Presentation:
Corporate Taxation
Chapter Ten: Corporate Divisions
Professors Wells
April 6, 2015
Chapter 10 §355 & §368(a)(1)(D)
Corporate Divisions
p.455
1.  Spinoff: prorata; cf., §301 dividend.
S/Hs
S/Hs
D
C
Div
A
Div
B
C
D
Div
A
Div
B
Div
A
2 Chapter 10 §355 & §368(a)(1)(D)
Corporate Divisions
p.456
2.  Split-off: non-prorata; cf., redemption - §302.
S/H
X
S/H
Y
D
C
Div
A
S/H
X
S/H
Y
C
D
Div
A
Div
B
Div
B
Div
A
3 Chapter 10 §355 & §368(a)(1)(D)
Corporate Divisions
p.456
3.  Split-up: distribute stock of 2+ corporations; cf., §331 liquidation.
D Li
quid
ate
S/Hs
D
C-1
Div
A
Div
A
S/Hs
s
Div
B
C-2
C-1
C-2
Div
A
Div
B
Div
B
4 §355 Overview
1.  Early Evolution of §355 was focused on preventing the use of §355
to beat the shareholder dividend / ordinary income tax. Casebook
pages 455-507 give us the statutory framework that developed
with this thought first and foremost in mind.
2.  Since 1986, with the repeal of the General Utilities doctrine, §355
has become an important means to move assets out of the
Distributing Corporation’s ownership without triggering
corporate level tax. §355(d) and §355(e) evidence a relatively new
goal for §355 created as a result of the 1986 tax law changes:
prevent §355 from being used as a means to effectuate a sale of
Distributing or Controlled in a manner that beats the corporate
level tax.
5 Gregory v. Helvering, Disguised Dividend
p.459
Gregory
FACTS: Gregory owns 100% of
United Mortgage. United
Mortgage creates Averill, transfers
Monitor shares to Averill,
distributes Averill shares to
Gregory. Gregory liquidates
Averill liquidated with Monitor
shares distributed to Gregory.
Gregory sells Monitor stock.
United
Mortgage
Averill
1000 shs
Monitor
Stock
Held: Equivalent of a dividend
distribution. No business or
corporate level purpose. Only a
distribution from the corporation.
Liquidate
1000 shs Monitor Stock
Gregory
1000 shs
Monitor
Stock
$133,333
Cash
Buyer
Averill
6 Code §355 Requirements
p.463
1)  Parent must control subsidiary before distribution (i.e., at least 80
percent). §355(a)(1)(A).
2)  Distributing must distribute all of Controlled’s stock or establish
that no tax avoidance purpose. §355(a)(1)(D)(ii).
3)  Active Trade or Business. Both Distibuting and Controlled must
be engaged in an active trade or business. §355(b). Also, each
trade or business must have been actively conducted during the
five year period ending on the acquisition date and not acquired
within the five year period. §355(b)(2)(C).
4)  Arrangement must not be principally a “device” for the
distribution of earnings and profits of distributing corporation
or a controlled corporation. §355(a)(1)(B).
5)  Judicial requirements must be satisfied: (a) business purpose,
and (b) continuity of interest.
7 Active Trade or Business Requirement
Lockwood’s Estate: §355(a)(1)(C), (b)
Spinoff of a corporation holding the Maine
business – was separately incorporated for the
spin-off.
p.465
Thorval &
Margaret
Lockwood
Issue: Is the 5 year active business requirement
met?
Lockwood
Maine
Div
Maine
Tax Court: Said No.
8th Circuit: Said “yes.” The 8th Circuit stated that it was okay to
divide a single business into two corporations. The spin-off segment
was part of the business that Lockwood had always performed. Not
a newly acquired business.
8 Rev. Rul. 2003-38
Expansion to Internet
Facts: Dropdown of an internet
business into a sub and the
distribution of that sub stock
within two years after
organization.
Held: The interest site is (1) an
expansion of current retail
business and (2) not a new or
different business.
p.471
S/Hs
D
C
Year
10
Internet
Shoes
Year 8
Retail
Shoes
Year 1
Implication: Changes in a business are disregarded as long as of
such a charater as to cnstitute the acquisition of a new or different
business. What makes this the “same business?” Same shoes, same
principle activities. Website sales drew on pre-existing business
experiences. Thus, the website is a “business
9 expansion.”
