The IRS issued proposed regulations (REG-134016-15) that provide
guidance under Treas. Reg. Secs. 1.355-2 and -9 to address concerns
regarding the spinoff of too many nonbusiness assets relative to
business assets, as well as when the active trade or business is
too small compared with the other assets being spun off.
A spinoff may not be a device for the distribution of earnings and
profits. Existing regulations provide several device and nondevice
factors. The proposed regulations would modify the “use of
assets device factor” to provide some bright-line rules when
the amount of nonbusiness assets is evidence of a device.
The proposed regulations would modify the business purpose device
factor to provide that to overcome evidence of a device due to
nonbusiness assets, then the company must prove an exigent need to
invest or otherwise have such nonbusiness assets. The proposed
regulations also add a per se device standard whereby if certain
thresholds of nonbusiness assets are present, there will be a per
se finding of a device (i.e., a bad spinoff) regardless of other
factors. The per se device standard does not apply to
split-offs.
Finally, the proposed regulations would add rules for determining
the minimum size of an active trade or business to require that the
active trade or business for both the distributing corporation and
the controlled corporation is at least 5% of the total assets on
each side.
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.
