1. Does the Separation Qualify under Section 355?
Section 355 covers qualifying subsidiary-stock distributions. Some involve Section 368(a)(1)(D). Boards should examine each step, not only ownership.
Verify Control and the Shares Distributed
- Confirm Section 368(c)'s 80% voting-power and nonvoting-class share thresholds.
- Determine whether the parent distributes all shares or at least statutory control.
- If stock remains, document the absence of a principal tax-avoidance purpose.
Section 355(a)(1)(D) imposes a separate retention test. Corporate restructuring must reflect the actual distribution.
Document Active Business Operations
- Check five-year business activity for each company, subject to Section 355(b) exceptions.
- Confirm how each business was acquired and operated.
- Confirm qualifying operations immediately after distribution.
Section 355(b) restricts certain acquisitions within the five-year period.
2. Can Business Purpose and Device Tests Be Met?
A separation needs a substantial nonfederal tax business purpose. Separately, the device test considers whether the transaction principally distributes earnings and profits.
Record the Business Reasons
- Identify operational needs for separate ownership.
- Document why practical alternatives fall short.
- Match board materials to transaction documents.
Regulation § 1.355-2 evaluates purpose in light of the company's circumstances.
Evaluate Possible Device Indicators
- Review planned share sales and nonbusiness assets.
- Examine earnings and profits with other relevant factors.
- Consider evidence supporting a genuine corporate purpose.
No fixed earnings threshold controls.
3. Could Ownership Changes Trigger Section 355(E)?
Related acquisitions can change the tax result. Review ownership, operations, and transaction sequencing together.
Review Continuity and Transaction Steps
- Map shareholder interests before and after separation.
- Identify relevant continuity rules for any reorganization.
- Review asset transfers and continuing business activity.
Continuity is not a universal requirement that shareholders retain exactly 50%.
Screen Planned Stock Acquisitions
- Identify acquisitions of either company's shares.
- Assess whether a related plan transfers at least 50% by vote or value.
- Consider potential corporate-level gain and contract restrictions.
Section 355(e) can tax the distributing corporation. Related mergers and acquisitions merit early review.
4. What Tax Covenants Should the Board Approve?
Separation agreements allocate tax and audit duties, but cannot restrict IRS collection rights. Boards should settle those terms before closing.
Allocate Taxes and Indemnification
- Assign responsibility for pre-closing and later taxes.
- Set payment, indemnity, and dispute procedures.
- Define cooperation during audits and adjustments.
The agreement should distinguish contractual reimbursement from statutory tax liability.
Address Conduct after Closing
- Review acquisitions that may implicate Section 355(e).
- Define approval and notice duties for sensitive transactions.
- Set record-retention and information-sharing obligations.
Post-spin restrictions should reflect identified risks rather than impose an indiscriminate ban.
5. Is an IRS Private Letter Ruling Appropriate?
IRS approval is not a routine prerequisite to closing. Boards should weigh the scope and cost of a private letter ruling against a tax opinion and the transaction timetable.
Compare Ruling and Tax-Opinion Options
- Apply Rev. Proc. 2025-30 to relevant Section 355 requests.
- Assess significant-issue rulings under Rev. Proc. 2026-21.
- Check current no-rule policies before filing.
A significant-issue ruling addresses identified issues, not the full transaction. Chief Counsel Advice is different.
Substantiate the Requested Conclusions
- Reconcile business histories, ownership, and transaction steps.
- Prepare support for factual representations.
- Align any tax opinion with the documented structure.
Changes to the documented facts may affect a ruling or opinion.
6. Who Bears Taxes from before the Spin?
Consolidated tax liabilities may survive separation. Boards should examine those liabilities alongside acquisition-related tax exposure and the agreed allocation.
Check Consolidated-Group Responsibilities
- Review prior returns, audits, and asserted deficiencies.
- Assess liability under Treasury Regulation § 1.1502-6.
- Evaluate SRLY restrictions on relevant tax attributes.
SRLY rules concern attribute use. A tax-sharing agreement cannot reduce statutory group liability.
Allocate Contingent Liabilities
- Estimate potential Section 355(e) corporate-level tax.
- Assign contractual reimbursement for specified events.
- Plan procedures for later tax assessments.
Indemnification allocates economic risk between parties but does not bind the IRS.
7. What Reporting Follows the Distribution?
Post-closing reporting depends on securities basis and any separate control or capital changes. Each entity needs its own filing checklist.
Match Filings to Applicable Duties
| Reporting Item | Purpose |
|---|---|
| Reg. § 1.355-5 | Statements by the distributor and significant distributees. |
| Form 8937 | Basis-affecting actions, subject to reporting exceptions. |
| Form 8806 | Separate covered control or capital-structure changes. |
Form 8806 is not required merely because a spin-off occurs.
Coordinate Post-Closing Tax Records
- Retain valuations, representations, and tax agreements.
- Coordinate returns, audit responses, and estimated payments.
- Track reporting and transaction-related covenant dates.
Ongoing corporate tax compliance depends on each entity's circumstances.
8. Frequently Asked Questions
Can shareholders owe tax on cash received in a spin-off?
Yes. Cash or other consideration may receive different treatment from qualifying distributed stock.
Can another company rely on a private letter ruling?
Generally, no. The ruling applies to the requesting taxpayer and its stated facts.
Does a tax-free spin-off eliminate state tax questions?
No. State tax treatment and filing obligations require a separate jurisdictional review.
9. Review the Structure before Board Approval
The tax analysis should match the approved deal, including retained shares and post-closing obligations.
SJKP's attorneys can assess Section 355 requirements, ruling options, separation covenants, and tax exposure. Contact SJKP to discuss the proposed transaction.
06 May, 2026