Rev. Rul. 2007-42
Active Business through LLC?
FACTS: Corp. D owns minority interest
in LLC engaged in office building leasing
and management enterprise (for more
than five years). Corp. D also holds
stock in Corp. C which has an unrelated
business – proposed to be distributed.
p.473
S/Hs
D
C
33%
20%
LLC
Code §355(a)(1)(C) and §355(b) require D & C to have been
engaged in the active conduct of a trade or business for the prior
five years. Can a partner be so engaged? IRS says “yes” if D owns
33 1/3 but “no” if D owns 20%.
10 Issues Concerning Business Requirement
p.476
1)  Factual issue re continued conduct of two active businesses
with a five year history.
2)  Vertical division of single integrated business is OK, e.g.,
based on geography.
3)  Functional/horizontal division – supply corp. research corp.,
may be OK.
4)  Expansion of trade or business OK – e.g., suburban store.
5)  Real estate? Are significant management services being
conducted?
11 Problem 1(a) Active Trade or
Business Requirement
Lemon contributes assets and
research of Boston division to Peach,
Inc. & distribution of all Peach stock
to Mr. Chips in redemption of his
Lemon stock. Ms. Micro as sole
shareholder of Lemon.
This split-off satisfies the §355(b)
active business requirement. Each
entity is engaged in the active conduct
of a computer business immediately
after the distribution.
Vertical division of an integrated
business.
Mr. Chips
p.482
Ms. Micro
Lemon
Boston
Div
Peach
Mr. Chips
San Jose
Div
Ms. Micro
Peach
Lemon
Boston
Div
San Jose
Div
12 Problem 1(b) – Three Year Research Activity
p.482
FACTS: Same as (a) except that
the Boston branch was opened
only three years ago.
New activity in the same line of
business actively conducted by
the distributing corp. for 5 years
pre-distribution period is not a
separate trade or business. Reg.
§1.355-3(b)(3)(ii). Similarity to
the Lockwood case.
Mr. Chips
Ms. Micro
Lemon
Boston
Div
Peach
Mr. Chips
San Jose
Div
Opened
3 yrs ago
Ms. Micro
Peach
Lemon
Boston
Div
San Jose
Div
13 Problem 1(c)
Taxable Acquisition
FACTS: Same as (b) except Lemon
acquired Peach three years ago for
cash. Peach operates the Boston
facility. See §355(b)(2)(C) regarding
acquisition in a transaction where gain
or loss recognized in whole or in part.
Lemon will contend that a single
computer business conducted for more
than five year period.
Yes: Prop. Reg. §1.355-3(b)(1)(ii).
Acquisition of Peach is an expansion of
Lemon’s active trade or business. See
Prop. Reg. §1.355-3(d), Ex. 20.
p.482
Mr. Chips
Ms. Micro
Lemon
Peach
Boston
Div
Mr. Chips
San Jose
Div
Purchased
3 yrs ago
Ms. Micro
Peach
Lemon
Boston
Div
San Jose
Div
14 Problem 1(d)
Taxable Acquisition
Similar to Problem 1(c), but Peach
stock only acquired to enable control
(§368(c)) but not “separate affiliated
group” (SAG) status (under §1504(a)
(2) – measured by voting power and
value).
E.g., failure to acquire 80% of total
value of Peach stock.
Mr. Chips
Ms. Micro
Lemon
Peach
Boston
Div
Mr. Chips
IRS position: Prop. Reg.
§1.355-3(d), Example 21, specifies
that §355(b)(3) not satisfied.
p.482
San Jose
Div
Purchased
3 yrs ago
Ms. Micro
Peach
Lemon
Boston
Div
San Jose
Div
15 Problem 1(e)
Divestiture Order
Horizontal/functional division of a single
business. Reg. §1.355-3(b)(2)(ii)
provides that a “trade or business” must
consist of a specific group of activities
carried on for purpose of earning
income.
Regulations do not require that the
activity must independently produce
income, i.e., from outside sources. See
Reg. §1.355-3(c), Ex. 9.
p.483
Mr. Chips
Ms. Micro
Lemon
Research
Div
Research
Functional divisions also must withstand
scrutiny under the §355(a)(1)(B)
“device” limitation (see later problem).
