In Notice 2015-59, the IRS announced there are several areas that are currently under study based upon characteristics of certain Section 355 spin-offs that concern the IRS due to possible abuse.
These areas under study are (1) the nature of the assets of either the distributing or controlled corporation in a spin-off where "investment assets" of either represent a high ratio of the total assets for either entity; (2) transactions where the active trade or business assets represent a small percentage of the total assets of either the distributing or controlled corporation; (3) spin-offs involving either a regulated investment company (RIC) or real estate investment trust (REIT) election by either the distributing or controlled corporation after the spin; and, (4) the Treasury regulation provisions that provide that a non-pro rata spin-off (a split-off) is usually not indicative of a transaction not being a device for the distribution of earnings and profits.
In connection with this Notice, the IRS also released an accompanying revenue procedure that expanded spin-off "no rule" areas. In Rev. Proc. 2015-43, the IRS added three new "no rule" areas for Section 355 spin-offs.
First, the IRS will generally not rule when either the distributing or controlled corporation converts to RIC or real estate investment trust status in connection with the spin-off.
Second, the IRS will generally not rule when the fair market value (FMV) of the gross active trade or business assets of either the distributing or controlled corporation is less than 5% of the total FMV of all the assets of such corporation. That calculation includes all members of the separate affiliated group of either entity.
Third, the IRS will not rule on any spin-off when either the distributing or controlled corporation fails to pass a multipart calculation related to its investment assets compared with its active trade or business assets and its overall gross assets. This third no-rule area has antiabuse provisions that the no-rule policy includes either acquisition or disposition transactions undertaken to "fatten up" or "skinny down" an entity to work around these calculated ratios and percentages related to the no-rule areas.
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