In a soon-to-be-released private letter ruling, the IRS approved Windstream Holding Inc.'s plan to distribute a corporate subsidiary in a tax-free spinoff whereby the spun-off corporation would elect to become a real estate investment trust (REIT) as defined under Section 856.

As part of the transaction, Windstream spun off certain assets, including its fiber and copper networks and other real estate, to a subsidiary corporation. After the spinoff, the subsidiary leased its assets to Windstream through a long-term triple-net exclusive lease. In addition, the subsidiary elected to become a REIT, enabling Windstream to move certain corporate assets into a single-taxed entity in a tax-free transaction.

In addition to approving the tax-free spinoff of the subsidiary's stock, the IRS ruled that the subsidiary's fiber and copper network assets qualified as real estate assets for purposes of Section 856. Section 856(c)(4) requires 75% of the value of a REIT's total assets to be represented by real estate assets, cash and cash items, and government securities. Under Treas. Reg. Sec. 1.856-3(d), real estate assets for purposes of Section 856 include real property and other inherently permanent structures. Under Proposed Treas. Reg. Sec. 1.856-10(d), transmission lines are inherently permanent structures for purposes of Section 856.

Generally, to qualify as a tax-free spinoff under Section 355, the distributing corporation and the controlled corporation must be engaged in the historic active trade or business of the distributing corporation immediately after the distribution. In its press release announcing the IRS ruling, Windstream didn't address that active trade or business requirement or the business purpose of the spinoff. Accordingly, tax preparers should exercise caution when addressing similar transactions in the future.

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