Code Section 355, and related Code provisions, when applicable, will allow a corporation to spin-off or split-off a subsidiary corporation to its shareholders without triggering gain to the corporation or its stockholders. One of the requirements for this treatment is that the distributing corporation “control” the distributed corporation (i.e., own 80% or more of the voting power and number of shares of the distributed corporation) immediately before distributing it to its shareholders.
To come under Section 355, the distributing corporation may intentionally acquire control before the spin-off or split-off, and then transactions are undertaken after the distribution that reverse in whole or in part such acquired control as to the shareholders that succeed to ownership of the distributed corporation. Determining whether the IRS will respect such acquisition and subsequent disposition of control and the application of Section 355 can be difficult to determine.
The IRS has now issued a Revenue Procedure describing some safe harbor circumstances when such an acquisition and divestiture of control will not be the basis of a challenge by the IRS to Section 355 applying.
Generally, under the safe harbor, if the distributing corporation is issued shares of the distributed corporation to give the distributing corporation control, and if no action is taken to unwind the acquired control within the first 24 months after the distribution, then the IRS will allow Section 355 treatment. If the unwind occurs via an unanticipated third party transaction with other persons, such as a merger, the safe harbor applies if there is no agreement, negotiations or discussions within the first 24 month period (even if the transaction itself occurs within that 24 month period), and there is not more than a 20% overlap of ownership between the other person in the transaction (e.g., the other corporation in the merger) and the distributed corporation.