Federal Tax

Corporate Separations (Portfolio 776)

  • Corporate Separations analyzes the tax consequences of corporate separations and distributions under §355.


Tax Portfolio, Corporate Separations, No. 776, analyzes the tax consequences of corporate separations and distributions under §355. Section 355 applies to two different types of situations. In the first, a corporation divides into separate corporations by transferring one or more of its businesses to a newly formed subsidiary and distributes that subsidiary’s stock to its shareholders. The second situation is a distribution to a corporation’s shareholders of all or most of the stock of an existing subsidiary. Although the first transaction can constitute a reorganization (a divisive (D) reorganization under §368(a)(1)(D)) and the second does not, §355 applies to both if its requirements are met.

This Portfolio analyzes the statutory and nonstatutory requirements for qualifying under §355: (1) the distributing corporation must control the corporation whose stock is distributed; (2) stock or securities of the controlled corporation must be distributed (although boot is also permitted under a related provision, §356); (3) the distribution must not be a device for distributing earnings and profits; (4) after the distribution both corporations must conduct an active business that has been conducted for at least five years and has not been acquired in a taxable transaction within that time; (5) an amount of stock constituting control of the controlled corporation must be distributed; (6) the transaction must have a corporate business purpose; and (7) the continuity of interest requirement must be met.

This Portfolio also analyzes the tax consequences to the corporations and the shareholders of a transaction that meets all of the requirements of §355. The shareholders who receive stock (other than nonqualified preferred stock), and to some extent, securities, of the controlled corporation do not recognize gain or loss on the distribution, except to the extent that they also receive property other than stock and securities of the controlled corporation. Subject to potentially-significant exceptions, both the distributing and the controlled corporation generally receive nonrecognition treatment in the transaction. The portfolio also discusses the tax consequences if a distribution of controlled corporation stock fails to meet the requirements of §355, as well as the reporting requirements for §355 transactions.

Table of Contents

I. Spin-Offs – Purpose and Policy
II. Basic Requirements for Tax-Free Spin-Off
III. Control
IV. Stock vs. Boot
V. Device
VI. Active Business
VII. Continuity Requirements
VIII. Business Purpose
IX. Tax Consequences of Spin-Off to Distributing
X. Tax Consequences of Spin-Off to Controlled
XI. Tax Consequences to Shareholders
XII. Consequences of Taxable Spin-Off
XIII. Information to Be Filed After a Spin-Off

Candace A. Ridgway
Jones Day

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