Reg. §1.355-2(d)(2)(iv)(C).
Mr. Chips
San Jose
Div
Ms. Micro
Research
Lemon
Research
Div
San Jose
Div
16 Problem 1(f)
New Business?
Three years ago Lemon purchased stock of
Floppy Disk, Inc. (software co.) in a
taxable transaction. Pursuant to a
regulatory decree Lemon distributes
Floppy Disk stock to its shareholders
prorata.
p.483
Shareholders
Lemon
Floppy
Hardware
Div
Floppy Disk failing to qualify as an active
business – acquisition within 5 year period.
Purchased
3 yrs ago
Shareholders
Software and hardware are different, and
therefore, not expanding an existing
business.
Rev. Rul. 2003-38 (p.515) not helpful here.
Floppy
Lemon
Hardware
Div
17 Problem 1(g)
Tax-free Acquisition
Floppy Disk merged into Lemon three
Shareholders
years ago in an “A” reorganization for
Stock
nonvoting preferred stock (80%) and S.T. 80%
20% Boot
Notes (20%) (i.e., “boot”). Transaction is
Floppy
not an expansion of the existing Lemon
trade or business.
§355(b)(2)(C) permits the acquisition of
business in a wholly tax-free transaction as
meeting 5 year rule.
The use of boot means that gain is
recognized in the transaction. Even though
gain is recognized to the shareholders, not
to Floppy Disk, the current regulations Floppy 2
suggests that this fails
the 5-year rule.
p.483
80% Stock
20% Boot
Merge
Lemon
Shareholders
Lemon
Software
Div
Hardware
Div
18 Problem 2(a)
Rental Real Property
FACTS: DC transfers 10 story
building to a Rentals and distributes
Rentals stock prorata to
shareholders. DC leases the six
floors that it occupies. Rental
employees actively manage the
building.
p.483
Shareholders
DC
Building
Mfgr
Div
Rentals
Properties
Issue: is the real estate activity an
active “trade or business”?
Net Leases
ANSWER: Real estate rentals is an active trade or business if
significant management activities concerning the property.
19 Problem 2(b)
Mostly Independent Rental
DC occupies only one floor and the
remaining space is leased to
unrelated tenants.
Real estate rental activities will
likely qualify as an active trade or
business – premised upon Rental
employees engaged in active
management of the business.
p.483
Shareholders
DC
Building
Rentals
Mfgr
Div
Properties
Net Leases
See Reg. §1.355-3(c), Example 12.
20 Problem 2(c)
Long-term Lease
Shareholders
FACTS: Same as (b) except that nine
of the ten floors are rented to
outsiders on a long term net lease.
ISSUE: is Rental engaged in an active
business?
p.483
DC
Building
Rentals
Mfgr
Div
Properties
ANSWER: No. A long-term net lease
arrangement is not an active trade or
Net Leases
business. Rental probably is not performing any significant services
concerning the operation and maintenance of the building and is not
satisfying the active business test.
21 Problem 2(d)
Distribution of Properties
FACTS: The stock of Properties,
Inc. is distributed to the DC
shareholders on a prorata basis.
Assume the terms of the longterm net lease do not require
Properties to engage in any
significant activities other than
the collection of rent.
p.483
Shareholders
DC
Building
Rentals
Mfgr
Div
Properties
RESULT: This spin-off is
unlikely to qualify because
Properties, inc. is unlikely to
have an active trade or business
business even though the
buildings are rented to outsiders.
Net Leases
22 Judicial & Statutory Limitations
p.484
Business Purpose See Reg. §1.355-2(b), including (b)(1), which
indicates that the business purpose requirement is independent of
other §355 requirements.
Examples: Resolution of shareholder disputes; reduction of state
and local tax.
Can the objective be met through an alternative to a stock
distribution? p.486. E.g., drop to sub?
“Fit and focus” analysis is applicable. p.486.
23 Judicial & Statutory Limitations
p.487
Continuity of Interest Reg. §1.355-2(c).
Old shareholders must own 50% of each corporation after the
division of the several corporations.
Limit on rearranged post-distribution sales arrangements.
