Taxpayers Permitted to Request Guidance on Corporate Business Purpose and Device Requirements
On August 26, 2016, the Internal Revenue Service (IRS) issued Revenue Procedure 2016-45, stating that it is willing to provide private letter rulings to taxpayers pertaining to the corporate business purpose and device requirements that are required for a spinoff to be tax-free. The IRS will consider providing such guidance only with respect to a significant legal issue that is not inherently factual in nature. Under the device requirement, to be tax-free, a distribution must not be used as a device for the distribution of profits to the shareholders. Prior to the issuance of this Revenue Procedure, the IRS declined to issue private letter rulings on these two issues, believing them to be inherently factual. The IRS, however, has recently determined that there are a number of unresolved legal issues pertaining to these two tests.
Revenue Procedure 2016-45 is important in light of the issuance, on June 14, 2016, of proposed regulations pertaining to the device and active trade or business requirements for tax-free spinoffs that left open a few questions. Click here for prior coverage.
The IRS continues to maintain its no-ruling policy on whether a transaction qualifies for tax-free treatment as a whole (as opposed to meeting the business purpose and device tests, which are only part of the analysis), whether various tax consequences (such as nonrecognition and basis) result from the transaction and certain other matters.ould not be construed or relied on as legal advice or to create a lawyer-client relationship. Furthermore, this Tax update was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any U.S. federal, state or local tax penalties that may be imposed on such person.
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