Corporate Tax Segment 9
Corporate Divisions
University of Leiden –
International Tax Center
May 2007
Professor William P. Streng
University of Houston Law Center
4/30/2007
(c) William P. Streng
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Alternative Formats for
Corporate Divisions
1. Spinoff
Cf., § 301 dividend
2. Splitoff
Cf., Redemption treatment §302
3. Split-up
Cf., liquidation treatment §331
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(c) William P. Streng
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Structure & Objectives
Tax-free divisions may be:
1. Prorata or non prorata
2. Preceded by a drop-down into subsidiary
3. In exchange or not in exchange for parent
stock
Objectives
1. Increased market recognition.
2. Parts worth more than the whole
3. Option for tracking stock.
4/30/2007
(c) William P. Streng
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Section 355 Requirements
1) Parent must control subsidiary before
distribution (i.e., at least 80 percent
§355(a)(1)(A)
2) Post-distribution active conduct of two or
more businesses. §355(b)(2)(C)
3) Five year pre-distribution rule–
Each trade or business must be been actively
conducted during the five year period
ending on the acquisition date and not
acquired within the five year period.
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(c) William P. Streng
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Section 355 Requirements,
cont.
4) Distribution of all stock and
securities of the controlled corporation.
§355(a)(1)(D).
5) Not be a "device" for the
distribution of earnings and profits.
§355(a)(1)(B)
6) Judicial requirements: Business
purpose, and Continuity of interest.
4/30/2007
(c) William P. Streng
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Consequences to the
Shareholders
Receipt of the distribution--no gain or
loss - §355(a)(1)
Basis for stock allocated between two
stocks based on relative fair market
values.
Tacked holding period.
Treatment of "Boot"- not invalidating
the basic transaction as tax-free.
4/30/2007
(c) William P. Streng
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Consequences to Distributing
and Controlled Corporations
1. Part of "D" reorganization plan:
No recognition on distribution to
shareholders of "qualified property" §
361(c)(1) & (2); i.e., no corporate level gain
§ 311(b) not applicable to a spinoff--since not
a dividend
§ 336 not applicable to equivalent of a
liquidating distribution when part of a taxfree reorganization.
4/30/2007
(c) William P. Streng
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Consequences to Distributing
and Controlled Corp., cont.
2. No preliminary "D" reorganization
§ 355(c) provides distributing corporation
recognizes no gain or loss on the distribution
of qualified property: stock or securities of
distributing corporation.
Gain recognized, however, on distribution of
other than "qualified property" § 355(c)(2).
Receipt of the distribution - no gain or loss §355(a)(1).
4/30/2007
(c) William P. Streng
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Consequences to Distributing
and Controlled Corp., cont.
Basis for stock is allocated between two
stocks based on relative fair market
values.
Tacked holding period.
Treatment of "Boot“ - not invalidating
the basic transaction as tax-free.
4/30/2007
(c) William P. Streng
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