Tax strategies for corporate acquisitions, dispositions, spin-offs, joint ventures, financings, reorganizations and

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PRACTISING LAW INSTITUTE

TAX STRATEGIES FOR CORPORATE ACQUISITIONS,

DISPOSITIONS, SPIN-OFFS, JOINT VENTURES,

FINANCINGS, REORGANIZATIONS AND

RESTRUCTURINGS 2013

Corporate Divisions Under Section 355
June 2013

By
Mark J. Silverman

Steptoe & Johnson LLP

Washington, D.C.

Copyright © 2013 Mark J. Silverman, All Rights Reserved.

TABLE OF CONTENTS


Internal Revenue Service Circular 230 Disclosure: As provided for in IRS regulations, advice (if any) relating to federal taxes that is contained in this document (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

Page



  1. INTRODUCTION 1

  2. In General 1

  3. Historic Focus 1

  4. Current Importance 1

  5. Future of Section 355 -- Subchapter C Study 3

  6. Significant Developments 4
  7. Section 355 -- Overview 6


  8. Tax-Free Division 6

  9. Types of tax-free divisions 6

  10. Division of one or more businesses -- \ 7

  11. Tax Consequences of a Section 355 Transaction 7

  12. No shareholder-level gain 7

  13. No corporate-level gain 7

  14. Gain on the distribution of boot 7

  15. Gain or Loss on Divisive “D 10

  16. Basis of stock and securities 11

  17. Tax attributes 12

  18. REQUIREMENTS UNDER SECTION 355 13

  19. In General 13

  20. Statutory requirements 13

  21. Non-statutory requirements 14

  22. Interrelationship between requirements 14

  23. Control Requirement 14

  24. In general 14

  25. Definition of control 14

  26. Control in a \ 18

  27. Control and application of the step-transaction doctrine 19

  28. Device Restriction 45

  29. In general 45

  30. Evidence of a device 46

  31. Evidence of nondevice 52

  32. Transactions not ordinarily considered a device 53
  33. Additional factors not contained in the regulations 54


  34. Five-Year Active Trade or Business Requirement 54

  35. In general 54

  36. Statutory requirements for an active trade or business -- Generally 55

  37. Trade or business 58

  38. Active conduct 60

  39. Percentage of total assets that must be related to the active business 63

  40. Five-year period 68

  41. Acquisition of a trade or business, or of control of a corporation conducting a trade or business, in a transaction without any gain or loss 75

  42. Division of a functionally integrated business 82

  43. Direct vs. indirect conduct of a business 83

  44. Distribution of All or Substantial Ownership in the Controlled Corporation 96

  45. Business Purpose Requirement 105

  46. In general 105

  47. Corporate vs. shareholder purpose 108

  48. Business purpose for the distribution 110

  49. Relation to device test 111

  50. Ruling guidelines 114

  51. Specific business purposes 118

  52. The Continuity of Interest Requirement 157

  53. In general 157

  54. Degree of continuity 158
  55. Post-distribution continuity 158


  56. Pre-distribution continuity (i.e. historic continuity) 164

  57. Continuity in both Distributing and Controlled 166

  58. Continuity issues arising from the division of a subsidiary as part of a \ 166

  59. Continuity of Business Enterprise Requirement 168

  60. Section 355(d) Issues 169

  61. In general 169

  62. Disqualified distributions 170

  63. Disqualified stock 171

  64. Stock acquired by purchase 173

  65. Fifty-percent test 182

  66. Purpose exception 185

  67. Section 355(e) 188

  68. In General 188

  69. Plan regulations under section 355(e) 198

  70. Proposed Section 355(e)(4)(D) Regulations Defining Predecessor and Successor “ \f C \l “3 225

  71. Intragroup Spin-offs – Section 355(f) 233

  72. Examples 234

  73. Planning Transactions/Alternatives to Spin-offs 246

  74. Synthetic 246

  75. Subsidiary Tracking Stock 248

  76. Dividend Followed by Public Offering 249

  77. Option to Purchase Corporate Assets 250

  78. Transaction to Thwart Hostile Takeovers 250


  79. Requesting a Private Letter Ruling Under Section 355 251

  80. In General 251

  81. Checklist 251

  82. Change in Facts 252

  83. APPENDIX A 254



I.INTRODUCTION

A.In General. Generally, corporate distributions of appreciated property are subject to tax on the amount by which the property’s value exceeds the corporation’s basis in the property. Under section 355 of the Internal Revenue Code of 1986, as amended (the “Code”), however, the distribution of stock of a subsidiary that is “controlled” by another corporation may not be subject to tax either at the corporate level or to the recipient shareholders, provided a number of requirements are met.

B.Historic Focus

1.Traditionally, the focus under section 355 of the Code has been whether the transaction has been undertaken by the shareholders as a “device” in order to bail out earnings and profits at favorable capital gains rates.

2.Even in the absence of a rate disparity, the device issue remains relevant. A dividend distribution is taxed currently while a section 355 transaction is tax free. Moreover, a dividend is generally fully taxed (without recovery of any basis) while a transaction structured under section 355 followed by a sale permits the selling shareholder to recover basis. Furthermore, section 355 enables a distributing corporation to avoid the impact of the repeal of the General Utilities doctrine by the Tax Reform Act of 1986 (the “1986 Act”).




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