Sometimes, a corporation wants to distribute stock of a subsidiary to its shareholders in a taxable transaction and does not want Section 355 to apply to prevent income recognition to both the corporation and the shareholders. Perhaps the corporation has expiring losses it can use to offset any Section 311 gain, and perhaps the shareholders wanted to enjoy the waning moments of the 15 percent tax rate on dividends in 2012.

Of course, Section 355 is not elective. Therefore, the corporation may have to do something to avoid the application of Section 355. One thing to do is to state that it is distributing the stock so that its shareholders can sell it, or sell the stock of the distributing corporation, or both. This appears to have been the plan of the taxpayer in LTR 201252014.

Facts. The corporate group had the proverbial two businesses and wanted to separate them so its shareholders could sell one or the other, or both. The businesses were spread around multiple subsidiaries, some of which were disregarded entities and some of which were not. This required preliminary internal restructuring by which all of Business A was lined up under one corporation and all of Business B under another—then the parent distributed the stock of the Business A sub to its shareholder, a partnership.

Ruling. The taxpayer did not ask for a ruling on the internal and external distributions of stock at all. Rather, it asked for rulings that certain liquidations and contributions preliminary to the stock distributions were nontaxable, either under Section 332 or as upstream reorganizations.

As to the upstream reorganizations, the IRS relied on the now standard technique of treating an upstream liquidation as an upstream reorganization when later restructuring may look like a reincorporation. Reg. 1.368-2(k). This technique requires satisfaction of continuity of business enterprise, which is usually easy when the reorganized corporation’s assets remain in the qualified group of the surviving corporation. Reg. 1.368-1(d).

The taxpayer did not ask for—and the IRS did not rule on—the tax treatment of the distributions of stock. The taxpayer stated to the IRS that the shareholders planned to sell stock and that was the purpose of the distributions. Presumably, the IRS did not want to go on record ruling that a distribution done to facilitate a sale of part of the business did not qualify under Section 355, when it could not be known whether such a sale would actually occur post-spin. Presumably, the taxpayer was sufficiently comfortable that would be the result when the sale did occur post-spin, as planned.

Conclusion. Why did the taxpayer seek this ruling? Perhaps to help convince a curious IRS auditor later that the shareholders could take a stepped-up basis in the stock of the distributed corporation (and keep all of their basis in the stock of the original corporation) at the price to them of a 15 percent tax on any dividend received.