But, can have a division of ownership among old shareholders to
enable the break-up of the enterprise.
Continuity of interest must also be maintained after the distribution.
Cf., acquisitive reorganizations requirement as modified.
24 Judicial & Statutory Limitations
p.488
The “Device” Limitation Reg. §1.355-2(d).
Code §355(a)(1)(B) provides that a corporate division is not to be
“used principally as a device for the distribution of the earnings and
profits” of the distributing corporation.
Device factors (p.490): (1) prorata distribution; (2) subsequent stock
sale (evidence of bailout?); (3) nature and use of the corporate assets
after the division (e.g., excess cash transferred).
Non-device factors (p.493): (1) corporate business purpose; (2) wide
shareholding distribution; no Acc. E&P; distribution would be
entitled to redemption under §302(a) or §303.
25 Problem (a)
Two Equal Shareholders
Distribution of all the stock of
Floppy to Mr. Chips in complete
redemption of his Lemon stock.
Resolution of a shareholder
dispute is a recognized corporate
business purpose.
p.495
Mr. Chips
Ms. Micro
Lemon
Research
Div
Mfgr Div
Floppy
Reg. §1.355-2(b)(5), Example (2).
Not a prorata distribution;
finding of “device” is unlikely.
26 Problem (b)
Mother & Son as Shareholders
Result should be the same as in
(a) above.
Mr. Chips
(son)
p.496
Ms. Micro
(mother)
Lemon
A redemption would not qualify
as a complete redemption
without a waiver of family
attribution under §302(c)(2).
Research
Div
Mfgr Div
Floppy
Reg. §1.355-2(d)(5)(iv) says ten
year look forward rule in Code
§302(c)(2)(A)(ii) and (iii) are not
relevant in this context.
27 Problem (c)
Pre-distribution Stock Sale
FACTS: Mr. Modem buys all Ms.
Micro’s stock shortly before split-off.
RESULT: Mr. Modem is not a historic
shareholder for “continuity of
interest” purposes with the
consequence that the continuity of
interest requirement would not be
satisfied.
Mr. Chips
p.496
Mr. Modem
Lemon
Research
Div
Mfgr Div
Floppy
The historic shareholders must own at least 50% of both the
distributing and the controlled corporations. Reg. §1.355(c)(2). Ex.
3. Lemon has no historic shareholders after the split-off of Floppy.
28 Problem (d)
Different Retirement Plans?
FACTS: Transfer of research division
to new corporation (Research, Inc.)
and spin-off to enable companies to
adopt two different retirement plans.
Assuming a valid business purpose, no
purpose for the stock distribution.
Mr. Chips
p.496
Mr. Modem
Lemon
Research
Div
Mfgr Div
Research
Floppy
RESULT: This split-off likely fails §355
due to an inadequate business purpose.
Need not have a distribution to achieve this objective. Could be
achieved merely through separate subsidiaries. See Reg. §1.355-2(b)
(5), Examples 3 & 4. If business purpose is flunked, never get to
question of device.
29 Problem (e)
Compliance with Decree
Same as (d) except that the purpose of
the spin-off is to comply with a
regulator decree. Business purpose is
satisfied (see Problem 1(e) on p.483),
but does this functional division past
muster under the “device” test?
p.496
Mr. Chips
Mr. Modem
Lemon
Research
Div
Mfgr Div
Research
RESULT: Device factors include the
prorata nature of the distribution.
Critical inquiry is whether Research
could be sold without adversely
affecting the business of Lemon. See
Reg. §1.355-2(d)(2)(iv)(C).
Floppy
30 Problem (f)
Subsequent Stock Sale
Issue: Do sales subsequent to the
division constitute evidence of a device?
p.496
Shareholders
Lemon
RESULT: The spin-off likely fails the
“device” requirement. §355(a)(1)(B)
indicates that the “mere fact” that sale
or exchange occurs is not construed as Floppy
a “device,” but Reg. §1.355-2(d)(2)(iii)
(A) states that the sale of either
distributing or controlled after the
distribution is evidence of a device.
Suitor
Reg. §1.355-2(d)(2)(iii)(B) also provides
that post-spin sell that was negotiated
before the spin-off is “substantial
evidence” of a device.
