United States

Proposed restrictions on nonbusiness assets in spinoffs


In a spin-off, a corporation distributes stock of a subsidiary to its shareholders. To qualify for tax-free treatment, the distributing and distributed corporations each must conduct an active trade or business (ATB) and the spin-off must not be a device for the distribution of earnings (a device). Other requirements must be met, too.

Whether the business assets involved in a spin-off must be valuable in relation to the other assets has been an open question. For example, what if the distributed corporation operates a hot dog stand business worth $20,000 and has non-business assets worth $2 million? Previously, government guidance did not necessarily deny tax-free treatment to this ‘hot dog stand’ spin-off. Proposed regulations issued July 14, 2016, would. 

Under the proposed rules, spin-offs with non-business assets of either company having values that are too high in relation to the value of the business assets would not qualify for tax-free treatment under the proposed rules. The proposal was expected following earlier guidance from the IRS and Treasury limiting the availability of private IRS rulings on spin-offs.   

The proposal includes rules for classifying assets as business or non-business assets in spin-off contexts. In addition to revising the existing device rules business or non-business assets in, the proposal would draw some new lines in the sand. Beyond those lines, a spin-off transaction would not qualify for tax-free treatment. 

Companies considering a spin-off should consider the relative values of business and non-business assets involved in light of the proposed rules. 

Nick Gruidl


Nick advises businesses on M&A activity, restructuring, partnerships and NOL issues, among other topics. Reach him at nick.gruidl@rsmus.com.

Areas of focus: Corporate TaxationMergers & AcquisitionsPrivate EquityWashington National Tax