant for taxpayers seeking greater certainty on the tax consequences of Internal Revenue Code Section 355 transactions, as the program presents an expansion of the IRS’s willingness to rule on spinoffs other than for certain “significant issues.” A senior IRS attorney indicated at a recent District of Columbia Bar event that the IRS plans to continue this program beyond the slated expiration date, though he could not confirm when the IRS would release guidance to renew the program.


Background: Section 355 and IRS Ruling Policy On Spinoffs

Section 355 provides a limited exception to the general rule that a distribution of appreciated property from a corporation is taxed at both the corporate and shareholder levels. A spinoff of stock in a corporation may take the form of a distribution, redemption, or liquidation. To qualify as tax-free, the transaction must meet the statutory requirements under Section 355 as well as certain judicial requirements, including a good corporate business purpose, continuity of shareholder interests, and continuity of at least two active trades or businesses that have been conducted for at least five years and that were not acquired in a taxable manner during those five years.

These requirements are very complex and entail an in-depth analysis in application. The requirements include examining the history and makeup of both the corporation making the stock distribution (Distributing) and the corporation whose stock is distributed (Controlled), as well as the business purpose(s) for undertaking the distribution. In addition, the transaction cannot be “used principally as a device” to distribute the earnings and profits (E&P) of Distributing, Controlled, or both. Alternative transactions with a good business purpose also need to be considered, if they could accomplish the same objective as a Section 355 transaction. Moreover, even when the requirements of Section 355 appear to be met, a subsequent acquisition of either Distributing or Controlled may cause disqualification or, at a minimum, a corporate-level tax. Given the potentially substantial difference in tax treatment, coupled with the fact-based nuances in the rules, taxpayers have historically sought rulings from the IRS as to whether a transaction may qualify as tax-free under Section 355.

The IRS has issued a significant amount of letter rulings on the federal income tax consequences of Section 355 transactions. However, beginning with Rev. Proc. 2003-48, the IRS scaled back its ruling practice by explicitly declining to rule on certain aspects of Section 355 qualification, including the device prohibition, corporate business purpose requirement, and whether a distribution is pursuant to a plan that would trigger corporate-level tax under Section 355(e).

The IRS further narrowed its ruling policy when it issued Rev. Proc. 2013-32, announcing that it would no longer issue rulings on whether a transaction qualified as tax-free under Section 355 (Transactional Rulings), and that it would merely rule on “significant issues,” i.e., specific issues of law (Significant Issue Rulings). This policy was partially reversed by Rev. Proc. 2016-45, in which the IRS announced it would provide Significant Issue Rulings on the device prohibition and corporate business purpose requirements, which were previously “no-rule” areas under Rev. Proc. 2003-48.

Pilot Program under Rev. Proc. 2017-52

On September 21, 2017, the IRS issued Rev. Proc. 2017-52, which began an 18-month pilot program to expand the IRS ruling policy on Section 355 to once again include Transactional Rulings.  Specifically, under the pilot program, taxpayers may request Transactional Rulings from the IRS on “Covered Transactions,” which include transactions intended to qualify as tax-free under Sections 368(a)(1)(D) and 355, and distributions intended to qualify as tax-free under Sections 355(a) and (c). This expansion did not extend Transactional Rulings to the issues of device prohibition, business purpose, or Section 355(e). Transactional Rulings may, however, include the collateral tax consequences related to Covered Transactions, including consequences associated with E&P, basis, and relevant consolidated return regulations.

In addition, Rev. Proc. 2017-52 includes an updated list of representations a taxpayer must make in requesting a letter ruling. Rev. Proc. 96-30 originally set forth an appendix of representations to be made by taxpayers seeking a ruling. Although later modified by Rev. Proc. 2003-48 and Rev. Proc. 2013-32, these documents remain a useful resource for tax professionals as they can be leveraged as a documentation checklist in vetting the application of Section 355, even when the taxpayer is not seeking a ruling. In the case of a ruling request, the filer must make all stated representations (or explain why a representation cannot be made) and must describe facts pertinent to certain issues - including issues the IRS will not rule on (for example, corporate business purpose). These representations are meant to streamline the IRS review, but may also give the IRS insight into specific issues associated with the transaction.


The indication that the IRS plans to continue its ruling policy under the pilot program established in Rev. Proc. 2017-52 should be well received by taxpayers seeking greater certainty on Section 355 transactions. The publication of rulings gives taxpayers additional guidance on specific issues, even though a private letter ruling is non-precedential authority to anyone other than the requesting taxpayer. Although relatively few corporate divisions may meet the stringent requirements, an examination of the application of Section 355 is typically at the forefront of restructuring projects that may prove taxable for various reasons. Deciding between distributing assets versus stock, or whether a Section 336(e) election can and will be made, should begin with an assessment of the Section 355 requirements.

Time spent documenting the ability to meet such requirements may also be an investment in a taxable restructuring, as discerning the nature, value, and basis of the separated businesses is often necessary for quantifying the tax ramifications of alternative structures. In this way, an extension of the pilot program is good news for tax practitioners, as a continued dialogue with the IRS on Section 355 matters can play an important role in a comprehensive approach to corporate tax planning.

As mentioned above, despite the extension of the pilot program under Rev. Proc. 2017-52, a private letter ruling request may still be declined on certain aspects of Section 355 transactions. As such, a taxpayer may seek a tax opinion before engaging in Section 355 transactions to gain a level of assurance as to the tax consequences of such transactions. BDO’s Corporate Tax Practice  has experience advising on tax-free spinoffs, including assessing the qualification requirements and providing Section 355 tax opinions.


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