Research
Div
Mfgr Div
Cash
Shareholders
Floppy
31 Problem (g)
Rejected Deal & Delayed Sale
FACTS: Lemon rejects Suitor offer.
Pro rata distribution of the Floppy
stock. Subsequent sale to White
Knight, Inc.
p.496
Shareholders
Lemon
RESULT: Likely passes the “device”
Floppy
test. The sale to White Knight is not
a prearranged sale and therefore
protected by the §355(a)(1)(B)
parenthetical. It is true that a
Cash
subsequent sale is evidence of a
White Knight
device (see Reg. §1.355-2(d)(2)(iii)
(C)), but the overall facts here re
subsequent sale as evidence of a
device.
Research
Div
Mfgr Div
Shareholders
Floppy
32 Problem (h)
Subsequent Shareholder Sale
FACTS: same as (g) except that the
sale is made to Suitor.
p.496
Shareholders
Lemon
RESULT: If no understanding was
reached, then there is not
“substantial evidence of device,” but
the fact that a sale was made
represents “evidence” of a device.
See Reg. §1.355-2(d)(iii)(A).
Research
Div
Floppy
Cash
Suitor
Also, even if the “device” test were
met, the sale may violate postdistribution continuity of interest.
Mfgr Div
Shareholders
Floppy
33 Consequences to Distributing Corporation
p.497
A corporate division may be preceded by a Type D reorganization –
the formation of a corporation to facilitate the stock distribution.
Distributing corporation treatment:
1)  Distributing has no gain (or loss) on asset transfer to Controlled per §361(a)
2)  Distributing takes a substitute tax basis for the Controlled stock per §358(a)
3)  Distributing tacks its holding period for the new Controlled stock received per
§1223(1).
Assume Unwanted is worth $3 million and zero basis and D wants to do a share
buy-back like Rev. Rul. 99-58. §355 is significantly better (discuss CBS split-off of CBS
Outdoor Americas 6/12/2014)
S/H S/H
X
Y
S/H
X
$1.95
million
$3
million
D
C
S/H
Y
Unwanted
$3 million
D
Buyer
C
Unwanted
34 Consequences to the Shareholders
p.497
Receipt of Controlled stock – no gain or loss to the shareholder per
§355(a)(1).
The Shareholder’s old tax basis in Distributing is allocated between
the Distributing and Controlled stock owned after the distribution
based on the relative fair market values. See §358(b).
Shareholders have a tacked holding period for its Controlled stock.
Treatment of “boot” – does not invalidated the basic transaction as
being tax-free but is taxable (see §356(a); §355(a)(3)); the tax status
depends on distribution form.
1.  Prorata spin-off, then dividend.
2.  Split-off/Split-Up that §356(a)(1) requires realized gain to be
recognized to the extent of boot.
35 3.  Boot takes FMV basis per §358.
Rev. Rul. 93-62
Cash Boot as “Dividend”?
Code §356(a)(2) – treatment of
cash boot as a dividend if having
the effect of a dividend (i.e., to the
extent of the ratable share of
accumulated earnings and profits).
Dividend equivalence test is
applied by reference to §302
principles (i.e., a meaningful
reduction of the shareholder’s
proportionate interest). Cf., the
Clark case in the reorganization –
boot context.
p.500
Other
S/Hs
A
D
C
A
Other
S/Hs
C
D
36 Consequences to Distributing
& Control Corporation
p.503
1)  If part of a “D” reorganization plan, then §361(c) controls for
distributee:
a)  No recognition on distribution to shareholders of “qualified
property” per §361(c)(1) & (2); i.e., no corporate level gain.
b)  §311(b) is not applicable to a spinoff – since not a dividend.
c)  §336 is not applicable to the equivalent of a liquidating
distribution when part of a tax-free reorganization.
2)  If no preliminary “D” reorganization, then §355(c) controls for
distributee:
a)  §355(c) provides the distributing corporation recognizes no
gain or loss on the distribution of qualified property, i.e.,
stock or securities of the distributing corporation.
b)  Gain recognized, however, on distribution of other than
“qualified property”, i.e., appreciated “boot”. §355(c)(2).
c)  Receipt of the distribution – no gain or loss - §355(a)(1).
