United States

IRS reverses course on rulings in two key section 355 spin-off areas

Expands the list of issues the IRS will rule on for section 355 spins


If certain criteria are met, stock distributions (e.g., spin-offs, split-ups and split-offs; hereinafter called spin-offs) pursuant to section 355 are tax free. The criteria are complex, often subjective, and, in some cases, open for interpretation. Many of these criteria have been included on the IRS no-rule list—the list of issues that the IRS will not release private letter rulings or determination letters on (see Rev. Proc. 2016-3). For over a decade, the business purpose and non-device requirements discussed here have been on the no-rule list.

In a taxpayer friendly change, on Aug. 26, 2016, the IRS issued Rev. Proc. 2016-45 updating its no-rule list, removing both business purpose and device issues from the list.

This move comes on the heels of recently issued proposed regulations (see Proposed rules address section 355 non-business asset distributions) on the device test in the wake of recent high profile transactions (or contemplated transactions) involving the distribution of non-business assets. Now, the IRS decided that, in the interest of sound tax administration, it will once again accept ruling requests on significant issues involving business purpose and device. This change will allow many taxpayers to obtain a level of certainty with respect to these issues that has been lacking for a number of years.

Business purpose

Under section 355, stock distributions must have a real and substantial corporate business purpose. The purpose of avoiding federal income taxes does not meet this requirement. The business purpose test looks at the motivation behind the transaction and how it is supported by the business exigencies facing the corporation(s) involved. The business purpose requirement for spin-offs is particularly stringent and in some situations the spin-off must be the only nontaxable method for the corporation(s) to accomplish the business purpose. The willingness of the IRS to rule on whether a corporate business purpose is satisfactory should help not only the corporation(s) seeking the ruling, but also taxpayers in general as private letter rulings often serve as a good explanation of where the IRS stands on certain tax issues.


To qualify for tax-free treatment under section 355, a spin-off cannot be principally a device for distribution of earnings and profits (device). Whether a transaction will be considered a device is based on all the facts and circumstances, including the types and amounts of corporate assets.


This IRS’ expansion of its ruling policy is welcome news. Section 355 remains one of the more complicated areas in corporate tax, and the downside to a failed distribution can be catastrophic from a tax perspective. Any corporation considering a tax-free spin-off should consult with its tax advisor.


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