Instead, it will focus on matters that tax may be handling on its own without the benefit of an outside advisor. The nuances of those items have been discussed in many other great articles. It will not discuss the two most important tax deliverables: a private letter ruling (PLR) and a tax opinion. This article lays out a few of the key issues you will need to consider as the head of an in-house corporate tax department. After the board has made its decision, the CFO will reach out to you-the vice president of tax-to effectuate the spin.
This article will use the terms “Distributing” to describe the original company, which will carry on Business A after the spin, and “Controlled” to describe the spun-off company, which will carry on Business B after the spin. In due course, the directors decide that it is in the best interests of the company to spin off Business B as a separate publicly traded company. These divisions (having the remarkably original names Business A and Business B) are now operated by distinct groups of managers and have different operating margins, strategic priorities, and risk profiles. For many years, the company has operated two major divisions that have gradually diverged over time. See § 1.356-7(c) for the treatment of the receipt of preferred stock in certain exchanges for (or in certain distributions with respect to) common or preferred stock described in section 351(g)(2)(C)(i)(II).Behind the closed doors of a corporate boardroom somewhere in America, the directors of a publicly traded company are discussing the future of their business.
See § 1.356-7(a) and (b) for the treatment of nonqualified preferred stock (as defined in section 351(g)(2)) received in certain exchanges for (or in certain distributions with respect to) nonqualified preferred stock or preferred stock. This paragraph (c) applies to distributions occurring on or after March 9, 1998. See, for example, sections 83 and 421 through 424 and the regulations thereunder.
IRC 355 CODE
Other Internal Revenue Code provisions governing the treatment of rights to acquire stock may also apply to certain distributions occurring in connection with a transaction described in section 355. For this purpose, rights to acquire stock has the same meaning as it does under sections 305 and 317(a). For purposes of this section and section 356(d)(2)(B), a right to acquire stock has no principal amount. Except as provided in § 1.356-6, for purposes of section 355, the term securities includes rights issued by the distributing corporation or the controlled corporation to acquire the stock of that corporation.
IRC 355 PRO
See § 1.355-4 for types of distributions that may qualify under section 355, including pro rata distributions and non pro rata distributions. Section 355 contemplates the continued operation of the business or businesses existing prior to the separation. Throughout the regulations under section 355, the term distribution refers to a distribution by the distributing corporation of stock, or stock and securities, of one or more controlled corporations, unless the context indicates otherwise. The controlled corporations may be preexisting or newly created subsidiaries. A separation is achieved through the distribution by the distributing corporation of stock, or stock and securities, of one or more subsidiaries (the “ controlled corporations”) to its shareholders with respect to its stock or to its security holders in exchange for its securities. It applies only to the separation of existing businesses that have been in active operation for at least five years (or a business that has been in active operation for at least five years into separate businesses), and which, in general, have been owned, directly or indirectly, for at least five years by the distributing corporation. Section 355 provides for the separation, without recognition of gain or loss to (or the inclusion in income of) the shareholders and security holders, of one or more existing businesses formerly operated, directly or indirectly, by a single corporation (the “distributing corporation”).
This section and §§ 1.355-2 through 1.355-4, other than § 1.355-2(g) and (i), do not reflect the amendments to section 355 made by the Revenue Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, and the Tax Technical Corrections Act of 2007. For transactions occurring on or before that date, see 26 CFR 1.355-1 through 1.355-4 (revised as of April 1, 1987). Except as otherwise provided, this section and §§ 1.355-2 through 1.355-4 apply to transactions occurring after February 6, 1989. (a) Effective/applicability date of certain sections. § 1.355-1 Distribution of stock and securities of a controlled corporation.
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