37 Consequences to Distributing
& Controlled Corp. Cont.
p.504
Earnings and profits are allocated between the several corporations
per §312(h) and Reg. §1.312-10(a) or (b).
Other Section 381 carryover rules are not applicable (the tax history
of the distributing corporation remains in tact).
38 Failed Divisions
p.505
Tax consequences depend upon the form of the transaction:
1)  1st segment as a qualifying Section
S/H S/H
351 organization if new Controlled
X
Y
$3
is created.
million
2)  Distribution of Controlled stock
D
causes any built-in gain to be
ý
recognized per §311(b)
✔
3)  Shareholders are taxed on receipt of
Unwanted
C
distribution.
a.  Spin-off taxed §301 distribution
b.  Split-off – tested under stock
redemption rules.
c.  Split-up – examine under
complete liquidation rules.
39 Problem
Father’s Estate Planning
FACTS: Father as sole shareholder in Store Corp (Father’s Basis=
$200x FMV=2,000). Store has $400,000 accumulated E&P.
Suburb store represents 25 percent of total FMV. Proposal to
organize Branch Corp for stock & debt & distribute Branch stock
& debt to Father who gives Branch to children.
p.506
A
B=200x
FMV=2,000x
Branch
(FMV=400x)
$100x boot
Store
RESULT: Estate planning may be valid business purpose.
If a valid §355 spin-off, then:
1.  S has no gain or loss on transfer of assets to B. §361(a)
2.  S takes substitute basis in B stock and securities (§358(a)(1)).
Branch
3.  E&P attributable to B is 100x (25%) per §312(h).
4.  S recognizes no gain on distribution of B stock and securities (which are qualified property per
§361(c)(2)(B)) to A. See §361(c)(1) & (2).
5.
S has no issues under §355(d) since stock purchased 15 years ago.
6.  B recognizes no gain on issuance of its stock per §1032(a).
7.  B takes transferred basis in assets (per §362(b)) and a tacked holding period (per §1223(2)).
8.  F has 100x of boot per §355(a)(3)(A) / §356(d)(1) and takes a FMV basis in the boot per §358(a)(2).
9.  F allocates basis of 200x based on relative FMV of 400x and 1,500x.
10.  F has no gain on gift to children and they take carryover basis per §1015 and tacked holding
period per §1223(2).
40 §355 & Corporate Acquisitions
p.507
Limitation on use of §355 in taxable acquisitions.
§355(b)(2)(D) – dispositions of recently acquired businesses.
Five year holding period applies to enable satisfying active trade or
business requirements. Target recognizes gain on distribution of Sub
stock to Purchaser – but DRD on distribution to corporate parent.
Example (see p. 507) that §355(a)(2)(D) was designed to address:
Cash
Purchaser
(“P”) 80%
T stock
S
P
T
Shareholders
T
Unwanted
T
S
Unwanted
41 §355 & Corporate Acquisitions
(Cash-Rich Split-offs)
(11/13/2014)
p.507
But, patient investors can overcome the time period
Berkshire Hathaway held P&G stock for more than
5 years and the P&G stock was substantially
appreciated. P&G has a low basis in its Duracell stock.
1.
P&G contributes $1.7 billion cash to Duracell subsidiary to
fatten it up.
2.
P&G exchanges Duracell stock for P&G stock.
§355(a)(2)(D) five year holding period met. §355(g) inapplicable
because Duracell is not an investment company
Berkshire
Hathaway
Berkshire
Hathaway
P&G
Duracell
P&G
Duracel
+ $1.7B
42 Problem (a) Bust-Up Base Case
Buyer Wants S. Purchaser Wants T.
FACTS: T sells S stock to buyer –
gain on the stock sale.
T shareholders sell T stock to P –
gain to be recognized on this stock
sale.
A §338 election by P is not likely.
p.508
Cash
T
Shareholders
Cash
Purchaser
T stock
T
Buyer
S stock
S
RESULT:
1.  Buyer and Purchaser both have FMV basis in their stock.
2.  T recognizes corporate level gain on sell of S stock.
3.  T shareholders recognize gain on sell of T stock.
43 Problem (b)
Purchaser not Wanting Sub
2005: P purchases T stock from
T shareholders. Shareholders
have gain recognition.
