The IRS recently released its annual guidance for taxpayers requesting letter rulings (Rev. Proc. 2013-1), and it adds three areas under Section 355 for which the IRS will no longer issue letter rulings.

For Section 355 divisive transactions, the "no rule" list has historically included such areas as:

  • the business purpose requirement for a Section 355 transaction,
  • the requirement that the 355 transaction is not a device for the distribution of earnings and profits, and
  • whether the distribution of stock in a Section 355 transaction along with an acquisition of stock are a plan within the meaning of Section 355(e) (the "anti-Morris Trust" provision).

Rev. Proc. 2013-3 adds three new no-rule areas. First, the IRS will not rule on transactions where the distributing corporation recapitalizes into the controlled corporation. Second, the IRS will not rule on north-south transactions. Finally, the IRS will not rule on the consequence of distributing controlled stock in satisfaction of debt of the distributing corporation if such debt was issued in anticipation of the spinoff.

One requirement for a Section 355 spinoff is that the distributing corporation must have control of the controlled corporation (to be spun off) within the meaning of Section 368(c). Section 368(c) requires control of 80% of the vote of the voting stock and 80% of each other class of stock. Thus, if distributing owns only 60% of the vote beforehand, the company might recapitalize all the stock into two classes, one high vote and one low vote, in order to increase voting control over 80%.

A north-south transaction is one in which either the shareholders contribute assets to the distributing corporation or the distributing corporation contributes assets to the controlled corporation as part of the spinoff. The southbound assets intersect with the northbound stock being spun off. The open question is how one should treat that collision (or whether there is an intersection at all versus two, independent transactions).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.