Pub. 1 2019 Issue 5

S E P T E M B E R / O C T O B E R 2 0 1 9 10 nebraska cpas C O U N S E L O R ’ S C O R N E R IRS TO CONTINUE ISSUING SECTION 355 TRANSACTIONAL RULINGS BY JEFF SCHAFFART & KURT TJADEN, KOLEY JESSEN In March 2019, the IRS announced that the ruling program for section 355 distributions created under Rev. Proc. 2017- 52 has been extended indefinitely. The ruling program expands the scope of letter rulings and offers taxpayers the opportunity to obtain a transactional ruling for corporate distributions intended to qualify as tax-free under section 355. Due to section 355’s numerous statutory requirements and the inherent high stakes in securing tax-free treatment for a section 355 distribution, taxpayers and practitioners were often hesitant to implement a section 355 distribution in the absence of a favorable IRS ruling. The ruling program allows taxpayers to obtain a transactional ruling and confidently implement a section 355 distribution. Background: Section 355 & IRS Ruling Policy Section 355 provides an exception to the general rule that a distribution of appreciated property from a corporation is taxable. A corporation can be divided tax-free under section 355 through a split-off, spin-off, or split-up. • In a split-off, a divesting corporation transfers part of its assets or a segment of its business to some, but not all, of its existing shareholders. • In a spin-off, the divesting corporation transfers assets and liabilities to a subsidiary in exchange for all the outstanding shares of the subsidiary. The shares of the subsidiary are then distributed pro-rata to the shareholders of the divesting corporation. • In a split-up, the divesting corporation transfers all of its assets and liabilities to two or more wholly owned subsidiaries followed by a liquidation of the divesting corporation. Rev. Proc. 2017-52 is a reversal of the IRS’ prior letter-ruling policy. Starting in 2003, the IRS limited the scope of letter rulings under section 355 by refusing to rule on specific issues. In 2009 and again in 2013, the IRS further limited the scope of its section 355 ruling program and allowed taxpayers to only obtain rulings on “significant issues,” rather than on whether the overall transaction qualified for tax-free treatment under section 355. Then with Rev. Proc. 2016-45, the IRS expanded the scope of issues pertaining to the “corporate business purpose” requirement, or a “significant issue” under section 355(a)(1)(B) and regulation section 1.355-2(d). The IRS would only rule on legal issues and not those that were inherently factual.