In such a case, the transaction is carried out for one or more corporate business purposes. Depending upon the facts of a particular case, however, a shareholder purpose for a transaction may be so nearly coextensive with a corporate business purpose as to preclude any distinction between them. A shareholder purpose is not a corporate business purpose. Ī corporate business purpose is a real and substantial purpose that is germane to the business of Distributing or of Controlled. A transaction is carried out for a corporate business purpose if it is motivated, in whole or substantial part, by one or more corporate business purposes. For example, the transaction must be carried out for one or more corporate business purposes. In order to secure this favorable tax treatment, the transaction must meet various requirements. In this regard, one or more persons who, directly or indirectly, were the owners of the enterprise prior to the distribution or exchange own, in the aggregate, an amount of stock establishing a continuity of interest in each of the modified corporate forms in which the enterprise is conducted after the separation. Non-recognition treatment applies to a distribution of Controlled that effects only a readjustment of the continuing interests of Distributing’s shareholders in the property of Distributing and Controlled.
#Irc 355 pro#
ĭistributions of the stock of Controlled generally take three different forms: (1) a pro rata distribution to Distributing’s shareholders of the Controlled stock (a “spin-off”), (2) a distribution of the Controlled stock in redemption of Distributing stock (a “split-off”), or (3) a liquidating distribution in which Distributing distributes the stock of more than one Controlled, either pro rata or non-pro rata among its shareholders (in either case, a “split-up”).
#Irc 355 code#
However, the Code also provides that, under certain circumstances, a corporation (Distributing) may distribute stock in a corporation it “controls” (Controlled) to its shareholders without causing either Distributing or its shareholders to recognize income, gain, or loss on the distribution.
The corporation recognizes gain to the extent the fair market value of the property distributed exceeds the corporation’s adjusted basis in the property. This amount is treated as (1) the receipt by the shareholder of a dividend to the extent of the corporation’s earnings and profits, (2) the recovery of the shareholder’s basis in the stock, and/or (3) gain from the sale or exchange of property.
#Irc 355 plus#
Generally, if a corporation distributes property with respect to its stock to a shareholder, the Code provides that the amount of the distribution is equal to the amount of money plus the fair market value of other property received.
That being said, there are still other owners and advisers who are unaware of the various accommodations the IRS has made over the years that facilitate the satisfaction of the active business requirement by recognizing certain business realities.īefore describing a recent IRS private letter ruling that illustrated the application of one such accommodation, let’s quickly review the operation of the Code’s spin-off rules, followed by a description of some of the ways by which the IRS has made it a bit easier to meet the ATB test.
Some do encounter difficulties, I agreed, while others foresee them before embarking on the division of the corporation and plan accordingly. “Business separations,” I immediately replied, “I’ve been working on a greater number of business separations, generally, and of corporate separations, in particular, than at any other time.” Īfter a brief description of “spin-off” transactions, and of the conditions that must be satisfied in order for such a transaction to enjoy “tax-free” treatment, the reporter wondered whether many closely held businesses find it difficult to satisfy the “active business” test. When I asked whether they were referring to any specific industry, form of M&A transaction, or type of buyer, they replied that they were not necessarily thinking about the purchase and sale of a business – they were just curious whether I was seeing businesses engaging in one type of strategic transaction more any other. A couple of months back, a local business reporter asked whether I could identify one kind of corporate transaction that was occupying more of my time than any other.
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