On August 26, 2016, the Internal Revenue Service issued Rev. Proc. 2016-45, which modified the IRS’s annual list of issues that the IRS will not issue letter rulings or determination letters.73 According to the announcement, the IRS has removed two of the first three spin-off-related no-rules, which were put in place in 2003 by Rev. Proc. 2003-48. The two areas that are no longer no-rule areas are significant issues relating to:
(i) The requirement under § 1.355-2(b) of the Income Tax Regulations that a distribution be carried out for a corporate business purpose (the corporate business purpose requirement), and
(ii) The requirement under § 355(a)(1)(B) and § 1.355-2(d) that a transaction not be used principally as a device for the distribution of earnings and profits of the distributing corporation, the controlled corporation or both (a device).
The reason for the change is that the Service has determined there are a number of unresolved legal issues under § 1.355-2(b) pertaining to the corporate business purpose requirement and under § 355(a)(1)(B) and § 1.355-2(d) pertaining to device that can be germane to determining the tax consequences of a distribution. The Service has also determined that it is appropriate and in the interest of sound tax administration to provide guidance to taxpayers on significant issues in these two areas. Accordingly, the Service will now issue a letter ruling with respect to a significant issue under § 1.355-2(b) pertaining to the corporate business purpose requirement, and a significant issue under § 355(a)(1)(B) and § 1.355-2(d) pertaining to device, provided that the issue is a legal issue and is not inherently factual in nature. Notwithstanding the announcement in Rev. Proc. 2016-45, the Service may decline to issue a letter ruling when appropriate in the interest of sound tax administration or on other grounds when warranted by the facts or circumstances of a particular case. The remaining spin-off issue that remains on the no-rule list relates to whether an acquisition subsequent to a spin-off is part of a plan under section 355(e).