The IRS and Treasury Department recently withdrew several proposed rules that would have imposed additional restrictions on certain tax-free distributions of corporate stock under Section 355 of the Internal Revenue Code.
Section 355 allows corporations to distribute stock or securities of a controlled corporation without recognizing gain or loss if certain requirements are met. Among other things, the distribution cannot be used primarily to distribute earnings and profits, and both corporations must continue operating an active trade or business immediately after the distribution.
In 2016, the IRS proposed additional restrictions, including a test based on the amount of non-business assets held by each corporation and rules designed to prevent companies from avoiding certain requirements through other transactions. After receiving criticism of these proposed restrictions, the IRS and Treasury decided to withdraw the test and two anti-abuse rules.
Although the withdrawal provides greater flexibility, corporations must still comply with existing Section 355 requirements and other applicable legal principles.
For businesses considering a corporate stock distribution or restructuring, this change may create new opportunities for tax-efficient planning. Understanding the remaining requirements will be key to taking advantage of this increased flexibility. For additional information, contact Liskow Transactional and Tax attorneys Leon Rittenberg III, Caroline Lafourcade, Abby Strohmeyer, or visit our Tax Practice page.