A common theme we see today in family-owned businesses is the ownership of several lines of business either through a parent corporation with the original business and one or more subsidiaries holding other newer business lines or through a parent holding company and several subsidiaries holding the various business lines. At some point along the ownership journey, whether it be in a single multi-generational family or in a multi-family investment, certain owners may favor one or more of the business lines while other shareholders favor other business lines. A recent IRS private letter ruling provides a roadmap for separating and dividing those business lines among interested shareholders without incurring US federal income tax.
Private Letter Ruling 202622007, issued by the IRS Office of Associate Chief Counsel (Corporate) on May 29, 2026, confirms that a proposed corporate separation transaction qualifies for tax-free treatment under IRC Sections 355 and 368(a)(1)(D) (as a split-up). The ruling addressed a privately held corporation that conducted two distinct businesses through a single corporate structure: one directly and through disregarded entities, and a second through a wholly-owned limited liability company also treated as a disregarded entity.
For valid business purposes, the company proposed to separate the two businesses into independent corporate entities, allowing certain shareholders to exit the original corporation and become owners of the newly independent company while the remaining shareholders retained their interests in the original. The proposed transaction involved converting a disregarded LLC into a corporation under state law or by federal tax election, followed by the distributing entity (“Distributing”) distributing the newly formed corporation’s stock to three of its five shareholders in exchange for some or all of their Distributing shares, leaving the remaining two shareholders holding interests only in Distributing. Following the distribution, the two businesses would be held and operated by entirely separate shareholder groups going forward.
The IRS confirmed that the entire transaction, including both the initial conversion of the LLC to corporate status and the subsequent distribution of shares to the departing shareholders, qualifies as a reorganization under Section 368(a)(1)(D) and a distribution under Section 355, with no gain or loss recognized at either the corporate or shareholder level. The IRS issued ten specific rulings covering the tax consequences of the proposed transaction. At the corporate level, neither the Distributing nor the controlled entity (“Controlled”) recognized gain or loss on the conversion, the distribution of Controlled stock, or the exchange of Distributing shares. Controlled took a carryover basis in all assets received from Distributing, and Controlled’s holding period for each asset tacked on to Distributing’s prior holding period.
At the shareholder level, the shareholders who received Controlled stock recognized no gain or loss on the exchange, and their basis in the Controlled shares equaled the basis of the Distributing shares they surrendered, with holding periods carrying over from the surrendered shares. The ruling also confirmed that Distributing’s earnings and profits, if any, would be allocated between Distributing and Controlled in accordance with Section 312(h) and the applicable Treasury Regulations. Notably, the IRS expressly declined to rule on whether the distribution satisfied the business purpose requirement of Treasury Regulation Section 1.355-2(b), which remains a factual determination outside the scope of a PLR on structural tax consequences.
PLR 202622007 is a useful illustration of the planning flexibility available to privately held corporations seeking to separate distinct business operations among shareholders with divergent interests. Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, John Rouchell, John Bradford, and Kevin Naccari can help your family business optimize the tax results of these family business separations.