Business purpose requirement.

• Author: Laffie, Lesli S.
• Position: From the IRS

In Rev. Rul. 2004-23, the IRS concluded that a distribution expected to cause the aggregate value of a distributing and a controlled corporation's stock to exceed the predistribution value of the distributing corporation's stock met the Sec. 355 and Regs. Sec. 1.355-2(b) business purpose requirement when the increased value is expected to serve a corporate business purpose of either the distributing corporation or the controlled corporation (or both), even if it benefits the former's shareholders.

Under one situation in the ruling, because a corporation, which indirectly conducts two businesses through its subsidiaries, believes that the increased value of its stock expected to result from the separation will enhance the value of its employee compensation, providing a real and substantial benefit to the corporation, the distribution is motivated by a non-Federal tax purpose germane to the corporation's business. Further, because the put pose cannot be achieved through another nontaxable transaction that is neither impractical nor unduly expensive, the distribution is carried out for a corporate business purpose. Although the increase in stock value is expected to benefit the shareholders by increasing the amount they would realize on a...