IRS Changes Policy and Will Again Rule on Business Purpose and Device Requirements

The Internal Revenue Service (the “IRS”) announced today1 that it will again issue private letter rulings on certain significant legal issues relating to the business purpose and device requirements under Section 355 of the Internal Revenue Code for tax-free spinoff and splitoff transactions. This is a meaningful departure from the current IRS practice announced in 2003.2

Under the new ruling policy, the IRS will accept ruling requests on whether a spinoff or splitoff has a business purpose and whether the transaction is used principally as a device for distributing earnings and profits to shareholders, provided that the issue is a significant issue and is not inherently factual in nature. A significant issue, for this purpose, is defined as “an issue of law the resolution of which is not essentially free from doubt and that is germane to determining the tax consequences of the transaction.”

Consistent with the policy previously announced in 2013,3 the IRS will not rule on an entire transaction, but only on significant issues.

The new policy is effective for ruling requests that are postmarked or, if not mailed, received on or after August 26, 2016, and relate to distributions that occur after such date.