Originally published in Tax Notes, November 2, 2015,
The recently issued Notice 2015-59 expresses significant concerns with the application of section 355 to certain corporate separations, including transactions that result in distributing corporation (distributing) or distributed corporation (controlled) having large amounts of investment assets. The notice suggests that those transactions may run afoul of section 355 and circumvent the purposes of General Utilities repeal.
This article focuses on corporate separations that result in Distributing or Controlled owning a substantial amount of investment assets, for example, in relation to the value of their assets and the gross assets of the trades or businesses used to satisfy the section 355 (b) active conduct of a trade or business requirement. While the IRS's concern with investment assets is understandable, corporate separations are incredibly complicated transactions, and the IRS should dismiss the idea of using arbitrary formulas to determine whether nonrecognition treatment should be disallowed. Instead the IRS should analyze the facts and circumstances to determine whether investment assets prevent a corporate separation from satisfying the business purpose requirement or the device requirement. Specific factors that can be helpful with the facts and circumstances analysis are discussed below. Also, the IRS's focus on General Utilities' repeal misses the mark.
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