In a private letter ruling, the IRS approved the tax-free spinoff under Section 355 of real estate assets into a newly formed real estate investment trust (REIT).

In PLR 201337007, “Distributing,” the common parent of a consolidated group, internally restructured to move certain historic real estate assets, as well as all the outstanding stock of certain operating subsidiaries, into a newly created subsidiary corporation, “Controlled.” 

Distributing also redeemed a portion of the ownership interest held by certain shareholders to ensure no shareholder owned more than a 10% interest in Distributing. Distributing made a pro rata distribution of all the outstanding stock of Controlled to Distributing’s shareholders. After the distribution, Controlled declared and paid a dividend to purge Controlled of any earnings and profits. 

Controlled and Distributing entered into an arrangement whereby Controlled would lease the use of the real estate assets to Distributing. On its first federal income tax return, Controlled elected REIT status. The IRS ruled that Distribution was a tax-free spinoff under Section 355. This ruling is significant because it represents the first time the IRS has issued a private letter ruling allowing a taxpayer essentially to take some assets out of double taxation. The IRS has not issued rulings where either Distributing or Controlled (but not both entities) elected subchapter S status.   

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