2007: Distribution of Sub stock to
purchaser and then Purchaser
sells Sub stock to Buyer.
Issue: Does this reordering allow
P to avoid shareholder level gain
on Sub stock?
RESULT: Failed §355 because P
does not satisfy 5 year active
business rule as to the S stock.
2005
p.508
Cash
Shareholders
Purchaser
T stock
T
S
2007
Cash
Purchaser
T
S
9 mos Buyer
S stock
44 Problem (c)
Purchaser not Wanting Sub
Same as (b) except P is an
individual.
2005
p.509
Cash
Shareholders
Purchaser
T stock
RESULT: §355(b)(2)(D) is not a
barrier because P is not a
corporate distributee. Assuming
a valid business purpose, the
subsequent sale of S stock raises
a device problem that may be
overcome. §355(d) in next
section is now relevant to this
technique.
T
S
2007
Cash
Purchaser
T
S
9 mos Buyer
S stock
45 Problem (d)
Purchaser not Wanting Sub
Same as (b) except P acquired T
in a B reorganization.
2005
p.509
Stock
Shareholders
Purchaser
T stock
RESULT: §355(b)(2)(D) is not
violated if T was acquired in a
nonrecognition transaction.
Abuse is less obvious here,
however, as P is likely to have lowbasis when it sells S stock.
T
S
2007
Cash
Purchaser
T
S
9 mos Buyer
S stock
46 Problem (e)
Purchaser not Wanting Sub
Same as (b) except P acquired 50%
of the T stock from T Shareholders
and B purchases 50% from T
shareholders. 2 years later, T
distributes S to B in exchange for
all of B’s stock in T.
2005
Buyer
p.509
Cash
Purchaser
Shareholders
50% T
stock
T
S
RESULT: This is the transaction
that potentially safely navigated
§355(b)(2)(D) and was viewed as an
inappropriate avoidance of the
General Utilities repeal. Congress
responded by enacting §355(d).
2007
Buyer
T
stock
S
stock
Purchaser
T
S
47 Divisions in Change in Control
p.509
§355(d) imposes corporate level tax (but not shareholder level tax)
on a distribution if any person holds disqualified stock and such
stock constitutes a 50% or greater interest in either distributing or
controlled.
Disqualified stock includes any stock of Distributing or Controlled
acquired by purchase during the five year period before the
distribution. Purchase transaction occurs if basis is not a
transferred basis or a §1014 date-of-death basis.
2005
Buyer
Cash
Shareholders
Purchaser
50% T
stock
T
S
2007
Buyer
T
stock
S
stock
Purchaser
T
S
48 Anti-Morris Trust Technique
And Progeny
Morris Trust Transaction: Transfer of
Unwanted Division A to C followed by
Spin-off of C allowed D to retain only
wanted business. D then merged into P
in a tax-free transaction where D
shareholders kept 50+% of combined
entity shares.
p.513
S/Hs
D
C
A Reorg
P
Div
A
Div
A
Fourth Circuit held this was a valid
transaction. Further, subsequent
enactment of §355(d) could be safely
navigated.
Levered Morris Trust: Viacom, GM, and Disney Transactions.
Same as above, but now D borrows cash to lever-up the controlled
subsidiary.
49 §355(e)
The Anti-Morris Trust Provision
§355(e) requires D to recognize gain
as if it had sold C stock for its fair
market value if the distribution of C
was part of a plan for one or more
persons to acquire a 50% or greater
interest in D or C within 2 years
before or after the distribution.
p.513
S/Hs
D
C
A Reorg
P
Div
A
Div
A
§355(e) does not apply if P was not
in discussions with D within 6 months of C’s distribution.
Planning Point: Rev. Rul. 2005-65 announced spin-off before
negotiations. B/E Aerospace press release (June 2014) announced its
intention to separate its business into a manufacturing and separate
service business.
50 Recent Announcement:
(1/9/2015)
(MeadWestvaco Spin-Off of Specialty Chemicals Business)
1.  MWV announces plan to
contribute specialty
chemical business to
SpinCo with debt equal to
SpinCo stock basis
(levered contribution) and
spins-off SpinCo. But
MWV announces it is
“open” to other options.
