In private letter ruling (PLR) 201436033, the IRS considered a
transaction that involved the back-to-back distributions of a real
estate investment trust (REIT). In the first distribution under the
facts of the ruling, a partnership distributed a newly formed REIT
(Controlled) to the partnership's partners, one of which was
another REIT (Distributing). In a second distribution, Distributing
distributed its stock in Controlled to Distributing's
shareholders pro-rata. The IRS ruled that Distributing's
distribution of Controlled qualified as a tax-free spinoff under
Section 355.
Distributing was the sole general partner in the partnership. To
separate the business lines of the partnership, the partnership
contributed certain assets and liabilities to Controlled. The
partnership then distributed all the outstanding stock of
Controlled pro-rata to its partners, which included Distributing
and various limited partners.
The IRS ruled that the second distribution, mentioned above, was a
tax-free spinoff under Section 355. Generally, to qualify as a
tax-free spinoff under Section 355, the distributing corporation
must control the controlled corporation "immediately
before" the spinoff and must not acquire such control in a
taxable acquisition during the five-year period preceding the
distribution.
Though not specifically stated in the PLR, Distributing presumably
owned at least 80% of the combined voting power and 80% of the
total number of shares of Controlled, constituting control as
defined by Section 368(c), immediately before the second
distribution. In addition, the PLR indicates that
Distributing's acquisition of newly formed Controlled from the
partnership does not violate Section 355's control test.
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