On January 27, 2015, Yahoo Inc. announced its intention to seek
an IRS private ruling that would confirm its view that the
inclusion of a relatively small active business along with its
stake in Alibaba Group Holding Ltd. would meet the "active
business requirement" for a tax-deferred spinoff under the
Internal Revenue Code. In May, the IRS announced that it was
reconsidering its policy in that area, and in July it indicated
that it was considering issuing new administrative guidance. On
September 8, 2015, Yahoo announced that the IRS would not rule
favorably on its request and withdrew the ruling request. Now the
IRS has officially announced that it will not rule in cases in
which the active business of either the distributing or the
controlled corporation is too small. What is interesting is the
manner in which the IRS concluded not to rule on this issue and, of
course, the facts on which the IRS will still rule. The question
remains whether opinions of counsel will continue to be issued at
the same level of certainty and whether the markets will discount
such spinoffs due to additional uncertainty.
When Yahoo announced the intended spinoff of assets, its stake
in Alibaba was worth up to $40 billion, and the active business
that Yahoo intended to distribute, along with a newly formed U.S.
corporation holding the distributed assets, was probably worth no
more than $600 million (or less than 1.5% of the total assets to be
In its new release, Revenue Procedure 2015-43 (the Rev. Proc.),
the IRS states that its no-rule policy in the cases described below
will apply to rulings submitted on or after September 14, 2015.
Ordinarily no ruling. More specifically, the
IRS announced that it will "not ordinarily rule" in
proposed spinoffs involving
a RIC or REIT (other than spinoffs in
which both the distributing and the controlled corporations are a
RIC or a REIT); or
cases in which the fair market value
of the gross assets of the active trade or business (of either the
distributing or controlled corporation) is less than 5% of
the fair market value of the gross assets of such corporation
(other than spinoffs occurring solely within a corporate
The "not ordinarily" in this area means that a
taxpayer may still seek a ruling if the taxpayer can show that
"unique and compelling reasons" justify the issuance of a
letter ruling or determination letter.
Temporarily no ruling. The IRS also announced
that it would "temporarily not rule" on proposed spinoffs
when all three of the following conditions are met (and the spinoff
does not occur solely within a corporate group):
the fair market value of the
investment assets of the distributing or the controlled corporation
is two-thirds or more of the total fair market value of its gross
the fair market value of the gross
assets of the trade or business on which the distributing
corporation or the controlled corporation relies to satisfy the
active trade or business requirement is less than 10% of the fair
market value of its investment assets; and
the ratio of the fair market value of
the investment assets to the fair market value of the assets other
than investment assets of the distributing or controlled
corporation is three times or more than such ratio for the other
corporation (i.e., the controlled corporation or the distributing
Unlike an ordinarily no-rule item, there are no circumstances in
which a taxpayer can seek a ruling on an issue subject to the
temporary no-rule list.
The addition of RICs and REITs to the no-rule list appears to be
targeted at increasingly common transactions in which operating
companies seek to reduce their overall effective federal tax rate
by spinning off their real estate holdings into a newly formed
REIT. These transactions seem to be well received by the markets
where the proposed REIT will own hotels, data centers or private
The ordinarily no-rule item based on the 5% test and the
temporarily no-rule item both seem clearly applicable to situations
like Yahoo's. Aside from these no-rule areas, the IRS will
continue to consider ruling on spinoff-related issues as it had
before the Yahoo announcement in January.
For spinoffs caught in the newly expanded no-rule net, one
practical question is whether such spinoffs will still occur
without a ruling – based solely on opinions of counsel. Those
opinions may become even more critical, and, in the case of
publicly held companies, the market may act as an arbiter of the
soundness of the positions taken by such opinions.
Concurrently with the Rev. Proc., the IRS issued Notice 2015-59,
which announces that it is continuing to study issues relating to
the newly covered transactions, and it requests comments.
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.
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