2.  Does Pre-Announced
Spin-Off “Turn-Off”
Section 355(e) as to the
subsequent purchase even
if prearranged before the
spin-off is completed? See
Rev. Rul. 2005-65.
MWV S/Hs
MWV
SpinCo
Chemical Specialty Business
+
Debt = SpinCo stock basis
MWV S/Hs
MWV S/Hs
MWV
SpinCo
100% MWV
SpinCo
> 50% Buyer S
tock
Buyer
Merger S
51 Recent Transaction:
(4/29/2014)
(Comcast Divestiture to Charter After Time Warner Acquisition)
Com S/Hs
1.  Comcast contributes
unwanted historic
Com
Comcast customers to
SpinCo with debt equal to
2.5 million customers
SpinCo stock basis
+
SpinCo
(levered contribution) and
Debt = SpinCo stock basis
spins-off SpinCo.
2.  Charter Communications
(CC) acquires 49.25% of Com S/Hs
CC Stock
CC
Com
S/Hs
SpinCo and agrees to 2
< 49.25% SpinCo stock CC
year stand-still. This is
< 49.25
> 50.75
CC Stock
done to divest in a
manner that avoids
Merger S
Com
Com
§355(e).
3.  Comcast will exchange 3
3 million customers
million COM customers
Com
CC
in exchange for 1.6 million
1.6 million customers
CC customers and cash.
52 +
Cash
Problem (a)
Acquirer not Wanting Sub
p.516
Shareholders
If integrated, the transaction fails as
a C reorganization because
“substantially all” of the assets were
not transferred to Denim.
Leisure
Motel
Div
If not integrated, then probably
represents a device.
Even if the above gauntlet were
passed, §355(e) would be violated.
Motel
Leisure
C Reorg
Apparel
Div
Denim
Apparel
Div
53 Problem (b)
Acquirer not Wanting Sub
Shareholders
Same as (a) except that Leisure
merges into Denim and receives
Denim nonvoting preferred stock.
RESULT: Effective before §355(e)
but now Leisure is taxable on its
distribution of the Motel stock as if
Leisure had sold it for its FMV.
p.516
Leisure
Motel
Div
Motel
Leisure
A Reorg
Apparel
Div
Denim
Apparel
Div
54 Problem (c)
Acquirer not Wanting Sub
FACTS: Leisure transfers apparel
business to new Cords and
distributes Cords. Cords then
merges into Denim and receives
Denim in exchange for Denim voting
stock.
RESULT: Cords distribution
qualifies for §355 but unless historic
Leisure shareholders own more than
50% of Denim then §355(e) applies
to cause Leisure to be taxable on its
distribution of the Cords stock.
p.516
Shareholders
Leisure
Apparel
Div
Motel
Div
Cords
Cords
A Reorg
Denim
Apparel
Div
55 Problem (d)
Acquirer not Wanting Sub
Shareholders
FACTS: Same as (c) except that
Leisure shareholders receive more
than 50% of the Denim stock.
RESULT: Tax-free to all concerned
as §355(e) no longer applies.
p.516
Leisure
Apparel
Div
Motel
Div
Cords
Cords
A Reorg
Denim
Apparel
Div
56 Problem (e)
Acquirer not Wanting Sub
p.516
Shareholders
FACTS: Same as (b) except that the
merger of Leisure into Denim occurred
Leisure
one year after the spin-off.
RESULT: §355(e) contains a
Motel
rebuttable presumption that a plan
Apparel
Div
Div
exists. This is rebuttable if there were
Motel
no negotiations with Denim within 2
years of the Motel Spin-off. Another
means to rebut the presumption is if it 1 Year Later
can be shown the distribution occurred
Leisure
A Reorg Denim
more than 6 months earlier and there
was a corporate business purpose
Apparel
Div
other than to facilitate the Denim
acquisition.
57 Problem (f)
Acquirer not Wanting Sub
FACTS: Same as (b) except that the
merger of Leisure into Denim occurred
three years after the spin-off and had a
business purpose other than Leisure’s
acquisition.
RESULT: §355(e)’s rebuttable
presumption should be able to be
overcome in this fact pattern.
p.516
Shareholders
Leisure
Motel
Div
Motel
Apparel
Div
3 Year Later
Leisure
A Reorg
Denim
Apparel
Div
58