A Tax Executive's Guide to Spin-offs: 10 Things You Won't See in Section 355

Speak With Directors and Officers First; Spins Are No Time for Loose Talk The corporation's directors and officers are likely aware that a spin is an effective way to distribute an operating business to the public with no federal income tax at either the corporate or the shareholder level and that the company should obtain a PLR from the Internal Revenue Service and a tax opinion from a reputable firm confirming the spin's tax-free status. DEVICE TEST This test, dating back to the Gregory v. Helvering case, denies tax-free treatment for a spin that is actually a device to distribute earnings and profits to shareholders.1 The regulations spell out a number of factors that weigh in favor of a transaction's being considered a device and a number of non-device factors weighing against it.2 It is not necessary to educate the board and officers on all of these factors. BUSINESS PURPOSE The directors and officers of Distributing likely discussed a number of corporate business purposes before voting to approve the spin: the desire for each of Businesses A and B to have managers who are more focused on each business, the desire to avoid competition for capital within the company between Businesses A and B, and the desire for Business B to be able to do acquisitions using its own stock as currency. [...]as the PLR and tax opinion begin to take form, tax will need to verify that all the representations made in those documents are valid and supportable.